Harvard endowment beats S&P 500 by 2% a year over last 40 years

[tc101]

I have read several threads here about the poor performance of the Harvard endowment in the last 5 years, but according to the link below, it has beaten the S&P 500 by an average of 2% a year over the last 40 years. How do you explain that?

But if you can beat Harvard with a simple S&P 500 index fund, as you could have over the past five years, why bother with exotic and illiquid asset classes at all?

Well, if you have a long time horizon like Harvard, you have good reason to.

Sure, the S&P 500 has generated 16.88% over the past five years. But that's a historical anomaly. Over the longer 40-year period, the S&P 500 has generated an annual return of only 10.29%.

Harvard has generated 12.3% annual returns over the past 40 years. This outperformance of 2.01% per year compared to the S&P 500 may not seem like much,

http://www.marketwatch.com/story/why-yo ... 2014-09-30

[livesoft]

2014 article. Plus good early results.

But why and how did you dig this old article up?

[sunnywindy]

Simply put, they have so much money, they have access to investable assets that you and I do not. They also operate under a completely different tax structure that helps their returns.

[nisiprius]

How do you explain that?

Probably, taking more risk than the S&P 500 and making investments that are less liquid than the S&P 500. You would expect to be compensated for both.

Investments that are appropriate for Harvard are probably not appropriate for me. Harvard does not plan to retire at age 65.

[McGilicutty]

Subsequent to the article, 2015 return of the Harvard Endowment was 5.8% and 2016 return was -2.0%. It looks like they are going downhill.

[Phineas J. Whoopee]

... How do you explain that?
...

Do you mean the Efficient Market Hypothesis says nobody can ever beat the S&P 500? Maybe you don't, but I've heard that assertion more times than I care to remember.

The EMH does not say that. See the link for the explanation.

PJW

[corner559]

Net of fees?

[FreeAtLast]

Net of fees?

Indeed, the first question that popped into my mind as I perused this thread.

[whodidntante]

It's reasonably easy to beat the S&P 500. Just take more risk, and get lucky.

[McGilicutty]

The Harvard press release from 2014 says that the endowment had an "average annual return" of 12.3% over the past 40 years. See http://news.harvard.edu/gazette/story/2 ... year-2014/. The average annual return of the S&P 500 from Jan 1, 1974 to December 31, 2014 was 12.65% whereas the CAGR including dividends was 11.08%.

I wonder if this supposed outperformance against the S&P 500 is just a terminology issue. In any event, the investing conditions and people who delivered the supposed outperformance are long gone.

EDIT: After a little further research, it appears that the marketwatch author is comparing the CAGR of the S&P 500 against the average annual return of the Harvard endowment. See here for an explanation of CAGR versus average annual return: http://www.investinganswers.com/educati ... umber-1996.

So consider this one explained. The Harvard endowment had an average annual return over 40 years of 12.3% versus about 12.65% for the S&P 500. Therefore, the Harvard endowment DID NOT beat the S&P 500.

A much better question is how Warren Buffett's Berkshire Hathaway, even at the ripe old age of 86, continues to crush the S&P 500.

[dkturner]

The Harvard press release from 2014 says that the endowment had an "average annual return" of 12.3% over the past 40 years. See http://news.harvard.edu/gazette/story/2 ... year-2014/. The average annual return of the S&P 500 from Jan 1, 1974 to December 31, 2014 was 12.65% whereas the CAGR including dividends was 11.08%.

I wonder if this supposed outperformance against the S&P 500 is just a terminology issue. In any event, the investing conditions and people who delivered the supposed outperformance are long gone.

EDIT: After a little further research, it appears that the marketwatch author is comparing the CAGR of the S&P 500 against the average annual return of the Harvard endowment. See here for an explanation of CAGR versus average annual return: http://www.investinganswers.com/educati ... umber-1996.

So consider this one explained. The Harvard endowment had an average annual return over 40 years of 12.3% versus about 12.65% for the S&P 500. Therefore, the Harvard endowment DID NOT beat the S&P 500.

A much better question is how Warren Buffett's Berkshire Hathaway, even at the ripe old age of 86, continues to crush the S&P 500.

Harvard, like most colleges and universities, operates on a fiscal year ending in June. Since the Harvard press release in question was issued in September 2014 it u ndoubtedly is quoting returns for years ending in June, not December. We really don't know the average, or annualized, returns of the S&P 500 for the 40 years ending June 30, 2014. This isn't a minor point, because 1974 was one of the worst years for the S&P 500 (-26.5%), while 1975 was an excellent year (+37.2%). There would be a major difference between beginning a calculation of average returns in July of 1974 or January of 1975.

