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

awealthofcommonsense.com

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

#61

Post by rbcgerard »

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…

I wonder how much of the difference between the "bogle" portfolio and the endowment portfolios can be explained by simply adding Real Asset beta and Alternative beta?

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

#62

Post by saosebastiao »

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…

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.

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

#63

Post by wdewind »

enoch_r wrote: post #51
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…

> 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 Vall…

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.

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

#64

Post by jannotti »

tamana wrote: post #56
jannotti wrote: post #52

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.)

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

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.)

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

#65

Post by dang »

tamana wrote: post #60

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.

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

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

#66

Post by mathattack »

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…

Endowments also worry about mapping their endowment to potential future costs or liabilities:

1) When the economy is bad, they need to provide more financial aid, so they want some counter-cyclical assets. (Long term bonds who increase in value when rates decline are an example.)

2) If they want to expand in the future, they don't want to be priced out of their neighborhood, so they're more likely to invest in local real estate.

This doesn't mean that endowments are all optimally managed - many would still be better served with ETFs. It's just not as simple as tossing everything into the S&P500.

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

#67

Post by shoover »

wdewind wrote: post #63
enoch_r wrote: post #51

Earlier quoted context omitted.

> 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 Vall…

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.

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...

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

#68

Post by wdewind »

shoover wrote: post #67
wdewind wrote: post #63

Earlier quoted context omitted.

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.

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...

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.

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

#69

Post by justin66 »

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…

>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.

I think you're probably unfamiliar with the Harvard endowment's performance over time. They were badly hosed during the recession, despite their diversification.

> They care about wipe out risk, on the scale of centuries.

Perhaps they should, but they don't. They could easily put all their money in TIPS, after all.

The various college endowments are quite competitive with one another, with all the risk taking that implies. It's very silly.

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

#70

Post by shoover »

wdewind wrote: post #68
shoover wrote: post #67

Earlier quoted context omitted.

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...

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.

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

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

EDIT: cleaned up the first paragraph.

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