We crush stock indexes, Yale claims

[Northern Flicker]

The Yale portfolio is only 20% bonds, so VASGX LifeStrategy Growth is probably a fairer comparison. It delivered a CAGR of 6.5% the last 10 years. Considering that is not even an admiral share class, and endowments invwdt at institutional levels, the 10 bp lag in return would not really be a lag at all.

Actually for 2017 it was under 6% bonds. Not sure over the last 10 years.

[iamlucky13]

For the 20-year period ending June 30, Yale's endowment earned a 12.1 percent annualized return, beating its benchmark Wilshire 5000 stock index, which gained 7.5 percent. A passive portfolio with a 60 percent stock allocation and 40 percent in bonds, meanwhile, had a 20-year return of 6.9 percent.

Wow! Yale earned 12.1% over 20 years with 60 percent stocks and 40 percent bonds!?!?!

Oh. Right. Yale's risk tolerance as a perpetual institution is completely different than individual investors who will inevitable at some point no longer be able to accrue, so unsurprisingly, so is their allocation.

If they need to justify their aggressive methods and alternative investments to their donors and regents, I get it, but this is pretty much irrelevant to the target audience for Buffet's comment.

The 60/40 comparison was somewhat disingenuous, and as a response to Buffet's advice to individual investors strikes me even as a bit irresponsible.

Anyways, they still haven't compared their active management to passive management of a similar allocation, much less compared the strategies on average for such allocations.

[grok87]

Recent post at markovprocesses.com suggests that the Yale Portfolio returns could have been achieved with a 60/40 portfolio leveraged at 40%... for less risk than Yale took on. I had trouble copying in the link, but it is also at Abnormalreturns.com, Friday's post (4/13/18).

For the last 10 years 60/40 WITHOUT leveRage would have done it. Vanguard balanced index was Cagr of 6.6% same as the Yale endowment.

Vanguard balanced index is a US only stock/bond fund. Is the suggestion that Yale should invest 100% in US allocation and no international?

Fair enough.
Is there a global balanced index fund that we could use instead for the comparison? Maybe one of the target risk funds?

[pkcrafter]

In 2015,

Swensen said this: Fees can do terrible damage to your investment returns. Even in higher-risk, higher-return asset classes such as stocks you can only expect high-single digit or low double-digit returns over long periods of time. So if you end up paying 1 percent to a financial adviser, and then 1 percent to 2 percent on top of that in mutual fund fees and then adjust for inflation (2 percent to 3 percent a year), you're losing half of your returns or more, Swensen says. The odds, he says, are overwhelmingly in favor of index funds.

So Swensen says very-low-fee index funds make the most sense for individual investors. He says if you compare performance of higher-priced actively managed mutual funds to lower-cost index funds, "when you look at the results on an after-fee, after-tax basis over reasonably long periods of time," the odds, he says, are overwhelmingly in favor of index funds.

https://www.npr.org/2015/10/17/43699364 ... portfolios



Paul

[Tyler9000]

Maybe passive doesn't always beat active? At least for institutional investors.

https://www.institutionalinvestor.com/a ... ale-claims

Thanks for the link. Very interesting.

I started writing a reply, but it quickly got out of hand and I realized I had way more to say than could be summarized in a simple message board post. So I did a full write-up instead: Things We Can All Learn From The Yale vs. Buffett Debate

I hope you find it interesting. Your topic certainly took up way more of my day than you realize.

[CULater]

Maybe passive doesn't always beat active? At least for institutional investors.

https://www.institutionalinvestor.com/a ... ale-claims

Thanks for the link. Very interesting.

I started writing a reply, but it quickly got out of hand and I realized I had way more to say than could be summarized in a simple message board post. So I did a full write-up instead: Things We Can All Learn From The Yale vs. Buffett Debate

I hope you find it interesting. Your topic certainly took up way more of my day than you realize.

Wonderful article. I think you did a great job of covering all the issues and debate points and arrived at a very meaningful conclusion that pertains to individual investors. Thanks for all the effort! I'll read and re-read the article until I'm sure most of it has soaked into my frazzled brain. Glad my measly little post inspired this informative effort on your part.

