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A 19 basis point portfolio beats the average of most college endowments

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Re: A 19 basis point portfolio beats the average of most college endowments

#11

Post by wiredfool »

danielvf wrote: post #6
paulsutter wrote: post #3

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

That's a great point, however his comparison is actually the "standard" 60/40 index fund split, which means he's not retroactively picking a winning mix - he's comparing them to the control group, so to speak.

It would be interesting to see a sensitivity analysis of the mix to see what range of reasonably commonly recommended index strategies would match this baseline. Otherwise, it's very easy to cherry pick a set of funds to prove almost anything.

Re: A 19 basis point portfolio beats the average of most college endowments

#12

Post by wiredfool »

Steuard wrote: post #10
paulsutter wrote: post #3

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

Proponents of index funds have been proposing exactly this sort of portfolio for about 40 years. (Well, okay, 40 years ago was the origin of the first index fund, Vanguard's S&P 500 tracker; a portfolio amalgamating three market segments like this would only have become possible somewhat later.) The specific 60/40 stock/bond mix here (with moderate international exposure) is solidly in the "bog standard investment ad…

It's within a few percentage points of the holdings of the Vanguard LifeStrategy Moderate Growth Fund (VSMGX). There's a little more international in that, and there's an international bond fund included. And there's the 0.16 cost ratio, rather than 0.19.

Re: A 19 basis point portfolio beats the average of most college endowments

#13

Post by SixSigma »

baldeagle wrote: post #4

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.

I didn't drill down but are you taking "average" as the mean value of a normal distribution? I'd imagine a few big winners would male it more of a power series.

Re: A 19 basis point portfolio beats the average of most college endowments

#14

Post by sharemywin »

baldeagle wrote: post #4

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.

It didn't mention it but after fees it probably does better .

Re: A 19 basis point portfolio beats the average of most college endowments

#15

Post by Steuard »

baldeagle wrote: post #4

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.

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?

Re: A 19 basis point portfolio beats the average of most college endowments

#16

Post by 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.

Re: A 19 basis point portfolio beats the average of most college endowments

#17

Post by SilasX »

JumpCrisscross wrote: post #2

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.

I think the whole point of the research is to see whether it's worth it to try not to be an underperforming one vs just taking the index returns. Obviously if you restrict your set to the ones outperforming then the index looks bad but you don't know who these are going to be.

(I know your point was also about size and the risk of distorting the market but I think you added in an unnecessary caveat there.)

Re: A 19 basis point portfolio beats the average of most college endowments

#18

Post by ikeboy »

skolos wrote: post #16

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…

It gave a handwavy argument that risk for the endowments was higher, but no numbers.

Re: A 19 basis point portfolio beats the average of most college endowments

#19

Post by vibrio »

baldeagle wrote: post #4

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.

The top of the endowments for that year surely outperform index funds on a year to year basis, but the volatility of those returns, in addition to the illiquidity of some assets in determining their value to any investor. My guess is if you aren't able to invest with a 50 year time frame, and/or don't want massive swings in asset values, the index funds start to look good.

Re: A 19 basis point portfolio beats the average of most college endowments

#20

Post by 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)

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