Earlier quoted context omitted.
>If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. Why? I understand why this is the case for smaller investors like individuals, but for a school endowment isn't the sheer size of the endowment and the theoretically near infinite investment time horizon part of the risk management? Some years or even some decades it will be down, but they aren't investing with…
Maybe for somewhere like Harvard that has an absolutely ludicrously sized endowment, but a more normal university can't really afford to absorb losses like that. They need to withdraw from the endowment every year to pay expenses. If the stock market plunged and then they locked in losses by selling to pay expenses, they would run a real risk of having long term losses.
University Endowment Sued for Under performing the S&P 500
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Re: University Endowment Sued for Under performing the S&P 500
#52Earlier quoted context omitted.
It isn't possible for bond markets to collapse at the same time as stocks?
It happened during Coronavirus, but historically bonds have been counter cyclical. Some are worried that the paradigm has changed, and that bonds are no longer uncorrelated. If this is true, it has large and significant ramifications on optimal portfolio construction.
I don't know about that:
> The Nasdaq 100 ETF (QQQ) is up an astonishing 25.5% this year during a pandemic and that’s including a 29% peak-to-trough drawdown. But the long-term treasury ETF (TLT) is up 27.3%.
* https://awealthofcommonsense.com/2020/08/why-would-anyone-ow...
Though the article goes on to say the primary reason for owns bonds are:
* Bonds hedge stock market volatility.
* Bonds can be used to rebalance.
* Bonds can be used for spending purposes.
* Bonds protect against deflation.
See also his 2018 Q4 article (when the S&P 500 was in the middle of its 20% correction):
* https://awealthofcommonsense.com/2018/10/the-case-for-bonds/
Re: University Endowment Sued for Under performing the S&P 500
#53Beating the S&P on a return basis is totally irrelevant. Almost any diversified portfolio will have a lower absolute return than the S&P and a higher risk-adjusted return. If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and…
>If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. Why? I understand why this is the case for smaller investors like individuals, but for a school endowment isn't the sheer size of the endowment and the theoretically near infinite investment time horizon part of the risk management? Some years or even some decades it will be down, but they aren't investing with…
Endowments are used to fund operating expenses.
At all but the richest institutions, you need to think of the endowment more like the retirement fund of a retiree.
You can't just not pay your faculty / demand 50% more tuition / defer fixing a roof leak for a few months just because you were down in Q2, even if you expect to be back up in Q1 of the next year.
Re: University Endowment Sued for Under performing the S&P 500
#54What's his theory of even having standing in the first place?
His personal basis for standing is unclear even from the more detailed article, but part of it is claims for class action standing by a group of recent students on behalf of all students of the last decade years.
Re: University Endowment Sued for Under performing the S&P 500
#55Earlier quoted context omitted.
Maybe for somewhere like Harvard that has an absolutely ludicrously sized endowment, but a more normal university can't really afford to absorb losses like that. They need to withdraw from the endowment every year to pay expenses. If the stock market plunged and then they locked in losses by selling to pay expenses, they would run a real risk of having long term losses.
I’m on the investment committee of the board of a small school with a $300M endowment, and every year 4% is budgeted to be withdrawn to go towards school expenses. I am new, but I find it silly they pursue this very active management, diversified across tons of different (managed) funds. I feel like they should be putting everything in whatever has the highest long term return (they have access to sequoia funds and t…
The institution I work with has less than 100M and is on the larger side of small. If we had 300M and a faculty/facilities layout built for ~700 instead of ~3000 then life would be completely different.
I agree with you in general -- both that the active management is dumb and also the most probable reason small colleges pursue this strategy. But HMC can probably afford investment strategies that most others cannot.
Re: University Endowment Sued for Under performing the S&P 500
#56Beating the S&P on a return basis is totally irrelevant. Almost any diversified portfolio will have a lower absolute return than the S&P and a higher risk-adjusted return. If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and…
Re: University Endowment Sued for Under performing the S&P 500
#57Beating the S&P on a return basis is totally irrelevant. Almost any diversified portfolio will have a lower absolute return than the S&P and a higher risk-adjusted return. If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and…
> An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and have a moderate but stable return stream. Over the last ten years, all the fancy-pants portfolios that Ivey League endowments used have generally under-performed a 60/40 portfolio: * https://www.markovprocesses.com/blog/ivy-league-endowments-f... * https://www.institutionalinv…
As a non-expert this intrigued me so I found an online calculator for that period (https://dqydj.com/treasury-return-calculator/) and was confused when it showed an annualized return of 1.72%.[1]. But then I read the actual paper where they make it clear their "simplistic strategy" is investing in a "CRSP 10-Year U.S. Treasury Bond Index". (See page 10 of PDF at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117)
Digging further, as explained on this bond index calculator, https://portfoliocharts.com/bond-index-calculator/, a bond index fund uses mechanical rules, similar to an equities index fund, for buying and selling bonds, making money on changes in the market price, which can be greater or lesser than the nominal coupon return. IOW, such an index isn't simply buying and holding onto treasuries.