[barelybarefoot]

5 problems with this claim:

1. Scalability. Yale has a $27B endowment. It’s large, but not massive. It’s growth is limited because it doesn’t take outside investors, and the only infusions of capital are Yale’s budget surplus and reinvested endowment earnings. As a investment vehicle grows, it returns will slow down. Vanguard has $5T, 185x that of Yale’s AUM. Even Berkshire Hathaway’s annual returns have shrunk as the vehicle itself as grown due to WB being unable to find enough places to allocate his capital, and in the long run will eventually converge with the S&P 500 (hence, a cynic would say is the reason for WB’s championing index funds now.)
2. Fees. Yale has been able to hold down fund manager compensation and pays far less than the 2-and-20 standard on the street (although princely packages compared to professor compensation). But you can bet that any retail investor who plough into such a structure will be buying their fund managers yachts.
3. Taxes. Yale is a 501(c)3. They don’t pay any taxes on reallocations, rebalancing, etc.
4. Stability. Yale is a university. It draws maybe 3-5% from its endowment every year, year in and year out. It is older than the republic and has seen its share of downturns. As a sole shareholder, it will not “panic” and make mass withdrawals in downturns. As a result, the fund needs to keep a very predictable, very regular, and very small portion of its assets in liquid form.
5. Access. Yale is not investing entirely in a portfolio of public equities. In public markets, the ability to access management both for information and to have a hand in governance is next to nonexistent. In private equity investing, good managers can actually add value to their own investment by participating in governance.

Finally, I don’t believe Warren said that passive always beats active. I believe Warren said the “active” that is accessible by ordinary retail investors (high fees, few information or governance rights, tax inefficient) is unlikely to outperform passive over the long term due to these structural headwinds — and if they do, they are even less likely to repeat that performance for another period. The “active investment management” that is accessible to large institutions (esp nonprofits) have structural advantages versus the mutual funds you can buy off Edward Jones.

So, yes, Yale can crush stock indices. However, you are not Yale. You do not have access to the same investing opportunities as does Yale. You do not have the same tax advantages as does Yale. So therefore, you are far less likely to be able to “crush” those stock indices as is Yale, as Yale’s tailwinds are your headwinds. And anyone who claims they can give you the same advantages as Yale for the low, low price of 2% of assets under management, and 20% of gains over a benchmark, is full of stercus vaccae.

+++++1. What a fantastic post, thanks for summary learn d a lot

[bberris]

It is simply a math equation. The total outperformance of some equals the underperformance of the rest, minus costs. The net performance of all investors must equal the average performance minus fees. All this proves is that Yale got lucky. So as Dirty Harry says, "You've got to ask yourself one question: 'Do I feel lucky?'

[wolf359]

I suppose it's not surprising, but has anyone questioned how they managed to absolutely trounce the TSM over a 20 year period? Was it through a superior allocation to specific asset classes, was it through stock picking, was it through market timing, etc.?

They give broad sweeping views of this without a lot of specifics, of course.

Yale's endowment, for instance, said it had 75.1 percent of its portfolio invested in alternatives in June, including a 25.1 percent "absolute return" allocation and 17.1 percent commitment to venture capital. Leveraged buyout funds made up 14.2 percent of the portfolio, while real estate investments accounted for 10.9 percent. Only 3.9 percent of the endowment was invested in domestic equities, well below the average university endowment's 20.7 percent allocation.

75% in alternatives is huge. Fewer than 4% in domestic equities was a shocker to me. I have no doubt that one can far outperform stocks with venture capital if one has the necessary skill, but that's a very active strategy indeed, certainly not something available to the lion's share of investors or even institutions.

I suppose the real question is whether they'll be able to duplicate this feat for the next 20 years. I doubt that this performance was a complete fluke, though, and unlike many here, I wouldn't write it off as such.

If they are 75% invested in alternatives, then TSM is probably not the index that they should be using for benchmarking their performance. I read the Yale report. They do outperform the index on their equities as well, but not as much.

I believe that it is possible to beat an index fund. I just know that it is very unlikely that I will be able to do so. You can reliably get into the top quartile of performance over any given time period by just buying the index, keeping your costs low, and not swinging for the fences. I am not Yale.

[TonyDAntonio]

Doesn't Dave Ramsey and his armada of 'active growth mutual funds' earn 12% per year? What's the big deal here?

[randomizer]

Yale's endowment is several tens of thousands times larger than mine, and their tax status is a little bit different too, so I think I'm just going to nod silently and move on.

[willthrill81]

I suppose it's not surprising, but has anyone questioned how they managed to absolutely trounce the TSM over a 20 year period? Was it through a superior allocation to specific asset classes, was it through stock picking, was it through market timing, etc.?

They give broad sweeping views of this without a lot of specifics, of course.

Yale's endowment, for instance, said it had 75.1 percent of its portfolio invested in alternatives in June, including a 25.1 percent "absolute return" allocation and 17.1 percent commitment to venture capital. Leveraged buyout funds made up 14.2 percent of the portfolio, while real estate investments accounted for 10.9 percent. Only 3.9 percent of the endowment was invested in domestic equities, well below the average university endowment's 20.7 percent allocation.

75% in alternatives is huge. Fewer than 4% in domestic equities was a shocker to me. I have no doubt that one can far outperform stocks with venture capital if one has the necessary skill, but that's a very active strategy indeed, certainly not something available to the lion's share of investors or even institutions.

