"University Endowment Sued for Underperforming the S&P 500"

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MJS
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"University Endowment Sued for Underperforming the S&P 500"

Post by MJS »

A few endowments -- Nevada retirement, Carthage College -- have move to index funds. So far, they seem to be doing well. Is it possible for very very large and very very long-term investors with fixed annual expenses to switch to something as simple as a 1 or 3 or 10 fund portfolio? If one donates or contributes to an endowment is holding it responsible for at least meeting the SP500 reasonable? My alma mater has not been highly successful at growing their endowment.

"A 94-year-old donor is taking on the University of Colorado Foundation over active investing."
https://www.institutionalinvestor.com/a ... -amp-P-500
02nz
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by 02nz »

I'm no expert but university endowments have many considerations that make beating S&P 500 unrealistic in most cases. For example, income from the endowment funds operations, and so it shouldn't be 100% in equities. And no, I don't think contributing gives you a right to demand that the university invests the money the way you want, unless you got the university to sign a contract agreeing to your conditions in exchange for the donation (good luck with that, unless maybe you were giving many millions).

ETA: I tend to agree universities should use low-cost, passive investing. But that doesn't mean the S&P 500 is a good benchmark to which the endowment's performance should be compared.
Last edited by 02nz on Tue Jul 21, 2020 6:10 pm, edited 1 time in total.
Drovor
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by Drovor »

I found this statement somewhat ironic:
We believe, and our board believes, that following the plaintiffs’ demands would be a breach of our fiduciary duty.
Would be great if more endowments, pensions, etc moved to a more passive approach but doubt it will happen unfortunately.
Last edited by Drovor on Tue Jul 21, 2020 6:18 pm, edited 1 time in total.
jimmy2040
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by jimmy2040 »

HCM returned 6.5% last year.

http://www.hmc.harvard.edu/content/uplo ... Report.pdf

https://www.hmc.harvard.edu/about/

The CEO was paid 9 million + and it looks like he hired a few friends. (Noticed some of the long term HMC people left in 2018).
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Taylor Larimore
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University Endowments vs. Total Market Index Fund

Post by Taylor Larimore »

mjs:

Thank you for your post.

Last year (2019) college endowments earned an average of 5.3% after expenses (most are managed). Meanwhile, Vanguard Total Market Index Fund returned 30.8% after expenses. No wonder they are being sued. It's about time they use index funds which Bogleheads learned many years ago.

Endowment Returns Solid in 2019

Bogleheads know a better way. Thank you Jack!

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”
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ResearchMed
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Re: University Endowments vs. Total Market Index Fund

Post by ResearchMed »

Taylor Larimore wrote: Tue Jul 21, 2020 7:21 pm mjs:

Thank you for your post.

Last year (2019) college endowments earned an average of 5.3% after expenses (most are managed). Meanwhile, Vanguard Total Market Index Fund returned 30.8% after expenses. No wonder they are being sued. It's about time they use index funds which Bogleheads learned many years ago.

Endowment Returns Solid in 2019

Bogleheads know a better way. Thank you Jack!

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”
I'm not sure that comparing a full college/university endowment to just a Total Market Index is the best comparison to make.
Should one compare only the Total Market Index to one's entire portfolio, year after year?
No bonds?
No international?
No cash/emergency fund? No other categories that might be suitable for very long-term holding?
Even the simple "3-fund" recommendation often given here wouldn't appropriately be compared with just this one fund.

I realize that not everyone includes international, but to have 100% equities?
What if there are unexpected major expenses (er, for something like a pandemic?), and the equity market is seriously down?

I am NOT making any argument about what *is* the best (or even "an appropriate") portfolio for a university endowment, but I'm not sure 100% equities is the best comparison.

RM
This signature is a placebo. You are in the control group.
tibbitts
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by tibbitts »

MJS wrote: Tue Jul 21, 2020 5:57 pm A few endowments -- Nevada retirement, Carthage College -- have move to index funds. So far, they seem to be doing well. Is it possible for very very large and very very long-term investors with fixed annual expenses to switch to something as simple as a 1 or 3 or 10 fund portfolio? If one donates or contributes to an endowment is holding it responsible for at least meeting the SP500 reasonable? My alma mater has not been highly successful at growing their endowment.

