How Endowed is your Endowment?

Vanguard has an interesting whitepaper out about how Endowments performance differs based on their size (sorry all those in the, “it’s not the size of the boat, it’s the motion of the ocean” camp… the large ones do much better), and there’s some interesting tidbits in it even though it’s a glorified ad for the type of low cost  indexing Vanguard is known for.  But instead of their normal tilt toward the retail investor,  they’re targeting the endowment space – breaking down small, medium, and large endowments vs low cost index funds and concluding that small and mid size endowments shouldn’t try and replicate large endowments success – they should just do low cost index funds (otherwise known as talking your book).

First, some of their cool charts:

    1. Endowment breakdown  (90% of all endowments are small/large)

      Endowment by sizeChart Courtesy: Vanguard

    2. The growth of Alternatives amongst Endowments of all sizes, with Large Endowments having  moved significantly above 50% after 2008 and having stayed there.Allocation to Alternatives
    3. The huge outperformance, and current underperformance of large endowments versus the traditional 60/40 portfolio:

Performance of Endowments(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Vanguard

We applaud Vanguard for the piece, and for the thoughts it brought to mind… including in no particular order the following:

  1. When do alternatives start to lose their name… If 60% of a portfolio is alternative, then it’s not so alternative… it’s the core holding.
  2. A lot of the Alternatives they talk about aren’t so alternative. See our “Truth and Lies in Alternative Investments” for more on how some of these aren’t so alternative.
  3. While the rolling 5-year Annualized returns might have suffered in 2012 and 2013, how about Yale and Harvard’s  huge outperformance of the traditional 60/40 portfolio over the past 25 years highlighted on page 2. Yale has done about 5% better (per year!)  and Harvard 3% better (per year!) over the traditional 60/40 portfolio.
  4.  This whole exercise ignores RISK… and assumes small and medium size endowments are after the highest possible returns, only.  There is a chart showing sharpe ratios, but it has well known problems (see here and here).
  5. This whole exercise ignores the fact that we’ve been in a 40 year bull market for bonds, across the entire history of this study, skewing the “40” in the 60/40 portfolio beyond what one could reasonably expect moving forward given how low interest rates are.
  6. They conveniently leave large endowments out of their chart showing endowment returns (and sharpe) against low cost funds.
  7. This is quite the opportune time to be highlighting a non diversified portfolio versus the 60/40 portfolio, given it has been one of the best 5 year runs perhaps ever for the 60/40 portfolio. The comparables won’t be as rosy when looking out 5 years from now, when aren’t coming off the 2009 lows.
  8. Digging in a little deeper on Figure 5, showing the excess return of small and large endowments over 60/40 portfolios – you can see that the endowments out perform during low periods for stocks (2000-2005 and 2008) and tend to underperform during big moves up in stocks (late 90’s, past 3 years). This is not by accident – and it’s only to be expected that when allocations to alternatives get bigger, the performance will deviate from the 60/40 performance more and more. The endowments aren’t diversifying into alternatives in order to beat the 60/40 portfolio during bull markets. Their diversifying in order to avoid being down -50% during down turn.

All in all, this looks to be another argument that diversification is dead. Call us skeptical, but we always get a little nervous when hearing “this time is different.”

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.