I suppose the real question is whether they'll be able to duplicate this feat for the next 20 years. I doubt that this performance was a complete fluke, though, and unlike many here, I wouldn't write it off as such.

If they are 75% invested in alternatives, then TSM is probably not the index that they should be using for benchmarking their performance. I read the Yale report. They do outperform the index on their equities as well, but not as much.

I believe that it is possible to beat an index fund. I just know that it is very unlikely that I will be able to do so. You can reliably get into the top quartile of performance over any given time period by just buying the index, keeping your costs low, and not swinging for the fences. I am not Yale.

It's possible to beat the S&P 500's returns with leveraged real estate, for instance. But that's more like running a business than being a passive investor.

[tchoupitoulas]

I read through this thread intending to post Tyler's great analysis from PortfolioCharts, since it just showed up in my inbox, but I see he's already posted it himself. One big question in my mind, Tyler, is whether the performance results you're working with are net of fees. As others have mentioned, it's hard to know whether Yale fully accounts for the various fees they pay, from the in-house staff to the private equity people. Even if it's less than 2 and 20, it's presumably much much more than it would cost to implement the Swensen portfolio using ETFs.

[Tyler9000]

One big question in my mind, Tyler, is whether the performance results you're working with are net of fees. As others have mentioned, it's hard to know whether Yale fully accounts for the various fees they pay, from the in-house staff to the private equity people. Even if it's less than 2 and 20, it's presumably much much more than it would cost to implement the Swensen portfolio using ETFs.

From the text of the annual report: "Yale’s Endowment generated an 11.3% return, net of fees, in fiscal 2017." They don't go into detail about what constitutes those fees, but taking it at face value they do account for them.

[staythecourse]

Okay I am too lazy to read the link, but does it matter? I am sure they hail Mr. Swensen, but he himself CLEARLY states the individual investor should stick with indexes. He himself states the advantage of active is more in private equity, real estate, alternatives, etc...

Even if the article is correct how is it actionable. Does the individual investor have couple billion lying around? The answer is no so WHO CARES what the top 10 college endowments do better or for worst.

Good luck.

[grok87]

Okay I am too lazy to read the link, but does it matter? I am sure they hail Mr. Swensen, but he himself CLEARLY states the individual investor should stick with indexes. He himself states the advantage of active is more in private equity, real estate, alternatives, etc...

Even if the article is correct how is it actionable. Does the individual investor have couple billion lying around? The answer is no so WHO CARES what the top 10 college endowments do better or for worst.

Good luck.

I think, actually, the actionable course is that even institutional investors like Yale would have been better off with a simple portfolio of index funds. For the last 10 years Yale returned 6.6% per year same as the vanguard balanced index fund.

[mickeyd]

Good for Yale and Dave Swensen's smarty-pants team of professionals. There are many funds and institutions that have active investing that beats my dumb index fund AA.

I'm OK with all of that.

[md&pharmacist]

I'm sure Yale can do this, no reason for denial.

I'm not a typical Boglehead, but studying the concerns of the Boglehead community to modify strategy enough to mitigate risk in the right market environment.

I personally found it quite easy to beat the market indices with a lot of work and a good system. I even posted my entire fund portfolio here (up 32% 12 month return at the time I posted). Unfortunately, I found here people don't want to know how I do it. It was called "pure luck", guessing, too much in cash (low risk), too much leverage (high risk), etc. Some say if you can do this why not just be a fund manager and make more? Money is good for security, but not everything - helping people is far more important to me.

Everyone says let's see how you do in a major market downturn. I have already been selling into new highs. If I suspect an opportunistic correction, I repurchase lower. If I suspect a recession/depression, I will have good cash positions for the fire sale. No I don't know when for sure, but I do know so far it's been working well for me and I also know that keeping up with the consensus will decrease my risk of being blindsided. And yes, I'm market timing - looking to buy low and sell high. Far more afraid of dollar cost averaging lofty markets with little cash available for the next big opportunity. I don't get it right all of the time and don't have to, just have to get it right enough of the time.

Ultimately it only matters that those who believe and perform can know it happens. It cannot happen by luck. What I do is very active with my daily involvement but the difference will be millions by retirement, so I appreciate most here want simple, passive low cost market returns which is fine. I think that less than 1 in 100 can/is willing to do what I do and/or are willing to take the risk for more return. It takes a little passion for it too.

I also have only about 15% of my total net worth exposed to the market at this time and pulling back. Will increase exposure after the next major correction stabilizes. Even if I lost all of this 15% I will be more than fine. I don't recommend most do what I do if the risk can significantly impact your quality of life in retirement (I'll never spend everything I have), just pointing out my personal experience shows me Yale and others who are committed can do it.

[CULater]

I'm sure Yale can do this, no reason for denial.