"A 94-year-old donor is taking on the University of Colorado Foundation over active investing."
https://www.institutionalinvestor.com/a ... -amp-P-500
I'm not an expert but would say it would be irresponsible for an endowment to not hold many asset classes including both domestic and international equities, debt, real estate, etc. So I don't see comparisons with the S&P500 are appropriate in any way.
Blue456
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Re: University Endowments vs. Total Market Index Fund

Post by Blue456 »

ResearchMed wrote: Tue Jul 21, 2020 7:44 pm
Taylor Larimore wrote: Tue Jul 21, 2020 7:21 pm mjs:

Thank you for your post.

Last year (2019) college endowments earned an average of 5.3% after expenses (most are managed). Meanwhile, Vanguard Total Market Index Fund returned 30.8% after expenses. No wonder they are being sued. It's about time they use index funds which Bogleheads learned many years ago.

Endowment Returns Solid in 2019

Bogleheads know a better way. Thank you Jack!

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”
I'm not sure that comparing a full college/university endowment to just a Total Market Index is the best comparison to make.
Should one compare only the Total Market Index to one's entire portfolio, year after year?
No bonds?
No international?
No cash/emergency fund? No other categories that might be suitable for very long-term holding?
Even the simple "3-fund" recommendation often given here wouldn't appropriately be compared with just this one fund.

I realize that not everyone includes international, but to have 100% equities?
What if there are unexpected major expenses (er, for something like a pandemic?), and the equity market is seriously down?

I am NOT making any argument about what *is* the best (or even "an appropriate") portfolio for a university endowment, but I'm not sure 100% equities is the best comparison.

RM
This is where David Swensen Portfolio comes to mind.
texasdiver
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by texasdiver »

It would be simple enough to model the ideal endowment asset allocation for a 50 or 100 year time frame just like is commonly done for retirement accounts and come up with something like 60/40. In fact, we can probably look at existing endowments and determine where they come down on the equity vs fixed income scale and start there. And then just buy whatever Vanguard or Black Rock 3-fund portfolio matches your target asset allocation.

Then come up with a safe long-term withdrawal rate. I think 5% is used, at least by some universities. Which is a little more aggressive than the 4% retirement number, but also takes into account the fact that endowments tend to continue to grow via contributions while retirement funds do not. If you can achieve a long term average donation rate of 1% of your endowment per year then your 4% becomes 5%.

I expect what really happens at most schools is that there is a very cozy small club of associates with the trustees and endowment managers, who probably also cross paths on corporate boards and such. And they either just look the other way or assume that the 2%+ fees charged are just who things are done.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by Trader Joe »

MJS wrote: Tue Jul 21, 2020 5:57 pm A few endowments -- Nevada retirement, Carthage College -- have move to index funds. So far, they seem to be doing well. Is it possible for very very large and very very long-term investors with fixed annual expenses to switch to something as simple as a 1 or 3 or 10 fund portfolio? If one donates or contributes to an endowment is holding it responsible for at least meeting the SP500 reasonable? My alma mater has not been highly successful at growing their endowment.

"A 94-year-old donor is taking on the University of Colorado Foundation over active investing."
https://www.institutionalinvestor.com/a ... -amp-P-500
This is really good news.
Scooter57
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by Scooter57 »

The index outperformed only because it has become dominated by a handful of tech stocks that soared, including Amazon with a P/E over 100. It would be wrong for managers to concentrate their assets in such a few stocks. There will be years when the index suffers for how unbalanced it has become and when the endowments will outperform as they have in the past.
reln
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by reln »

MJS wrote: Tue Jul 21, 2020 5:57 pm A few endowments -- Nevada retirement, Carthage College -- have move to index funds. So far, they seem to be doing well. Is it possible for very very large and very very long-term investors with fixed annual expenses to switch to something as simple as a 1 or 3 or 10 fund portfolio? If one donates or contributes to an endowment is holding it responsible for at least meeting the SP500 reasonable? My alma mater has not been highly successful at growing their endowment.

"A 94-year-old donor is taking on the University of Colorado Foundation over active investing."
https://www.institutionalinvestor.com/a ... -amp-P-500
Not a lawyer, but as a layperson observer, I think it's a frivolous lawsuit. And sp500 should not be the benchmark for an endowment (maybe a broader index that includes global stocks and bonds).
zie
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by zie »

I think it's silly to assume multi billion dollar funds like these should hold a 2-3 fund portfolio, but certainly for their portion that is allocated to domestic equities, VTSAX is a great idea.