[McGilicutty]

The Harvard press release from 2014 says that the endowment had an "average annual return" of 12.3% over the past 40 years. See http://news.harvard.edu/gazette/story/2 ... year-2014/. The average annual return of the S&P 500 from Jan 1, 1974 to December 31, 2014 was 12.65% whereas the CAGR including dividends was 11.08%.

I wonder if this supposed outperformance against the S&P 500 is just a terminology issue. In any event, the investing conditions and people who delivered the supposed outperformance are long gone.

EDIT: After a little further research, it appears that the marketwatch author is comparing the CAGR of the S&P 500 against the average annual return of the Harvard endowment. See here for an explanation of CAGR versus average annual return: http://www.investinganswers.com/educati ... umber-1996.

So consider this one explained. The Harvard endowment had an average annual return over 40 years of 12.3% versus about 12.65% for the S&P 500. Therefore, the Harvard endowment DID NOT beat the S&P 500.

A much better question is how Warren Buffett's Berkshire Hathaway, even at the ripe old age of 86, continues to crush the S&P 500.

Harvard, like most colleges and universities, operates on a fiscal year ending in June. Since the Harvard press release in question was issued in September 2014 it u ndoubtedly is quoting returns for years ending in June, not December. We really don't know the average, or annualized, returns of the S&P 500 for the 40 years ending June 30, 2014. This isn't a minor point, because 1974 was one of the worst years for the S&P 500 (-26.5%), while 1975 was an excellent year (+37.2%). There would be a major difference between beginning a calculation of average returns in July of 1974 or January of 1975.

Not really. The S&P 500 was at 79.31 on July 1, 1974 and was at 72.56 on January 1, 1975 (See http://www.multpl.com/s-p-500-historica ... e/by-month). That's only an 8.5% drop which averaged over 40 years isn't much.

Besides, I calculated the average annual return of the S&P 500 from January 1, 1974 not January 1, 1975. If you do the calculation from January 1, 1975 to December 31, 2014, the average annual return of the S&P 500 (including dividends) is 13.64% which smokes Harvard's returns. My calculations were done using this calculator: http://www.moneychimp.com/features/market_cagr.htm

[willthrill81]

With a portfolio split in thirds between LCV, SCB, and SCV from 1972 to now, you would have beaten the S&P 500 by about 2.4% real minus the added ER. And I can almost guarantee you that the expenses of that portfolio would have been a fraction of what Harvard's were, and the investments would have all been liquid.

Probably, taking more risk than the S&P 500 and making investments that are less liquid than the S&P 500. You would expect to be compensated for both.

By that logic, it would seem that non-traded REITs should have a higher return than traded REITs, but I've heard that the former are generally bad investments. Is it due to illiquidity, low returns, or both?

[JoMoney]

...

Probably, taking more risk than the S&P 500 and making investments that are less liquid than the S&P 500. You would expect to be compensated for both.

By that logic, it would seem that non-traded REITs should have a higher return than traded REITs, but I've heard that the former are generally bad investments. Is it due to illiquidity, low returns, or both?

Among the problems with EMH is its implication of the idea that rational agents are pricing "risk premiums". The market is littered with opportunities to take risks with no expectation of higher returns, or maybe more appropriately no expectation of higher returns for the investor whereas there's big money being made by the salesman and people in positions with better information that can transfer the risks to lesser informed suckers investors.

[orca91]

A much better question is how Warren Buffett's Berkshire Hathaway, even at the ripe old age of 86, continues to crush the S&P 500.

Do you mean crushed, as in, in the past?...

http://www.businessinsider.com/warren-b ... 500-2016-2

Not so much in recent times. Pretty even lately.

[willthrill81]

...

Probably, taking more risk than the S&P 500 and making investments that are less liquid than the S&P 500. You would expect to be compensated for both.

By that logic, it would seem that non-traded REITs should have a higher return than traded REITs, but I've heard that the former are generally bad investments. Is it due to illiquidity, low returns, or both?

Among the problems with EMH is its implication of the idea that rational agents are pricing "risk premiums". The market is littered with opportunities to take risks with no expectation of higher returns, or maybe more appropriately no expectation of higher returns for the investor whereas there's big money being made by the salesman and people in positions with better information that can transfer the risks to lesser informed suckers investors.

That sounds spot on to me.

