
A 19 basis point portfolio beats the average of most college endowments - jv_dh
http://awealthofcommonsense.com/2016/02/bogle-vs-golitath/
======
zrail
Blindly shoving all your money into Vanguard ETFs is a strategy that works
well for almost every _individual_ who's retirement period maxes out at 70
years (for the MMM types).

An endowment is a fund of money designed to sustain operations of it's
benefactor _forever_. Not 10 years. Not 50 years. Literally forever. When
you're operating on an indefinite timescale your idea of "risk" changes
considerably.

Take a look at the Harvard Endowment report[1], specifically the table on page
2. They are incredibly well diversified, across domestic and international
public equities, as well as private equity, commodities, fixed income
securities (bonds, etc), real estate, and a category they call "absolute
return", which is where they've placed money into external hedge funds. If the
US economy tanks, they'll be fine. If Europe falls apart, they'll be fine. A
bunch of start up unicorns fail in Silicon Valley? Fine.

My point is that the article completely misses the goals of an endowment. They
don't particularly care about matching or beating an index, nor do they care
about risk (as measured by volatility). They care about wipe out risk, on the
scale of centuries.

[1]:
[http://www.hmc.harvard.edu/docs/Final_Annual_Report_2014.pdf](http://www.hmc.harvard.edu/docs/Final_Annual_Report_2014.pdf)

~~~
enoch_r
> They are incredibly well diversified, across domestic and international
> public equities, as well as private equity, commodities, fixed income
> securities (bonds, etc), real estate, and a category they call "absolute
> return", which is where they've placed money into external hedge funds. If
> the US economy tanks, they'll be fine. If Europe falls apart, they'll be
> fine. A bunch of start up unicorns fail in Silicon Valley? Fine.

This does not appear to be true. See page 14 of this paper, which shows the
2008-2009 performance of six privately endowed colleges and universities in
New England. The smallest loss was 18%, the largest was 30%. Between January
1, 2008, when the S&P500 was at 1,378.76, and January 1, 2009, when the S&P500
was at 868.58, the S&P500 lost 37%. A reasonable mix of stocks and bonds would
have had a similar loss as the endowments.

[http://www.tellus.org/pub/Tellusendowmentcrisis.pdf](http://www.tellus.org/pub/Tellusendowmentcrisis.pdf)

~~~
wdewind
Right, in 2008 when the entire economy tanked they also tanked. You can't
really out-diversify the entire economy tanking. What happened in the years
after that? Oh right that paper has no idea because it was last updated in
2010.

~~~
shoover
_You can 't really out-diversify the entire economy tanking._

Sometimes you can. Chart [1] shows the ratio of a particular diversified
portfolio's value (4x25 Permanent Portfolio) to the three fund portfolio's
value starting in 2005. The ratio increases sharply in 2008-2009 and retains
its edge through the subsequent stock bull market.

[1] [http://morning-
wave-7809.herokuapp.com/#iau,vti,shy,tlt/vtsm...](http://morning-
wave-7809.herokuapp.com/#iau,vti,shy,tlt/vtsmx*4,vgtsx*2,vbmfx*4)

~~~
wdewind
The major point of OPs statement is that while sometimes you can get lucky for
a short period of time (which is what you just cherrypicked), for an endowment
you can't really do stuff like that because you are so big and have such a
long term perspective. Regardless, I'm not seeing the narrative you describe
in your graph.

~~~
shoover
I agree with the OP's point, but you mentioned 2008 and what happens after
that and I'm saying you can diversify in a way that handles those kinds of
economic events. (The strategy I mentioned also got _really_ lucky in the 70s
and held up cumulatively since then. Of course you can make it unlucky by
picking different dates, too e.g. ignore the 70s or 2001 or 2008.)

The chart page doesn't explain things very well, so it takes a bit to unpack,
but the point of the chart is actually to give a better idea of comparative
performance over a time period rather than focusing on a particular number
like average return. Basically it's dividing the current value of one
portfolio by the other at each point. The ratio shows the ebb and flow of the
two portfolios against each other. John Bogle's speech [1] and this forum [2]
probably explain it better.

[1]
[http://www.vanguard.com/bogle_site/sp20020626.html](http://www.vanguard.com/bogle_site/sp20020626.html)

[2]
[https://www.bogleheads.org/forum/viewtopic.php?t=138973](https://www.bogleheads.org/forum/viewtopic.php?t=138973)

EDIT: cleaned up the first paragraph.