I'm not a typical Boglehead, but studying the concerns of the Boglehead community to modify strategy enough to mitigate risk in the right market environment.

I personally found it quite easy to beat the market indices with a lot of work and a good system. I even posted my entire fund portfolio here (up 32% 12 month return at the time I posted). Unfortunately, I found here people don't want to know how I do it. It was called "pure luck", guessing, too much in cash (low risk), too much leverage (high risk), etc. Some say if you can do this why not just be a fund manager and make more? Money is good for security, but not everything - helping people is far more important to me.

Everyone says let's see how you do in a major market downturn. I have already been selling into new highs. If I suspect an opportunistic correction, I repurchase lower. If I suspect a recession/depression, I will have good cash positions for the fire sale. No I don't know when for sure, but I do know so far it's been working well for me and I also know that keeping up with the consensus will decrease my risk of being blindsided. And yes, I'm market timing - looking to buy low and sell high. Far more afraid of dollar cost averaging lofty markets with little cash available for the next big opportunity. I don't get it right all of the time and don't have to, just have to get it right enough of the time.

Ultimately it only matters that those who believe and perform can know it happens. It cannot happen by luck. What I do is very active with my daily involvement but the difference will be millions by retirement, so I appreciate most here want simple, passive low cost market returns which is fine. I think that less than 1 in 100 can/is willing to do what I do and/or are willing to take the risk for more return. It takes a little passion for it too.

I also have only about 15% of my total net worth exposed to the market at this time and pulling back. Will increase exposure after the next major correction stabilizes. Even if I lost all of this 15% I will be more than fine. I don't recommend most do what I do if the risk can significantly impact your quality of life in retirement (I'll never spend everything I have), just pointing out my personal experience shows me Yale and others who are committed can do it.

For every investor who beats the market there must be at least one dumb investor who is being beaten by the market. Who is that dumb investor and will he/she stay dumb over the long run (or be replaced by another dumb investor) to fund the above market gains of the "smart" investor?

[bberris]

Let me just grab this nit here: the number of investors outperforming and underperforming need not be (and certainly is not) the same. It is the amount of dollars above and below the average that must be the same.

[CULater]

Let me just grab this nit here: the number of investors outperforming and underperforming need not be (and certainly is not) the same. It is the amount of dollars above and below the average that must be the same.

Of course, but we are speaking of "investors" as a representation of money invested. More personalized than talking about "smart money" and "dumb money." At any rate, whenever we hear about some fund, strategy, or individual beating the market we try to identify and understand what smart thing is going on. But we should be really be trying to understand what dumb thing is happening on the other side of the trade. If we can't figure that out, then we're probably kidding ourselves.

[md&pharmacist]

Let me just grab this nit here: the number of investors outperforming and underperforming need not be (and certainly is not) the same. It is the amount of dollars above and below the average that must be the same.

Absolutely, that's why for every outperforming active investor there are many under-performers. A good system in place is what Yale uses to capitalize on this and this is considered in my own fund trading strategy.

The masses buy into euphoria often at market peaks and, due to emotion, freak out and sell during/after a major correction and therefore, without intention, wind up buying high and selling low. I do opposite the herd, selling into lofty, mature high P/E markets/euphoria to hold good cash positions for the corrections but even better these roughly once in a decade recessions or ideally the once in a generation/lifetime great recession or depression. People say I miss out if it goes higher. I don't sell everything, and I know most likely there is almost always an opportunity to buy lower and/or a better performing fund sector.

One of the reasons I am critical of dollar cost averaging and personally at least wait for a correction to buy is because one that dollar costs average monthly or quarterly inevitably will do some buying at market cycle peaks. Of course they will do this as well during market bottoms and that balances, but I don't quite understand why take the risk in mature, euphoric markets. A 30-50% correction reverses several years of dollar cost averaging gains.

Some people sell low not because of emotion but for other reasons. They may be retired and need the cash for their living expenses, or even if they don't need it may be required to take RMD's by law. Imagine those in their early 60's dollar cost averaging in 2006-2008 then having to cash out at market lows for living expenses during their early retirement years. I consider these things when I shun dollar cost averaging as portfolios are largest in the near retirement years and mistakes here hurt the most. I'm not at retirement for another 20 years, so that's 20 years I have to learn to avoid big mistakes.

Kind of feel guilty welcoming the next major correction because those that are heavily invested at the top ultimately take a beating, but this is the reality of our financial markets. On the other hand, one sleeps better at night welcoming the big correction, knowing it presents great opportunity for strong cash positions, as opposed to those that fear it.

All these things Yale is sure to capitalize on. I know I certainly consider all this in my trading strategy.

[md&pharmacist]

Let me just grab this nit here: the number of investors outperforming and underperforming need not be (and certainly is not) the same. It is the amount of dollars above and below the average that must be the same.