There are many areas of potential investment that just seem deplorable from a risk/return standpoint (i.e. non-traded REITs, vacant land).

Part of my problem with the EMH is that by the nature of my profession as a social scientist, I'm all too aware of the many biases in human judgment that preclude any presumption that human being are 'rational agents'. Humans' actions seem to be determined far more by their emotions than logic. And there are certainly many in the financial services industry who are very good at playing their hand to investors' emotions.

[sadie wess]

How do you explain that?

Probably, taking more risk than the S&P 500 and making investments that are less liquid than the S&P 500. You would expect to be compensated for both.

Investments that are appropriate for Harvard are probably not appropriate for me. Harvard does not plan to retire at age 65.

[Phineas J. Whoopee]

...
Part of my problem with the EMH is that by the nature of my profession as a social scientist, I'm all too aware of the many biases in human judgment that preclude any presumption that human being are 'rational agents'. Humans' actions seem to be determined far more by their emotions than logic. And there are certainly many in the financial services industry who are very good at playing their hand to investors' emotions.

The EMH, which of course is only a hypothesis, not a theory, does not presuppose rational action on the part of investors. The idea it does is an implication of an originally purposeful misrepresentation, I use the word parody, of the hypothesis. I wrote an explanation of it in this post, responding to points much the same as yours. Among other things my post debunks the parodic idea that there is a right price, but someone irrational is likely to trade at some other, wrong price. Perfect pricing is inherently impossible, even if all investors were fully rational and informed. Please read the linked post for the explanation.

I don't mind if people want to argue against the EMH, and may even engage with them, even agree. It has its problems. But I do object if somebody argues against a parody of it promulgated by the croupiers for the purpose of pocketing their customers' investment returns.

PJW

[sambb]

I dont hold Harvard or Warren Buffet in high regard for their "skill" - there is always going to be someone a few deviations above the mean. Great for them though, and congrats to them. I believe that 1/16000 investors is about 4 deviations above the mean in a random sample.

[willthrill81]

...
Part of my problem with the EMH is that by the nature of my profession as a social scientist, I'm all too aware of the many biases in human judgment that preclude any presumption that human being are 'rational agents'. Humans' actions seem to be determined far more by their emotions than logic. And there are certainly many in the financial services industry who are very good at playing their hand to investors' emotions.

The EMH, which of course is only a hypothesis, not a theory, does not presuppose rational action on the part of investors. The idea it does is an implication of an originally purposeful misrepresentation, I use the word parody, of the hypothesis. I wrote an explanation of it in this post, responding to points much the same as yours. Among other things my post debunks the parodic idea that there is a right price, but someone irrational is likely to trade at some other, wrong price. Perfect pricing is inherently impossible, even if all investors were fully rational and informed. Please read the linked post for the explanation.

I don't mind if people want to argue against the EMH, and may even engage with them, even agree. It has its problems. But I do object if somebody argues against a parody of it promulgated by the croupiers for the purpose of pocketing their customers' investment returns.

PJW

Do you concur with Investopedia's characterization of the EMH? It sounds very similar to other explanations I've seen of it, though less...sophisticated...than yours.

If so, then the biases that human investors exhibit can potentially be exploited in myriad ways. I think that this is very possible in macro terms, but I don't think that many can do so consistently enough with a strong enough advantage to overcome the inherent costs, which is why I'm an index investor who buys and holds. So maybe it's all semantics.

[lhl12]

Even if Harvard slightly lagged the S&P 500 over that period, that is still an excellent result. Harvard would never have set an asset allocation that was 100% S&P 500. A much more reasonable reference for that 40 year period would be a portfolio that was 70% equities and 30% fixed income, which I expect significantly lagged the S&P alone. Also, if that 70% equity allocation was set to global equities instead of the S&P 500 then that would have further improved Harvard's relative performance. Finally, I expect the volatility of Harvard's actual portfolio over that 40 year period was meaningfully lower than that of the S&P 500. So, on a risk-adjusted basis Harvard did even better.

So, I conclude that Harvard did substantially better over the past 40 years on a risk-adjusted basis than a simple indexed portfolio would have done.

[Kevin M]

As others have mentioned, it's easy to find investments that would have beaten the S&P 500 over 40 years or more. For example, US small-cap value (SCV) stocks returned 14.46% compared to 10.18% for S&P 500 from Jan 1972 through Feb 2017. Over that period the compounding resulted in terminal values of $4,456,142 for SCV vs. $798,701 for S&P. Backtest Portfolio Asset Class Allocation.