If you download the spreadsheet from the above link (the calculator is a spreadsheet) you'll see that YoY swings are huge, ranging from -4.5% in 2009 to 17.5% in 2011 for 10-year treasury index.[2] Those very good years are why a treasury bond index can achieve such amazing returns over longer periods--greater than 2x the nominal + reinvestment return, without using derivatives for leverage.
Now, I initially assumed the YoY bond index returns would be negatively correlated with equity returns. That's the point, right? But that doesn't seem to be the case; rather, it looks like a mixed bag. Here's the YoY returns of the example treasury bond index as compared to the S&P 500 (from https://ycharts.com/indicators/sp_500_total_return_annual):
bond | equity
-----------------------
2009 | -4.5% | 26.46%
2010 | 9.6% | 15.06%
2011 | 17.5% | 2.11%
2012 | 4.8% | 16.00%
2013 | -6.9% | 32.39%
2014 | 10.3% | 13.69%
2015 | 1.8% | 1.38%
2016 | 1.6% | 11.96%
2017 | 3.2% | 21.83%
On their face the years 2010, 2014, 2015, and possibly 2012 don't look negatively correlated. Maybe they are for some technical reasons, but it makes me skeptical about the degree to which such a bond index fund hedges equity risk.As a total layman in this domain but with some experience pouring through these sorts of academic research notes, what this tells me is that the Dahiya and Yermack paper is interesting but hides some significant assumptions and, presumably, some pretty deep theoretical disputes within the academic and investor communities.
[1] 1.72% is for January 2009 to January 2017. For June 2009 to June 2017 the return shown is 2.75%. That suggests we should be a little skeptical about the effects of the starting and stopping points of any analysis.
[2] AFAICT, actual CSRP models and data are proprietary. The calculator and historical returns are based on that author's own model. (EDIT: Table A3, page 62 of the Dahiya and Yermack paper give the benchmark returns. I'm just eyeballing them, but the 10-year treasury figures seem to match up well with the returns from the portfoliocharts.com spreadsheet.)
Re: University Endowment Sued for Under performing the S&P 500
#58Earlier quoted context omitted.
I’m on the investment committee of the board of a small school with a $300M endowment, and every year 4% is budgeted to be withdrawn to go towards school expenses. I am new, but I find it silly they pursue this very active management, diversified across tons of different (managed) funds. I feel like they should be putting everything in whatever has the highest long term return (they have access to sequoia funds and t…
Harvey Mudd? 300M at a small college is actually a quite large endowment, and HMC is tiny even by small college standards. The institution I work with has less than 100M and is on the larger side of small. If we had 300M and a faculty/facilities layout built for ~700 instead of ~3000 then life would be completely different. I agree with you in general -- both that the active management is dumb and also the most proba…
I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever... but you can never get your original investment back. It seems like this would be a product all endowments/permanent funds would use. And then I just put it all in the s+p 500. I guess I’d need to be the government for endowments to trust me forever though.
Re: University Endowment Sued for Under performing the S&P 500
#59Beating the S&P on a return basis is totally irrelevant. Almost any diversified portfolio will have a lower absolute return than the S&P and a higher risk-adjusted return. If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. An endowment should be diversified across asset classes (metals, real estate, equities, bonds) and strategies (PE, hedge funds, VC, etc) and…
Isn't sharpe invariant to leverage? If I lever up a position 2x my return doubles as does the volatility (StdDev) of the position. Metrics like alpha are better able to tease out if a portfolio is simply levered to a market factor.
Re: University Endowment Sued for Under performing the S&P 500
#60Earlier quoted context omitted.
Harvey Mudd? 300M at a small college is actually a quite large endowment, and HMC is tiny even by small college standards. The institution I work with has less than 100M and is on the larger side of small. If we had 300M and a faculty/facilities layout built for ~700 instead of ~3000 then life would be completely different. I agree with you in general -- both that the active management is dumb and also the most proba…
Yeah, but it seems like any sort of “permanent fund” where the timeline is infinite should be doing really aggressive, long-term, illiquid stuff, right? Investing like a 22 year old. And then any liquidity needs you need for annual distributions you handle via loans. I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever... but you can never get your original inves…