The American Economic Association, the professional association for academic economists, holds about $50 million in investment assets. How do the professional economists invest?
To be clear, I’m not giving away any secret information here. The AEA is a nonprofit, and it needs to report publicly. A “Report of the Treasurer” is published each year in the AEA Papers and Proceedings: for the 2022 version, with spending in 2020 and 2021 and projections for 2022, see pp. 650–654). A Budget and Finance Committee manages the Association’s financial assets. Back in April 2017, it set the following “target portfolio allocations,” which have remained the same since then:
Total Stock Market Index Fund 35%
FTSE All-World Ex-US Fund 25%
Long-Term Investment Grade Fund 12%
Value Index Fund 10%
REIT Index Fund 5%
PIMCO PFORX Foreign Bond Fund 5%
Intermediate Bond Fund and local operating cash 8%
Perhaps this goes without saying, but this is not intended as personal investment advice. There is no reason for any individual investor to be following the AEA. Planning for your personal retirement, for example, raises quite different issue than the choices of an professional academic association. That noted, some of the broader principles guiding the choice of investment may be useful.
- The AEA does not deal with individual stocks, only with funds.
- The funds are passively invested, most of them through Vanguard, with very low costs of managing the money, not actively invested in a way that would involve higher costs–and would also involve choosing an active investment strategy.
- The AEA allocations have remained the same since 2017: clearly, there is no attempt here to jump in and out of various allocations.
- About 70% of the funds are invested in stock markets.
- The AEA makes some effort to diversify into international stock markets. The first two entries on the list operate through Vanguard, which is to say that they are low-cost passive funds, the first in the US market and the second focused on outside-the-US stock markets.
- The AEA also diversifies outside the stock market, into real estate and bonds.
- The one category where the AEA is relying to some extent on the irrationality of markets is the “Value Index Fund.” According to Vanguard, “This fund invests in stocks of large U.S. companies in market sectors that tend to grow at a slower pace than the broad market; these stocks may be temporarily undervalued by investors.” Another way to look at this fund is that it gives large US companies a slightly greater weight in the overall portfolio than they would otherwise have.
You may also be wondering: Why does the American Economic Association even have $50 million? Starting back in 1969, the AEA got entrepreneurial. It started a project called EconLit, which creates an index of all articles in professional journals of economics. Back in 1969, this project was on paper and covered 182 journals. Now, it is a searchable online index covering over 1,000 economics journals, with abstracts describing many of the articles and with the ability to search the text of many of the underlying articles, too. This index is sold by subscription to research libraries around the world. In 2020, EconLit cost about $800,000 to produce, but brought in about $4.5 million in revenues–about 40% of total AEA revenues and by far the largest single amount. In turn, the AEA uses this financial cushion for other purposes: to keep membership dues low and to support nine different academic journals, as well as annual meetings, an index of job openings for academic economists, and other activities.
So one main reason the AEA has money to invest is EconLit. The other big reason is that the stock market has surged: for example, the S&P 500 stock index rose from about 800 back in 2009 to above 4,000 now, even after the declines since last December. In that situation, it would take a certain perverse genius not to make money in the stock market. But of course, what the stock market has given it can also take away, and that $50 million financial cushion as measured in September 2021 would already be substantially smaller today.