Sure, SCV has been riskier with a standard deviation of 18.10% compared to 15.26% for S&P, but Sharpe ratio for SCV was higher at 0.59 compared to 0.41 for SCV, so even on a risk-adjusted basis SCV looks better. If we're going to go only on historical results, then simply invest in SCV instead of large-cap US stocks, and beat both the S&P 500 and Harvard.

Of course Harvard did not invest in SCV, but has a diversified portfolio. As the article points out, Harvard's policy allocation to US stocks was only 11% when the article was written.

My next thought was that a retail investor can't invest in things that Harvard does, like timberland. However, the article contends that now there are ETFs that do allow a retail investor to construct a portfolio that seems to generate returns similar to Harvard's. One example is to use ETF WOOD to mimic Harvard's investments in timber. Interesting.

Note that the author states that he's been using this approach for his clients since 2009. Even at the time the article was written, this portfolio had underperformed the S&P 500 over the previous five years (since he started using this approach). The author stresses that you should look at longer-term results, which of course is true, but the article seems kind of like something he wrote to get his clients not to abandon him due to recent inferior performance.

I doubt most of us are willing to risk the tracking error regret of using a portfolio like the author discusses, just as most of us probably are unwilling to risk the tracking error regret of using something like the Larry Portfolio, which combines small-cap value stocks with low-risk bonds. It would take an awful lot of study and contemplation to develop the confidence that a portfolio like the author recommends makes enough sense for us to stick with it despite 5, 10 or maybe even 20 years of underperformance relative to a more typical total market approach.

Kevin

[willthrill81]

If Harvard was doing so great with their portfolio, then why did they just announce that they're downsizing their management team and moving toward more index investing?

I suspect it's because they were more successful with their investments 40 years ago than they have been for the last decade. While I'm not a strong proponent of the EMH, I think that markets have become more efficient over the last 20 years due to the easy access of information and other factors. This would seem to me to make Harvard's active approach less successful in terms of performance.

[jf89]

Does it really matter? I am fully aware that certain people are going to get better returns that I will over any period of time. What I'm concerned about is whether I am in that bottom portion of people that over-reached and failed. I can't tell reading this thread whether the number was mis-reported or if they did in fact outperform the S&P 500. If they did, God bless them. If they didn't, well it seems like they couldn't have been THAT far off, so they didn't do too bad.

[Phineas J. Whoopee]

...
Do you concur with Investopedia's characterization of the EMH? It sounds very similar to other explanations I've seen of it, though less...sophisticated...than yours.
...

Investopedia, unfortunately because I like to use it as a source for definitions and explanations, gets it precisely wrong. That the Efficient Market Hypothesis claims it's impossible for anyone to beat the market is as parodic as it gets.

The efficient market hypothesis (EMH) is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.
...

Wikipedia does no better, but to their (dis)credit, they're just copying off Investopedia, with a few word changes, or maybe the cribbing is in the other direction.

Morningstar does a little better in its glossary, but still says silly stuff:

...
attempts to outperform the market are essentially a game of chance rather than one of skill.
...

If I were trying to discredit a hypothesis whose implications would mean my boat's about to be repossessed, I'd pretend it made predictions that are clearly untrue, too. Fortunately for the EMH, it says no such thing:

...
The expected value is just one of many possible summary measures of a distribution of returns, and market efficiency per se (i.e., the general notion that prices "fully reflect" available information) does not imbue it with any special importance.
...

Who we gonna believe, the beeswax salesperson or the person who explained it properly?

Bumblebees, and I heard the legend no later than 1970, probably earlier, and the interesting part is the prefix bumble has been conserved, after all there are around 20,000 species of bees, and only about 250 qualify for the bumble moniker, as everybody knows can fly, could all along, and the person who reputedly worked a few numbers out on the back of a napkin at a dinner party was proving they can't fly like airplanes, therefore they must do something else.

I don't think most bumble-bee pointer outers are consciously lying. I should think they're, probably innocently, repeating an untruth they heard from somebody they find credible. Who wouldn't like to stick it to those uppity ivory tower scientists who know everything except common sense?

See any similarities to the EMH parody?

PJW

[wolf359]

I dont hold Harvard or Warren Buffet in high regard for their "skill" - there is always going to be someone a few deviations above the mean. Great for them though, and congrats to them. I believe that 1/16000 investors is about 4 deviations above the mean in a random sample.

Good for Harvard. But I don't have Harvard's resources, so it is not actionable for me.