AZ state's retirement system has $41 billion under management and has an entire page about their returns along with their benchmarks. They are actively managed, but diversified.
Their AA:

Code: Select all

Equities      50%
Real Estate 20%
Credit         20%
Bonds         10%
They allocate 24.4% to domestic equities and 19.8% to International. Their domestic equity benchmark(MSCI USA IMI) for last fiscal year was 9.0%, they ended up making 7.3%, if they held VTSAX they would have made 8.99%. In the last 10 years they have failed to meet their benchmark.

They accept public comments via their email address: contactus@azasrs.gov If you are inclined to teach them about VTSAX :)
Normchad
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by Normchad »

reln wrote: Tue Jul 21, 2020 8:46 pm
MJS wrote: Tue Jul 21, 2020 5:57 pm A few endowments -- Nevada retirement, Carthage College -- have move to index funds. So far, they seem to be doing well. Is it possible for very very large and very very long-term investors with fixed annual expenses to switch to something as simple as a 1 or 3 or 10 fund portfolio? If one donates or contributes to an endowment is holding it responsible for at least meeting the SP500 reasonable? My alma mater has not been highly successful at growing their endowment.

"A 94-year-old donor is taking on the University of Colorado Foundation over active investing."
https://www.institutionalinvestor.com/a ... -amp-P-500
Not a lawyer, but as a layperson observer, I think it's a frivolous lawsuit. And sp500 should not be the benchmark for an endowment (maybe a broader index that includes global stocks and bonds).
I agree that this seems frivolous. How has the 94 year old plaintiff been harmed?

I figure the university system owns the endowment, and manages it. So who really has standing in a case like this?
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Nate79
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by Nate79 »

So it is irresponsible for people to have 100% stock portfolios often said on here (though not all agree with that) yet an endowment gets compared to a 100% stock portfolio?
Talk about stupid.
BJJ_GUY
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by BJJ_GUY »

texasdiver wrote: Tue Jul 21, 2020 8:31 pm It would be simple enough to model the ideal endowment asset allocation for a 50 or 100 year time frame just like is commonly done for retirement accounts and come up with something like 60/40. In fact, we can probably look at existing endowments and determine where they come down on the equity vs fixed income scale and start there. And then just buy whatever Vanguard or Black Rock 3-fund portfolio matches your target asset allocation.

Then come up with a safe long-term withdrawal rate. I think 5% is used, at least by some universities. Which is a little more aggressive than the 4% retirement number, but also takes into account the fact that endowments tend to continue to grow via contributions while retirement funds do not. If you can achieve a long term average donation rate of 1% of your endowment per year then your 4% becomes 5%.

I expect what really happens at most schools is that there is a very cozy small club of associates with the trustees and endowment managers, who probably also cross paths on corporate boards and such. And they either just look the other way or assume that the 2%+ fees charged are just who things are done.
Swensen addressed these criticisms a few years ago. He explains in dollar amounts the difference between the Yale endowment's ability to support the university compared to a passive blend of 60/40 or, as Buffet apparently prefers, 90/10. For the trailing 30 year period from when he wrote about it, the actively managed endowment (plus cash used for the annual spend) would be $28bn smaller if they just had a 60/40. Further, it would be $26.4bn smaller if it was invested 90/10.

Link to the annual report below. Page 18 where he spells this out. Page 16 provides an overview on the spending policy, which may help explain why the example above won't really work, especially when you consider that every dollar donated is supposed to be managed such that it does not lose purchasing power parity. Those dollars have to be invested in a way that allows the endowment to keep pace with the higher-education inflation rate, even after they pay out ~5% per year.

https://static1.squarespace.com/static/ ... ent_16.pdf
zie
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by zie »

Nate79 wrote: Tue Jul 21, 2020 9:41 pm So it is irresponsible for people to have 100% stock portfolios often said on here (though not all agree with that) yet an endowment gets compared to a 100% stock portfolio?
Talk about stupid.
Our goals are different, usually. For an individual investor our goals are usually mass accumulation *yesterday*, so we can retire tomorrow. In retirement, our goal is to have enough to last until death, given unknown future expenses. Their goal is usually to sustain their level of spend indefinitely. It's very well known years in advance how much money they need to spend, and consequently earn. They don't have unknown futures.
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ram
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by ram »