~~~
wdewind
Sorry but your examples don't add up. You're showing a 20 year time frame of
outperformance, and admitting there are places where performance is a
negative, and then claiming all of this shows that there is a strategy that
works well all the time. Definitionally this is not true. Correct me if I'm
misunderstanding, totally possible.

~~~
shoover
Sorry the examples are confusing. I mention periods of relative
underperformance as a nod to your cherrypick comment: yes, the time frames
matter in both directions. The question is how much the strategy goes up or
down relative to the benchmark and for how long.

My claim with respect to this thread is that there is a strategy that
outperforms in certain conditions like the 2008 selloff and 1970s inflation
and does so without the risk of losing the gains as soon as the market turns
around.

Relative to stocks or 60/40 during a bull market, it doesn't look so good, but
it still generates positive returns, holding for some time any edge gained
during the earlier conditions.

The overall result is a smooth climb, so I do claim it works well (enough) all
the time. I don't claim absolute outperformance long term.

The best chart for what I'm trying to show is beneath the data table in [1].
And the Envy calculator at [2] has great data back to 1972 for different
assets (and lets you change the start date).

[1] [http://www.crawlingroad.com/blog/2008/12/22/permanent-
portfo...](http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-
historical-returns/)

[2]
[http://portfoliocharts.com/calculators/](http://portfoliocharts.com/calculators/)

------
skolos
Anyone who looked at investing knows that you don't compare pure returns, you
compare return per risk (say Sharpe ratio or some other measure). 10% return
might be truly impressive if it does not involve much risk.

EDIT: For people who look first at comments - the article compared some
endowment funds returns with broad market returns and found that funds did not
outperform the market. My argument that this is flawed comparison since it
ignored risk.

~~~
mjfl
I work in investing and take issue with the standard deviation of returns
being taken as equivalent to "risk". For example there were many quant funds
that had great Sharpe ratios up until 2008, after which they got completely
annihilated. But I have nothing else to add. It is hard to measure risk.

~~~
skolos
I agree that standard deviation might not be the best measure of risk. That's
why there are many other measures exist that try to address issues. But you
cannot compare returns without looking at risk.

Comparing fund performance is a tricky business and often you can cherry pick
methodology easily to support any conclusion you desire.

------
JumpCrisscross
Be wary of reading this as "if endowments fired their managers and invested in
Vamguard funds, they'd on average boost their returns". Perhaps true of the
smaller, consistently-underperforming ones. But at the endowment side, a lot
of planning goes into avoiding your size being felt by the markets.

~~~
maxerickson
What planning are the endowments able to do that Vanguard would not also be
doing?

~~~
xivzgrev
Anything. Vanguard index funds just track the market so there's no hedging.

The main planning I could see overlap is executing large trades since they're
both moving massive amounts of money.

~~~
aninhumer
Surely Vanguard still need to make large trades whenever the make-up of the
indices change?

When the (e.g.) 500th and 501st largest companies swap places, don't they need
to sell one and buy the other to keep tracking a 500 share index?

~~~
jonknee
Yes, rebalancing days involve some volatility.

The way these index ETFs work though is that broker dealers can trade a basket
of securities matching the index for a share of the ETF (and vice versa).
Because of this price mismatches get fixed very quickly. S&P announces also
changes ahead of time so while there is initial price movement it's not all
instantaneous.

------
AstroJetson
Index fund are a market basket of funds. The Index 500 fund is stock in the
500 largest companies in the US. It's intent is to give you the average across
all those companies.

Lets look another way. If you are a golfer, the "average" score for a golf
round is called PAR. Ask the regular golfer what would they do to be able to
play par rounds all the time, most would sell you a beloved grand parent. The
index funds are a way to play / invest in the market and get "average"
returns.

The leverage that Vanguard has is that these index funds are pretty easy to
manage, so they don't charge a lot of fees. Presently on the Index 500 fund,
it's 17 basis points. So not much of your capital or your profit is going back
to Vanguard. On the other side the big investment places are taking fees
anywhere from 2 to 10 times what Vanguard gets. That can make a big difference
in your annual rate of return.

Vanguard also has the advantage that in some cases Fund XYZ will be selling a
stock while Fund ABC is buying a stock. So it ends up being an in-house
purchase, so there is no brokerage fee, lower cost to both funds.

Mutual funds, and specifically index based mutual funds are a good way to get
average results across a long period of time. Sure run wild some with that
Gold Fund investment and those Oil funds, but be prepared for the downside)

(disclaimer: Long time Vanguard customer)