And good for Warren Buffet. Except I CAN invest like Warren Buffet. It's easy. Just buy Berkshire Hathaway.

And if I wanted to do good enough, and beat Harvard's recent performance or come close, I can just buy a cheap index fund.

I can reliably get market performance (minus a little bit for costs) by just buying an index fund.

Harvard maybe beats it and maybe doesn't over the next 40 years.

[691175002]

I have read several threads here about the poor performance of the Harvard endowment in the last 5 years, but according to the link below, it has beaten the S&P 500 by an average of 2% a year over the last 40 years. How do you explain that?

Anyone can beat the market easily. Borrow a bunch of money, invest it in the S&P500, wait twenty years. If market growth has outpaced your interest payments, you have beaten the market. This is extremely likely to occur if historical patterns persist.

Efficient markets imply that it is impossible to deliberately and consistently beat the market on a risk adjusted basis. In practice this definition starts to flow both ways such that anyone who has beaten the market must have taken on additional risk, even if that risk cannot be measured using traditional tools.

Endowments are in a position to take considerably more risk than the average investor due to their flexible withdrawals and very long investment horizon. Their recent performance has also been awful though.

[inbox788]

I'd argue that investment style for Buffett, Harvard AND SP500 have changed in 40 years. Also, the market and the companies that make up the market have changed substantially over that long timeframe. Now there are important elements that have been preserved in all these, but I think we're making a mistake thinking that there's some long term comparison that's valid that might make sense looking at things short term.

[kolea]

The Harvard press release from 2014 says that the endowment had an "average annual return" of 12.3% over the past 40 years. See http://news.harvard.edu/gazette/story/2 ... year-2014/. The average annual return of the S&P 500 from Jan 1, 1974 to December 31, 2014 was 12.65% whereas the CAGR including dividends was 11.08%.

I wonder if this supposed outperformance against the S&P 500 is just a terminology issue. In any event, the investing conditions and people who delivered the supposed outperformance are long gone.

EDIT: After a little further research, it appears that the marketwatch author is comparing the CAGR of the S&P 500 against the average annual return of the Harvard endowment. See here for an explanation of CAGR versus average annual return: http://www.investinganswers.com/educati ... umber-1996.

So consider this one explained. The Harvard endowment had an average annual return over 40 years of 12.3% versus about 12.65% for the S&P 500. Therefore, the Harvard endowment DID NOT beat the S&P 500.

This report from HE says they had annualized return in excess of 10% over the last 20 years. I have always considered "annualized return" to be CAGR. The report is undated by refers to FY 2016, so I take it to be late 2016. 20-year (total return) CAGR for the S&P 500, ending 12/2016 is 7.6%. So for the last 20 years they seem to have beat the market.

[willthrill81]

This report from HE says they had annualized return in excess of 10% over the last 20 years. I have always considered "annualized return" to be CAGR. The report is undated by refers to FY 2016, so I take it to be late 2016. 20-year (total return) CAGR for the S&P 500, ending 12/2016 is 7.6%. So for the last 20 years they seem to have beat the market.

Then why would they be radically changing their investment strategy this year, laying off investment managers left and right, moving toward a more index based approach? Maybe because they were far behind even a 60/40 portfolio for the last five and ten year periods?

Even if I had to pay half of it in fees, I would do so in a heartbeat if I had a very realistic, demonstrated-with-good-data shot at earning 2% more than the S&P 500. I just really doubt that they could do that going forward.

[Taylor Larimore]

Bogleheads:

According to the Boston Globe, In recent years Harvard has significantly under-performed the U.S. total stock market.

https://www.bostonglobe.com/business/20 ... story.html

Best wishes.
Taylor

[snowshoes]

Bogleheads:

According to the Boston Globe, In recent years Harvard has significantly under-performed the U.S. total stock market.

https://www.bostonglobe.com/business/20 ... story.html

Best wishes.
Taylor

I read that somewhere too > viewtopic.php?t=200080

[willthrill81]

Bogleheads:

According to the Boston Globe, In recent years Harvard has significantly under-performed the U.S. total stock market.

https://www.bostonglobe.com/business/20 ... story.html

Best wishes.
Taylor

They say exactly that on their 2016 annual report. Their performance lagged a 60/40 portfolio by 3% over the last five years.

Again, they wouldn't have made the recent radical changes to their investment strategy if it was so successful.