For many years I was on the board of a research foundation. The board's directive to the financial committee was to generate a (fairly) steady 4% annual return which would fund research activities. Thus the investments were bond heavy and most years generated a return of 3.5 to 5%. The returns were substantially better than S & P index in 2008 and much lower than S & P for many years from 2010 onwards.
S&P index was clearly not an appropriate benchmark here. Vanguard balanced fund would have been a much better but not ideal benchmark for these investments. I suspect that heads would have rolled if the money managers had invested 100% in S&P index at the beginning of 2008.
Ram
BJJ_GUY
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by BJJ_GUY »

jimmy2040 wrote: Tue Jul 21, 2020 6:12 pm HCM returned 6.5% last year.

http://www.hmc.harvard.edu/content/uplo ... Report.pdf

https://www.hmc.harvard.edu/about/

The CEO was paid 9 million + and it looks like he hired a few friends. (Noticed some of the long term HMC people left in 2018).
Yep, hopefully the new(ish) CEO will be able to lead this turnaround for what has been a complete bungling of the endowment over the last ~15 years. $9mm is probably below market value for this guy, so I'm not sure why you care how much money he makes. From reading the report, it looks like you are taking completely benign facts and trying to turn them into something nefarious.

The reason the endowment is in such bad shape is because people (professors, students, half-wit financial journalists etc.) who worry about what the endowment staff was being paid chased off the leadership that had built an elite institution by the early 2000s. Once they ran the previous leadership off the continued complaining about the investment team's compensation to the point where it became nearly impossible to retain talent in leadership positions, and perhaps as importantly (maybe more so) they also finally got their wish as the endowment began outsourcing more and more of the asset management.

It's sad that envy, and catering to the mob, resulted in a transformation that pays far less in headline compensation to Harvard Mgmt. Co. employees, but in return they no longer have the ability to manage capital in-house and lost talent along the way. Oh yeah, and the truth is, the several million the employees were making was far less than most ultimately made once they left the endowment to work at private asset managers. (Ironically, Harvard was then in a position where they had to pay more in fees to the very same people they were paying to do the same job in-house.)
palanzo
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by palanzo »

texasdiver wrote: Tue Jul 21, 2020 8:31 pm It would be simple enough to model the ideal endowment asset allocation for a 50 or 100 year time frame just like is commonly done for retirement accounts and come up with something like 60/40. In fact, we can probably look at existing endowments and determine where they come down on the equity vs fixed income scale and start there. And then just buy whatever Vanguard or Black Rock 3-fund portfolio matches your target asset allocation.

Then come up with a safe long-term withdrawal rate. I think 5% is used, at least by some universities. Which is a little more aggressive than the 4% retirement number, but also takes into account the fact that endowments tend to continue to grow via contributions while retirement funds do not. If you can achieve a long term average donation rate of 1% of your endowment per year then your 4% becomes 5%.

I expect what really happens at most schools is that there is a very cozy small club of associates with the trustees and endowment managers, who probably also cross paths on corporate boards and such. And they either just look the other way or assume that the 2%+ fees charged are just who things are done.
Exactly so. It's all a very cozy relationship.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by palanzo »

Normchad wrote: Tue Jul 21, 2020 9:36 pm
reln wrote: Tue Jul 21, 2020 8:46 pm
MJS wrote: Tue Jul 21, 2020 5:57 pm A few endowments -- Nevada retirement, Carthage College -- have move to index funds. So far, they seem to be doing well. Is it possible for very very large and very very long-term investors with fixed annual expenses to switch to something as simple as a 1 or 3 or 10 fund portfolio? If one donates or contributes to an endowment is holding it responsible for at least meeting the SP500 reasonable? My alma mater has not been highly successful at growing their endowment.

"A 94-year-old donor is taking on the University of Colorado Foundation over active investing."
https://www.institutionalinvestor.com/a ... -amp-P-500
Not a lawyer, but as a layperson observer, I think it's a frivolous lawsuit. And sp500 should not be the benchmark for an endowment (maybe a broader index that includes global stocks and bonds).
I agree that this seems frivolous. How has the 94 year old plaintiff been harmed?

I figure the university system owns the endowment, and manages it. So who really has standing in a case like this?
His standing is he donated $5 million.
palanzo
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by palanzo »

BJJ_GUY wrote: Tue Jul 21, 2020 10:17 pm
texasdiver wrote: Tue Jul 21, 2020 8:31 pm It would be simple enough to model the ideal endowment asset allocation for a 50 or 100 year time frame just like is commonly done for retirement accounts and come up with something like 60/40. In fact, we can probably look at existing endowments and determine where they come down on the equity vs fixed income scale and start there. And then just buy whatever Vanguard or Black Rock 3-fund portfolio matches your target asset allocation.