Of course, but we are speaking of "investors" as a representation of money invested. More personalized than talking about "smart money" and "dumb money." At any rate, whenever we hear about some fund, strategy, or individual beating the market we try to identify and understand what smart thing is going on. But we should be really be trying to understand what dumb thing is happening on the other side of the trade. If we can't figure that out, then we're probably kidding ourselves.

I wouldn't call it dumb, in my last post I gave some examples of some real world reasons people may buy high and sell low, whether they are active fund or passive index investors.

One example I gave was RMD's. When I'm retired, I think I will keep 5 years of RMD's in cash/low risk bonds so that if a major recession/depression occurs, I'm not selling beaten down stock funds to come up with my RMD's. I doubt most even consider this at 70 1/2 unless they have a seasoned advisor.

[NoRegret]

https://www.markovprocesses.com/blog/en ... red-60-40/

I didn't see anyone posting this link, so I'll. In summary, it shows Yale's performance was similar to a 60/40 with 50% leverage. That said, I think it's difficult to implement in practice -- not that Yale doesn't have access to cheap credit but adopting a levered two-asset portfolio as a policy in real time.

I think Yale's achievement is admirable -- after all high realized returns is what the school cares about. There is a tendency to dismiss volatility as a measure of risk when it suits one's argument, and then turning around to use Sharpe ratio to dismiss someone else's track record.

This thread is a microcosm of wider calls for endowments and pensions to adopt a passive strategy, usually at a higher equity allocation than in the global market portfolio. This is performance chasing at a grand scale. While the trend is alive everyone is a genius, at the eventual cost of future returns.

NR

[grok87]

https://www.markovprocesses.com/blog/en ... red-60-40/

I didn't see anyone posting this link, so I'll. In summary, it shows Yale's performance was similar to a 60/40 with 50% leverage. That said, I think it's difficult to implement in practice -- not that Yale doesn't have access to cheap credit but adopting a levered two-asset portfolio as a policy in real time.

I think Yale's achievement is admirable -- after all high realized returns is what the school cares about. There is a tendency to dismiss volatility as a measure of risk when it suits one's argument, and then turning around to use Sharpe ratio to dismiss someone else's track record.

This thread is a microcosm of wider calls for endowments and pensions to adopt a passive strategy, usually at a higher equity allocation than in the global market portfolio. This is performance chasing at a grand scale. While the trend is alive everyone is a genius, at the eventual cost of future returns.

NR

Thanks
The chart in the link shows that for the trailing 15 years Yale was same as levered 60/40.

But for the last 10 years the story is even simpler. Yale was the same as ACTUAL unlevered 60/40 or the vanguard balanced index fund which had annual avg return or cagr of 6.6% same as Yale.

[Phineas J. Whoopee]

...
One example I gave was RMD's. When I'm retired, I think I will keep 5 years of RMD's in cash/low risk bonds so that if a major recession/depression occurs, I'm not selling beaten down stock funds to come up with my RMD's. I doubt most even consider this at 70 1/2 unless they have a seasoned advisor.

Presumably you're aware, md&pharmacist (where are you located that one person can legally practice both?), you're not required to spend RMDs. You're only required to pay taxes on them. You can reinvest the after-tax remaining value in similar assets. If stocks in tax-deferred accounts are down the very same stocks in taxable will be down. RMD concern about beaten down stocks is misplaced.

I do not have, and I am not, any type of adviser.

PJW

[wrongfunds]

One example I gave was RMD's. When I'm retired, I think I will keep 5 years of RMD's in cash/low risk bonds so that if a major recession/depression occurs, I'm not selling beaten down stock funds to come up with my RMD's. I doubt most even consider this at 70 1/2 unless they have a seasoned advisor.

If only 15% of your net worth is in the market, how much of *that amount* is in the pre-tax retirement accounts subjected to RMD? Isn't it pretty much insignificant compared to your total assets?

Let us assume your worth is $100M. Out of that you have $15M in the market. Out of that $5M is in the retirement account. Assume you are required to take out 5% from it. So you will be taking out (and paying taxes on) $250,000. That is quarter million of dollars! That is a *lot* money for *me* but really it does not even move needle from *your* $100M worth of assets. It is pocket change for you.

If I am wrong about guessing your net worth, then just readjust all the numbers. The basic point of this reply does not change.

[md&pharmacist]

...
One example I gave was RMD's. When I'm retired, I think I will keep 5 years of RMD's in cash/low risk bonds so that if a major recession/depression occurs, I'm not selling beaten down stock funds to come up with my RMD's. I doubt most even consider this at 70 1/2 unless they have a seasoned advisor.