[randomguy]

One thing to remember is that comparing the harvard endowment to the S&P isn't fair. The endowment has some income requirements that prevent it from being 100% stocks. One of the reasons for the restructuring after 2007-8 was a realization that the investments they were in didn't meet the requirements that had for income.

With any strategy that deviates from the market portfolio, having 5-10 year periods of out performance or underperformance should be expected. It doesn't mean much. You don't stop investing in stocks because bonds happen to beat them over a 3 year period. Now with something like Harvard, you have to realize they don't have the same people they used to. The had a stud manager from 1990 to about 2015 who easily beat the market over that period. But he left (maybe because he was only getting paid like 10 million instead of his fair market value of like 100 million) along with a bunch of other people and they haven't had the same results. Was that manager lucky or was he just one of the few that adds value? Who knows. There is still a chance that after 60 years or so that most of Warren Buffets outperformance is just a result of him getting lucky breaks.

[kolea]

This report from HE says they had annualized return in excess of 10% over the last 20 years. I have always considered "annualized return" to be CAGR. The report is undated by refers to FY 2016, so I take it to be late 2016. 20-year (total return) CAGR for the S&P 500, ending 12/2016 is 7.6%. So for the last 20 years they seem to have beat the market.

Then why would they be radically changing their investment strategy this year, laying off investment managers left and right, moving toward a more index based approach? Maybe because they were far behind even a 60/40 portfolio for the last five and ten year periods?

Even if I had to pay half of it in fees, I would do so in a heartbeat if I had a very realistic, demonstrated-with-good-data shot at earning 2% more than the S&P 500. I just really doubt that they could do that going forward.

I am not trying to make a case for endowment funds here, I was mostly commenting on whether they were reporting arithmetic average returns or geometric average (i.e., CAGR) returns; someone above thought they were reporting arithmetic average (which are higher than geometric).

But that being said, there is no reason that out-performance must happen on a year by year basis. What matters more is cumulative performance - do we have more assets today than we would if we used a different investment approach?

But of course performance is always tempered with risk, and perhaps it is just that that prompted Harvard to change strategy - perhaps they felt the risk of being hedge-like is more than they wished to bear.

[selters]

Simply put, they have so much money, they have access to investable assets that you and I do not. They also operate under a completely different tax structure that helps their returns.

I don't think that is a valid argument. Is there any reason to believe assets not available to regular retail investors should outperform the public stock market? The S&P 500 total return index does not take taxes into account, so even a 0% tax rate won't help you outperform.

[richardglm]

Simply put, they have so much money, they have access to investable assets that you and I do not. They also operate under a completely different tax structure that helps their returns.

I don't think that is a valid argument. Is there any reason to believe assets not available to regular retail investors should outperform the public stock market? The S&P 500 total return index does not take taxes into account, so even a 0% tax rate won't help you outperform.

Yes, there is some reason. Even completely disregarding whether some assets engage in riskier business practices (which is also a possibility) it is known that there is a small but significant illiquidity premium with some assets, which really cannot be bought and sold on the open market, and are quite difficult to unload sometimes, or even impossible. In contrast, when the market loses relative liquidity, like in 2009, at least you can sell your public shares at a discount.

Now, allow me to contradict what I just said. Illiquidity premium is only part of both diversifiable and undiversifiable risk (and thus, by CAPM you only get illiquidity premium from the undiversifiable part) and isn't usually separable from other risk factors (quantitatively) which makes it very difficult to estimate. In addition, illiquid assets are often very difficult to appraise, leading to buying or selling at inflated or depressed prices (benefitting either the buyer or seller) which might also be considered a risk factor.

A cynical response might also be that public companies often care more about optimizing their quarterly numbers and impressing analysts, whereas privately held companies can make better long term choices, but I don't know how much evidence there is for this.

[WallStreetPhysician]

I have read several threads here about the poor performance of the Harvard endowment in the last 5 years, but according to the link below, it has beaten the S&P 500 by an average of 2% a year over the last 40 years. How do you explain that?

But if you can beat Harvard with a simple S&P 500 index fund, as you could have over the past five years, why bother with exotic and illiquid asset classes at all?

Well, if you have a long time horizon like Harvard, you have good reason to.

Sure, the S&P 500 has generated 16.88% over the past five years. But that's a historical anomaly. Over the longer 40-year period, the S&P 500 has generated an annual return of only 10.29%.

Harvard has generated 12.3% annual returns over the past 40 years. This outperformance of 2.01% per year compared to the S&P 500 may not seem like much,

http://www.marketwatch.com/story/why-yo ... 2014-09-30

How do you explain Warren Buffet beating the S&P 500 by 10% over the past 50 years? Some people can beat the market. Not many, but it doesn't surprise me if Harvard found them.

