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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

#41

Post by skolos »

nickff wrote: post #39
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…

How do you respond to the Fama and French paper on luck versus skill in mutual fund performance? They showed that on average, active managers hold a market portfolio, and since they take a cut, ETF portfolios make more money; there was no evidence of skilled managers getting better returns for the investor. Do you believe that institutional managers are better than mutual fund managers?

I agree with many points in Fama and French paper. However its conclusions are based on data more than 20 years old. Lots of things has changed since then. I would be curious to see the results with more recent data.

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

#42

Post by D3nver »

huac wrote: post #25
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…

I'd be surprised if the actively managed funds had less risk than the market.

The way to look at is that actively managed funds often define their risk profile so that LPs can correctly allocate their money in the risk buckets they are searching for.

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

#43

Post by ikeboy »

thanksgiving wrote: post #28
ikeboy wrote: post #18

Earlier quoted context omitted.

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

The university with the highest total endowment suffered along with the market. It would be an obvious statement to say that Harvard suffered along with the rest of the market. Of course, they did better than the biggest losers. One could always say they could have done worse and put all their money in Citi. I have to admit that I have no clue whether the endowment funds did better or worse than an index fund trackin…

According to http://www.wolframalpha.com/input/?i=s+and+p++500+august+200..., the S and P 500 lost 30% during that time. How much is it worth to only decline 22%? IIRC most outperformance over the long run comes from avoiding losses.

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

#44

Post by 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.

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

#45

Post by ropiku »

dzdt wrote: post #30

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.

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.

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

#46

Post by jonknee »

aninhumer wrote: post #27
xivzgrev wrote: post #9

Earlier quoted context omitted.

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.

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?

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.

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

#47

Post by jonknee »

hackeranswer wrote: post #35
AstroJetson wrote: post #20

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 ar…

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?

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

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

#48

Post by nickff »

skolos wrote: post #41
nickff wrote: post #39

Earlier quoted context omitted.

How do you respond to the Fama and French paper on luck versus skill in mutual fund performance? They showed that on average, active managers hold a market portfolio, and since they take a cut, ETF portfolios make more money; there was no evidence of skilled managers getting better returns for the investor. Do you believe that institutional managers are better than mutual fund managers?

I agree with many points in Fama and French paper. However its conclusions are based on data more than 20 years old. Lots of things has changed since then. I would be curious to see the results with more recent data.

Some of the data sets used end in 2002 or 2006, and I am not aware of any reason why we would expect different findings from more recent data. Using data from the great recession and the current market situation may also be more confusing than elucidating.

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

#49

Post by tamana »

zrail wrote: post #40

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…

Now explain how your theory fits that facts that

1) Harvard's endowment gets massive donations every year

2) Harvard has an incredibly high rate of return on invested capital, not low-risk low-reward

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

#50

Post by tamana »

louprado wrote: post #44

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…

Top endowed unis don't sell education, they largely give it away, funded by endowment. They also fund research, making them unis not colleges.
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