~~~
hackeranswer
stupid question, but when it lists 5 year return at 10.7%, does that mean it
returned on average 10 % per year for 5 years? So if someone started with
100k, they would now have about 160,000?

~~~
jonknee
Correct, annual is the normal way of talking about it. If you see "total
return" that would mean cumulative.

------
IkmoIkmo
You have to consider a few things:

1) one may be interested in the opportunity of above-average returns. If the
average vanguard return is 7%, and the average self-managed return is 6.9%, on
average of course vanguard is in your best interest. But what if you think you
can do better? Harvard's ran a 12% return for 20 years, for example. Should
they forgo it because the average is a more guaranteed, safe, and on average,
better bet? Probably not. Does it signal to weaker funds to simply go with the
Vanguard option? Yes.

e.g. check out this report:
[http://www.hmc.harvard.edu/docs/Final_Annual_Report_2015.pdf](http://www.hmc.harvard.edu/docs/Final_Annual_Report_2015.pdf)

2) looking at just returns is myopic. You need to look at risk-adjusted
returns, for which finance has proposed a whole bunch of measures. I would not
be surprised if the endowment funds were less risky than the vanguard,
although it's hard to tell. And guess which years generate brilliant
performance for risky portfolios that are heavy on stocks? Post-crisis years
where the market rebounds. Risk isn't the only thing, there are all kinds of
objective funds can set. Most colleges for example set liquidity limits that
would be unworkable for traditional hedge funds that invest in high-potential
returns in illiquid assets. Limiting yourself like this changes your roi.

That having been said, there's obviously a lot of value in this simple
perspective. And it completely confirms a new reality: outperformance is
getting harder and harder and investors are less likely to beat the market and
add value with their investing know-how. It's pretty recent that this has been
happening to this extent.

~~~
Retric
A single outlier over a few years does not mean anything.

Harvard got 5.8% in 2015.

~~~
tamana
A single outlier over a single year does not mean anything either.

------
dzdt
There is a statistics smell that he initially shows also 1y and 3y performance
for the endowments, but then doesn't show these for his alternative. Probably
he cherry-picked the data that supported his point and hid the rest.

~~~
ropiku
From the article "1 and 3 years returns are mostly noise". He focuses on a
longer term since it's a much better comparison. On a growing market it's much
easier to overperform the index but then get wiped when a crash happens.

~~~
dzdt
For the endowments, the 1y and 3y returns didn't look like noise. Hiding the
noisy data is hiding the fact that the ETF strategy is more risky than the
endowments.

~~~
ropiku
What do you mean ? The shorter term you look the more noise there is. I'm not
sure that it's exactly the same 1y period, you are just averaging out a lot of
funds. I would say the fact that ETFs overperformed on a long term means they
are less risky not more.

------
tamana
The headline is misleading. The vanguard portfolio beats the average of all
small endowments (under $1B) and is beaten by average of the large endowments.
Endowment performance is impressively correlated to size.

~~~
dang
Ok, we replaced 'every' with 'most' in the title.

------
vonklaus
This is true, both my bosses worked for a larger well respected endowment
about a year ago. The firms are not doing well and at least this one is not
and there is talk if going to the strategy here.

Basically a fund of funds with a bunch of mutual funds. They are facing
competition for PE deals and maintaining higher risk trading desks with high
cap costs.

I would note that while the numbers in the article did beat performance now
could be the best time to have a trade desk. Most indices look like this

    
    
        /\/\/?
    

Not / / /

So having a group work on minimizing that could be profitable

------
baldeagle
That only beats half of the endowments, I'd be more impressed if it be
something like 75% to indicate it was truly a top tier product instead of just
better than average.