-WallStreetPhysician

[Valuethinker]

With a portfolio split in thirds between LCV, SCB, and SCV from 1972 to now, you would have beaten the S&P 500 by about 2.4% real minus the added ER. And I can almost guarantee you that the expenses of that portfolio would have been a fraction of what Harvard's were, and the investments would have all been liquid.

Probably, taking more risk than the S&P 500 and making investments that are less liquid than the S&P 500. You would expect to be compensated for both.

By that logic, it would seem that non-traded REITs should have a higher return than traded REITs, but I've heard that the former are generally bad investments. Is it due to illiquidity, low returns, or both?

Retail non traded REITs pay far far higher fees than their institutional Limited Partnership equivalent.

Any gain from investing in illiquid assets is wiped out by the problems of high fees and no real way to audit management. It's a classic Asymmetric Information problem in academic language.

Exception is TIAA RE annuity and there the performance seems to be similar (within the confines of fund manager returns dispersion-- TIAA you are betting on only one manager, Vanguard REIT index fund you are betting on a multiplicity of managers).

[Valuethinker]

Da

How do you explain Warren Buffet beating the S&P 500 by 10% over the past 50 years? Some people can beat the market. Not many, but it doesn't surprise me if Harvard found them.

-WallStreetPhysician

Data suggests that by-and-large the outperformance active managers achieve does not exceed the fees paid.

Note that if Buffett had taken a hedge fund like fee his investors would be something like 1/100th as well off as they are, over that time period.

Also successful fund management is only known ex post, and we don't know what his composed of skill v. luck. So it's quite possible to find managers who are successful over 10, 20, 30 even 40 years. However that's only by looking backwards.

We don't know how Buffett is going to do over the next 50 years.

[Valuethinker]

Simply put, they have so much money, they have access to investable assets that you and I do not. They also operate under a completely different tax structure that helps their returns.

I don't think that is a valid argument. Is there any reason to believe assets not available to regular retail investors should outperform the public stock market? The S&P 500 total return index does not take taxes into account, so even a 0% tax rate won't help you outperform.

Yes, there is some reason. Even completely disregarding whether some assets engage in riskier business practices (which is also a possibility) it is known that there is a small but significant illiquidity premium with some assets, which really cannot be bought and sold on the open market, and are quite difficult to unload sometimes, or even impossible. In contrast, when the market loses relative liquidity, like in 2009, at least you can sell your public shares at a discount.

Now, allow me to contradict what I just said. Illiquidity premium is only part of both diversifiable and undiversifiable risk (and thus, by CAPM you only get illiquidity premium from the undiversifiable part) and isn't usually separable from other risk factors (quantitatively) which makes it very difficult to estimate. In addition, illiquid assets are often very difficult to appraise, leading to buying or selling at inflated or depressed prices (benefitting either the buyer or seller) which might also be considered a risk factor.

A cynical response might also be that public companies often care more about optimizing their quarterly numbers and impressing analysts, whereas privately held companies can make better long term choices, but I don't know how much evidence there is for this.

There's a fair bit of analysis on the former suggesting it is true. HOWEVER it may not matter. Because eventually the market catches up with them.

Not sure what the evidence is on private companies. In aggregate, they outgrow the profits of the US listed companies-- that much seems clear. The whole Venture Capital Cycle suggests as much (i.e. IPO companies at a premium for Founders & VCs & those investors paying the IPO price, at the expense of future investors).

[Phineas J. Whoopee]

...
How do you explain Warren Buffet beating the S&P 500 by 10% over the past 50 years? Some people can beat the market. Not many, but it doesn't surprise me if Harvard found them.
...

Hi Doctor.

If you're saying the Efficient Market Hypothesis predicts nobody can ever attain higher returns than the market, you may wish to read this post earlier in this thread, its link, and the followup which also appears earlier in this thread.

If that's not what you mean will you please clarify? I'll do my best to answer.

PJW

[wolf359]

We don't know how Buffett is going to do over the next 50 years.

Warren Buffet is 86 years old. His performance 50 years from now can probably be predicted.

Interestingly, John Bogle's performance 50 years from now can also probably be predicted.

Beethoven could tell you how to write a symphony, but you can't write a symphony like Beethoven does. You can't copy, with any hope of success, a Beethoven or Buffett. You can copy Bogle at any moment of time. Just buy the damn index fund.