Presumably you're aware, md&pharmacist (where are you located that one person can practice both?), you're not required to spend RMDs. You're only required to pay taxes on them. You can reinvest the after-tax remaining value in similar assets. If stocks in tax-deferred accounts are down the very same stocks in taxable will be down. RMD concern about beaten down stocks is misplaced.

I do not have, and I am not, any type of adviser.

PJW

Sell low = bad. I'll let the other guy sell low so I can pick up there and ride the bull.

Selling a beaten down stock/fund in a retirement account just to repurchase in a taxable account also triggers dual transaction costs at stock/fund weakness. You would wind up with fewer shares because you paid taxes. What's the point of that? Better sold into market euphoria before needed as an RMD. Sell high = good. Just my opinion. Not saying all have to agree.

My original point was Yale probably capitalizes on those that sell low by picking up those shares low and you agreed that happens when some people have to sell and take RMD distributions (has nothing to do with spending it). Lots of people struggled with this in 2008, 2009.

Not ready to abandon buy low sell high strategy.

[md&pharmacist]

One example I gave was RMD's. When I'm retired, I think I will keep 5 years of RMD's in cash/low risk bonds so that if a major recession/depression occurs, I'm not selling beaten down stock funds to come up with my RMD's. I doubt most even consider this at 70 1/2 unless they have a seasoned advisor.

If only 15% of your net worth is in the market, how much of *that amount* is in the pre-tax retirement accounts subjected to RMD? Isn't it pretty much insignificant compared to your total assets?

Let us assume your worth is $100M. Out of that you have $15M in the market. Out of that $5M is in the retirement account. Assume you are required to take out 5% from it. So you will be taking out (and paying taxes on) $250,000. That is quarter million of dollars! That is a *lot* money for *me* but really it does not even move needle from *your* $100M worth of assets. It is pocket change for you.

If I am wrong about guessing your net worth, then just readjust all the numbers. The basic point of this reply does not change.

The point was not the taxes. The original point was buying low and selling high in the account to optimize performance rather than risk selling low in a corrected market, when RMD's may force undesirable trades.

[CantPassAgain]

Not ready to abandon buy low sell high strategy.

Why didn't I think of that?

[inbox788]

https://www.markovprocesses.com/blog/en ... red-60-40/

I didn't see anyone posting this link, so I'll. In summary, it shows Yale's performance was similar to a 60/40 with 50% leverage. That said, I think it's difficult to implement in practice -- not that Yale doesn't have access to cheap credit but adopting a levered two-asset portfolio as a policy in real time.

I think Yale's achievement is admirable -- after all high realized returns is what the school cares about. There is a tendency to dismiss volatility as a measure of risk when it suits one's argument, and then turning around to use Sharpe ratio to dismiss someone else's track record.

This thread is a microcosm of wider calls for endowments and pensions to adopt a passive strategy, usually at a higher equity allocation than in the global market portfolio. This is performance chasing at a grand scale. While the trend is alive everyone is a genius, at the eventual cost of future returns.

NR

My take way from the article is summarized in the graph. Yale achieved higher return by taking higher risk (standard deviation). This "Risk Parity 8%" achieved similar return with much lower risk, almost as low as 60/40. The other risk adjusted outperformers were really Columbia and Princeton, while Cornell underperformed. The rest fall in line connecting the 60/40 and Yale portfolios.

Also, note the time period 2003-2017 includes the Great Recession and the Great Recovery. Would be interesting to see other periods as well as break down by shorter periods, say 5 year intervals to see how the strategies and risk/rewards compare under differing economic situations.

[ncbill]

Any backtesting of that "Risk Parity 8%" over a longer period available?

[wrongfunds]

RMD's may force undesirable trades.

How does that happen? What alternatives you are suggesting to prevent this type of situation?

[willthrill81]

RMD's may force undesirable trades.

You are assuming that RMDs must be spent; that is false. You can sell enough assets to cover the RMDs, then immediately repurchase the assets in a brokerage account, less any income taxes.

[md&pharmacist]

Not ready to abandon buy low sell high strategy.

Why didn't I think of that?

You should "think"!!! Why do you think it's otherwise called "the herd"?

Dollar cost averaging into Amazon 1500 and Apple $900 billion. Wow! Raise your hands if you "think" that's buying low.

Herd the masses buying into euphoric high then buy the shares from them next DOW 10,000. Yale and I and the "thinkers" will be buyers then.

[finite_difference]

I am willing to bet I can beat Yale with a portfolio of 100% VTSAX over the next 20 years .

That said, I hope I’m wrong and they continue to outperform the market and invest the difference in bright young minds and science and art.

[not4me]

One example I gave was RMD's. When I'm retired, I think I will keep 5 years of RMD's in cash/low risk bonds so that if a major recession/depression occurs, I'm not selling beaten down stock funds to come up with my RMD's. I doubt most even consider this at 70 1/2 unless they have a seasoned advisor.