~~~
Steuard
To a first approximation, this is what one would expect of index funds, right?
They're literally incapable of beating the broad market (they have _some_
expenses, so they have to lag a little). One point that's not addressed by
these statistics is whether any given university endowment consistently beats
the market, or whether they all fluctuate around that average over the long
term (say, 20+ years).

The underlying question is, why should universities employ big teams of
investment experts to manage their investments? (Those salaries are, I
suspect, _not_ accounted for in these performance numbers: the source says
they are "net of fees", but I assume that's only counting actual fees from the
investment products themselves rather than the costs of in-house staff.) If
you can get consistently average results with almost no investment strategy at
all, what are all those salaries for?

------
jannotti
I wonder if the returns quoted for endowments properly subtract out the
salaries, build space, etc for the employees of the institution with the
endowment, or just the explicit costs from outside management?

(See my clarification below. I'm talking about the costs only for the
employees making investment decisions.)

~~~
tamana
Hmm? Money spent on university operations is not an investment expense.

~~~
jannotti
I don't care about the label, I care for a fair comparison of the question,
"Would Universities be better off with a simple mix of index funds or using
their current approach?" To answer that question, you'd like to figure out
what the performance would have been if universities used that simpler
approach, and that might include saving a lot of money on the university
employees who select managers or make investment decisions at the university.
I hope it didn't seem like I thought you should subtract out the costs of
random university employees.

(Rereading my words, I can certainly understand that interpretation. Sorry.)

------
paulsutter
This would be more interesting if he had proposed the portfolio 10 years ago,
rather than to do so in retrospect.

~~~
robrenaud
Warren Buffet made a similar bet 8 years ago on a 10 year horizon, betting on
Vanguard against some top hedge funds.

Buffett is very likely to win that bet.

[http://fortune.com/2015/02/03/berkshires-buffett-adds-to-
his...](http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his-lead-
in-1-million-bet-with-hedge-fund/)

[http://longbets.org/362/](http://longbets.org/362/)

~~~
elbigbad
This is interesting! Shoddy writing int he Fortune piece though.

"The amount handed over [to charity], though, is not likely to be $1 million,
because of changes that Buffett and Protégé made in the wager a couple of
years ago"

One paragraph later:

"Buffett also issued a guarantee: He will pay the winning charity $1 million
if the Berkshire stock bought isn’t worth that much at the bet’s end."

Nitpicky I know, but it sounds like the winning charity is guaranteed $1
million.

~~~
aidenn0
Read a few more lines down and they state that the amount will most likely be
_more_ than $1 million, thus keeping the previous two quotes consistent.

------
louprado
The overlooked discussion is that universities are supposed to make money by
selling quality education. Their goal shouldn't be to make money by risking
money.

Perhaps the lower return simply reflects the less aggressive nature of their
portfolio. But ironically while waiting in the lobby of a prominent VC I met a
college endowment fund manager who was currently using machine learning to
trade options. I believe part of the endowment is now traded using his system
(not 100% sure about this).

When I asked why his approach won't suffer the same fate as LTCM, an
algorithm-based options-trading system run by Noble-prize winner Robin
Scholes, he claimed that his approach relied on less leverage. But he didn't
address the point on how his system would have predicted the Asian flu and
Russian default that ended LTCM. I guess it would have been harmful but not
fatal.

What's acceptable risk for a Wall Street fund isn't necessarily appropriate
for an endowment fund regardless of the upside.

~~~
saosebastiao
There is nothing inherently wrong with the LTCM algorithm. Using the same
algorithm after the crash, it was eventually liquidated at a profit. The
problem was how leveraged the investors were. Banks that invested in LTCM were
so heavily leveraged in it that the temporary collapse of the fund was
threatening the survivability of a few large institutional investors. The same
fund likely would have performed very well for an investor that was not as
heavily leveraged. The collapse would still be harmful but not fatal.

------
ansgri
The site is blocked in Russia citing national law. Wonder what they've
published.