-John Bogle

[nisiprius]

The other thing that needs to be said is that, unfortunately, financial data is badly behaved and averages don't settle down over time the way you might expect them to.

The average (CAGR) for the S&P 500 and its predecessors, 1926-1998 inclusive, a period of 74 years, was 11.39%.
But the CAGR for 1929-2008, a period of 80 years, was 8.91%.

So a difference of 2%, annualized, over forty years, isn't really conclusive. In the above example, we see that the "same" portfolio, the S&P 500 and predecessors, 1926-1998, beat itself by more than 2% compared to how it did 1929-2008. And those time periods include seventy years of overlap! That is to say, just a few really good or really bad years at the start of the end can pull a seventy-year average up or down by that much.

[691175002]

How do you explain Warren Buffet beating the S&P 500 by 10% over the past 50 years? Some people can beat the market. Not many, but it doesn't surprise me if Harvard found them.

-WallStreetPhysician

His early years were highly leveraged - I believe he was on average 160% invested. His advantage was access to extremely low cost leverage (via the insurance business). His past 10-15 years have not been spectacular.

Comparisons must always be done on a risk adjusted basis or finance falls apart. For example, any trading strategy can be inverted, so the existance of a "losing" strategy (before fees) implies that an opposite "winning" must also exist. If you ignore risk, then investors who hold cash or fixed income are losing to the market, and shorting those assets (aka borowing/leverage) becomes a free source of money.

As I've said before, beating the market is easy if you are willing to invest borrowed money. Historically being 120% invested has very low probability of ruin, and there is considerable evidence that it produces abnormal levels of outperformance because so few people are willing or able to aquire leverage.

Also note that there are billions of potential investors, so if you were to assume having a successful year is a 50-50 coin flip we expect at least a couple people to win 30+ consecutive years purely by chance.

[JimSmiley1850]

Can't resist a comment -- as a newly minted MBA schooled in EMH and some stats, I knew that someone would have to be at the upside of the distribution of market returns. OK so it turns out that the 1/16000+ guy could be identified and is Buffet. Concluding that in 1985 I decided it would be foolish to buy BRK as his performance was just luck. Hmmm..... (Finally bought in 1996 .. And it helped pay for kids college)

[Phineas J. Whoopee]

Can't resist a comment -- as a newly minted MBA schooled in EMH and some stats, I knew that someone would have to be at the upside of the distribution of market returns. OK so it turns out that the 1/16000+ guy could be identified and is Buffet. Concluding that in 1985 I decided it would be foolish to buy BRK as his performance was just luck. Hmmm..... (Finally bought in 1996 .. And it helped pay for kids college)

Hi JimSmiley1850.

If you're saying the Efficient Market Hypothesis predicts nobody can ever attain higher returns than the market other than by luck, you may wish to read this post earlier in this thread, its link, and the followup which also appears earlier in this thread.

If that's not what you mean will you please clarify? I'll do my best to answer both you and WallStreetPhysician.

PJW

[staythecourse]

Lets say there are no issues with the methodology and fees are accounted for and Harvard actually did better by 2% vs. SP500 (which had a proxy of Bogle's SP500 fund over last 40 years). Are we supposed to be that impressed? So basically, one of the finest institutions in the WORLD, who has MASSIVE financial resources and connections, and has some of the MOST brilliant folks working directly or indirectly on their behalf ONLY beat what a random, retail investor who may have NO knowledge of what a bond or stock is by only 2%?

So we are to cheer that the 2 ends of the spectrum of financial acumen when it comes to investing is a difference of 2%? That is pathetic. That is like saying the chances of a Harvard train doctor and some random guy who watches the ER after 40 years is only a 2% improvement in outcomes? We are supposed to cheer for either situation?

I would say that is a big FAILURE to even be proud of that supposed out performance.

Good luck.

p.s. Yes I agree with others in relation to a proper benchmark is needed AND accounting of fees and taxation (if attempted by anyone other then a nonprofit) before even thinking that 2% is real.

[burt]

How do you explain that?

Probably, taking more risk than the S&P 500 and making investments that are less liquid than the S&P 500. You would expect to be compensated for both.

Investments that are appropriate for Harvard are probably not appropriate for me. Harvard does not plan to retire at age 65.

+1
Very good. Thank-you.

burt

[gtwhitegold]

Issue looks mostly political to me. God forbid paying someone a competitive wage to his or her peers.

http://awealthofcommonsense.com/2016/10 ... ndowments/