If only 15% of your net worth is in the market, how much of *that amount* is in the pre-tax retirement accounts subjected to RMD? Isn't it pretty much insignificant compared to your total assets?

Let us assume your worth is $100M. Out of that you have $15M in the market. Out of that $5M is in the retirement account. Assume you are required to take out 5% from it. So you will be taking out (and paying taxes on) $250,000. That is quarter million of dollars! That is a *lot* money for *me* but really it does not even move needle from *your* $100M worth of assets. It is pocket change for you.

If I am wrong about guessing your net worth, then just readjust all the numbers. The basic point of this reply does not change.

The point was not the taxes. The original point was buying low and selling high in the account to optimize performance rather than risk selling low in a corrected market, when RMD's may force undesirable trades.

I thought one could take RMDs in kind....is that incorrect? Are you thinking about the tax portion only?

[IlliniDave]

Maybe passive doesn't always beat active? At least for institutional investors.

https://www.institutionalinvestor.com/a ... ale-claims

Thanks for the link. Very interesting.

I started writing a reply, but it quickly got out of hand and I realized I had way more to say than could be summarized in a simple message board post. So I did a full write-up instead: Things We Can All Learn From The Yale vs. Buffett Debate

I hope you find it interesting. Your topic certainly took up way more of my day than you realize.

Great job, Tyler!

[IlliniDave]

Interesting article/thread. Unfortunately (or perhaps fortunately) there's not a lot I can take away from professional management of a huge endowment. Yale has had a nice 20-year run. Kudos to them.

[AlohaJoe]

Maybe passive doesn't always beat active? At least for institutional investors.

https://www.institutionalinvestor.com/a ... ale-claims

Thanks for the link. Very interesting.

I started writing a reply, but it quickly got out of hand and I realized I had way more to say than could be summarized in a simple message board post. So I did a full write-up instead: Things We Can All Learn From The Yale vs. Buffett Debate

I hope you find it interesting. Your topic certainly took up way more of my day than you realize.

Unfortunately this analysis doesn't really tell us anything because it assumes that Yale's asset allocation was unchanged for 40 years. If you download their annual report from 2 or 3 years to see that they change it. Plus I wouldn't be surprised if Swensen would argue that talking about their results before he took charge of their investment strategy in 1985 isn't particularly meaningful.

[Tyler9000]

Unfortunately this analysis doesn't really tell us anything because it assumes that Yale's asset allocation was unchanged for 40 years. If you download their annual report from 2 or 3 years to see that they change it.

The Swensen Portfolio data in the article is indeed a fixed & annually rebalanced asset allocation modeled from the individual assets. The Yale Endowment data makes no such assumption, and I could not have modeled assets like "Absolute Return" or "Leveraged Buyouts" even if I wanted to. Instead, I constructed a "Yale fund" data series using returns information they provide in their annual reports. Think of it as putting 100% of your money into Vanguard Wellesley in the Simba spreadsheet. The data is blind to the underlying portfolio and allows us to study the performance of their managers over time.

Plus I wouldn't be surprised if Swensen would argue that talking about their results before he took charge of their investment strategy in 1985 isn't particularly meaningful.

Very true, and it's something I noted in the conclusions. Although if they want to ignore returns before he joined perhaps they shouldn't make the claim that the methods "will work for decades to come." Unless the endowment also funds making a clone of Swensen, of course.

[wrongfunds]

One of the BH is paying close to 80K per year for his child to attend Yale. I don't think Yale is going to go bankrupt if their endowment did not do well for a year or not! I am sure they cover their expenses from their students.

[nisiprius]

Since I have no way I can invest directly in Yale's endowment fund, and no way I, as a "mass affluent" retail investor can duplicate the fund's investments personally, it's all irrelevant and there's no reason to care. I can either ignore it, or I can get suckered by various people and products flinging around words like "ivy" and "university" and "Yale" and "endowment," or I can go read Swensen's book--which I have regrettably not done, but I understand it suggests a not-so-"unconventional" slice-and-dice type mutual fund portfolio.

One thing about mutual funds is that there is a quantum difference in the way they report composition and performance, compared to things like hedge funds or endowment funds. As this thread shows, when it comes to something like the Yale fund, you are actually in the land of not even really knowing what the facts are. The judgement and knowledge needed to evaluate this kind of portfolio are way beyond me.

Two or three morphs ago, Wealthfront's founder wrote an article claiming not only that all the university endowment funds' stock portfolios have crushed the indexes, but that they, Wealthfront, could enable you, with a click of a mouse, to personally invest in a clone of what the universities were doing. That didn't go on for every long before they switched to something completely different so I don't know how it turned out. Nowadays they are saying that with a click of a mouse you can invest in a clone of what Ray Dalio's All-Weather hedge fund is doing, so I guess they think he's better than university endowment funds.

[Valuethinker]

One of the BH is paying close to 80K per year for his child to attend Yale. I don't think Yale is going to go bankrupt if their endowment did not do well for a year or not! I am sure they cover their expenses from their students.

No.

Yale Endowment provides about 1/3rd of the university's operating expenses, last time I checked.

You have to remember they provide financial aid to a very large fraction of their undergraduate students. And, I would guess, nearly 100% of their graduate level students (where that funding was not available from a 3rd party such as NSF etc.). Their business, law and medical schools this would not be the case, however they are all fairly high cost operations in terms of resources per student.

Where these US private universities make the leverage is in the 1st and 2nd year courses, which are basically the same content at any university, in large class size, with tutorials delivered by grad students. Economics 101 at Stanford Yale etc. will be similar to Wisconsin or U Texas Austin or Minnesota. Perhaps they move faster and are more demanding of the students, but the cost to teach is similar.

[michaeljc70]

"For the 20-year period ending June 30, Yale's endowment earned a 12.1 percent annualized return, beating its benchmark Wilshire 5000 stock index, which gained 7.5 percent."

What? How can a fund with 5% US stocks have that as it's benchmark? It is really comparing apples and orangutans.

[iamlucky13]

"For the 20-year period ending June 30, Yale's endowment earned a 12.1 percent annualized return, beating its benchmark Wilshire 5000 stock index, which gained 7.5 percent."

What? How can a fund with 5% US stocks have that as it's benchmark? It is really comparing apples and orangutans.

I've been thinking along similar lines.

I'm honestly not above conceding that Yale's managers could have it figured out, however useless that information is to me both because of the difficult predicting their future results based on past returns and simply because they don't offer a way for me to join them for the ride if I were convinced I should do what Yale does.

It's not written in stone that nobody can consistently beat the market. It's just unlikely and nobody has a fool proof way of telling ahead of time which investments will do so.

However, when Yale chooses inappropriate points of comparison, it makes me wonder if even their investment team really believes they've got the golden touch, or if they're just making sure the university believes it.

[unclescrooge]

Maybe passive doesn't always beat active? At least for institutional investors.

Yale University's endowment has offered a rebuttal to Warren Buffett and other proponents of low-fee, passive investments.

In its 2017 annual report, released this week, the Ivy League school's investment office argued in favor of the active management strategies long employed by chief investment officer David Swensen and his staff. The top ten U.S. university endowments "amaze," Yale said in the report. "Their well-diversified portfolios crush the returns produced by U.S. stocks."

The argument came in response to Buffett's 2016 investor letter, which suggested that endowments and other institutional investors would be better off investing in the Standard & Poor's 500 index.

For the 20-year period ending June 30, Yale's endowment earned a 12.1 percent annualized return, beating its benchmark Wilshire 5000 stock index, which gained 7.5 percent. A passive portfolio with a 60 percent stock allocation and 40 percent in bonds, meanwhile, had a 20-year return of 6.9 percent.

https://www.institutionalinvestor.com/a ... ale-claims

Institutional investors and pension funds manage trillions. It's impossible to beat the market, when you are the market.

[maj]

If the Yale investment team does not beat the indexes, then they should be FIRED.

Why is the team boasting about what they are paid to do, and expected to do?

My reply to Yale investment team: So What?

peace

[inbox788]

If the Yale investment team does not beat the indexes, then they should be FIRED.

Why is the team boasting about what they are paid to do, and expected to do?

My reply to Yale investment team: So What?

peace

It's not just about Yale, but the same can be said of the 99 other top 100 endowment fund managers, and most of them are probably not beating the index. The same can be said of city/state/other municipality fund managers and retirement fund managers for teacher/firemen/police/etc funds.

Thankfully, the passive trend has also been partially picked up, along with cuts to hedge funds, but few have gone all the way passive.

https://www.bloomberg.com/news/articles ... taying-put

What Does Nevada’s $35 Billion Fund Manager Do All Day? Nothing
Nevada goes passive to beat peers; BLT or tuna

https://www.wsj.com/articles/what-does- ... 1476887420

Recent 5 year performance, 60/40 would have ranked number 5, beating out 95+ others! You could say the other funds gave or handed over some of their gains to Yale. My bet is Yale won't be on top this year and Princeton will beat Yale (better risk adjusted return strategy).
http://www.charlesskorina.com/?p=4828

https://thebestschools.org/features/ric ... -research/

Will Harvard fire their new $6M man for coming in 68th/100 last year? Is it about the managers?
https://www.bloomberg.com/news/articles ... t-columbia

[Tanelorn]

Yale returned over 12% for their FY2018, exceeding a rough benchmark of 60/40 or 70/30 by 3% or so. Over 25% in hedge funds and under 10% in US stocks and bonds combined.