Then come up with a safe long-term withdrawal rate. I think 5% is used, at least by some universities. Which is a little more aggressive than the 4% retirement number, but also takes into account the fact that endowments tend to continue to grow via contributions while retirement funds do not. If you can achieve a long term average donation rate of 1% of your endowment per year then your 4% becomes 5%.

I expect what really happens at most schools is that there is a very cozy small club of associates with the trustees and endowment managers, who probably also cross paths on corporate boards and such. And they either just look the other way or assume that the 2%+ fees charged are just who things are done.
Swensen addressed these criticisms a few years ago. He explains in dollar amounts the difference between the Yale endowment's ability to support the university compared to a passive blend of 60/40 or, as Buffet apparently prefers, 90/10. For the trailing 30 year period from when he wrote about it, the actively managed endowment (plus cash used for the annual spend) would be $28bn smaller if they just had a 60/40. Further, it would be $26.4bn smaller if it was invested 90/10.

Link to the annual report below. Page 18 where he spells this out. Page 16 provides an overview on the spending policy, which may help explain why the example above won't really work, especially when you consider that every dollar donated is supposed to be managed such that it does not lose purchasing power parity. Those dollars have to be invested in a way that allows the endowment to keep pace with the higher-education inflation rate, even after they pay out ~5% per year.

https://static1.squarespace.com/static/ ... ent_16.pdf
In that case why does not Wall Street pursue similar strategies to Yale and make all of us rich?
BJJ_GUY
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by BJJ_GUY »

palanzo wrote: Wed Jul 22, 2020 12:33 am
BJJ_GUY wrote: Tue Jul 21, 2020 10:17 pm Swensen addressed these criticisms a few years ago. He explains in dollar amounts the difference between the Yale endowment's ability to support the university compared to a passive blend of 60/40 or, as Buffet apparently prefers, 90/10. For the trailing 30 year period from when he wrote about it, the actively managed endowment (plus cash used for the annual spend) would be $28bn smaller if they just had a 60/40. Further, it would be $26.4bn smaller if it was invested 90/10.

Link to the annual report below. Page 18 where he spells this out. Page 16 provides an overview on the spending policy, which may help explain why the example above won't really work, especially when you consider that every dollar donated is supposed to be managed such that it does not lose purchasing power parity. Those dollars have to be invested in a way that allows the endowment to keep pace with the higher-education inflation rate, even after they pay out ~5% per year.

https://static1.squarespace.com/static/ ... ent_16.pdf
In that case why does not Wall Street pursue similar strategies to Yale and make all of us rich?
I'm confused by the question. Who are you defining as Wall Street? Not sure who you are asking to do similar things to how Yale is invested.
palanzo
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by palanzo »

BJJ_GUY wrote: Wed Jul 22, 2020 1:05 am
palanzo wrote: Wed Jul 22, 2020 12:33 am
BJJ_GUY wrote: Tue Jul 21, 2020 10:17 pm Swensen addressed these criticisms a few years ago. He explains in dollar amounts the difference between the Yale endowment's ability to support the university compared to a passive blend of 60/40 or, as Buffet apparently prefers, 90/10. For the trailing 30 year period from when he wrote about it, the actively managed endowment (plus cash used for the annual spend) would be $28bn smaller if they just had a 60/40. Further, it would be $26.4bn smaller if it was invested 90/10.

Link to the annual report below. Page 18 where he spells this out. Page 16 provides an overview on the spending policy, which may help explain why the example above won't really work, especially when you consider that every dollar donated is supposed to be managed such that it does not lose purchasing power parity. Those dollars have to be invested in a way that allows the endowment to keep pace with the higher-education inflation rate, even after they pay out ~5% per year.

https://static1.squarespace.com/static/ ... ent_16.pdf
In that case why does not Wall Street pursue similar strategies to Yale and make all of us rich?
I'm confused by the question. Who are you defining as Wall Street? Not sure who you are asking to do similar things to how Yale is invested.
OK then. Investment managers. With such large out performance I'm sure there will be lots of investors seeking annuities, for example.
BJJ_GUY
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by BJJ_GUY »

palanzo wrote: Wed Jul 22, 2020 1:14 am
BJJ_GUY wrote: Wed Jul 22, 2020 1:05 am
palanzo wrote: Wed Jul 22, 2020 12:33 am
BJJ_GUY wrote: Tue Jul 21, 2020 10:17 pm Swensen addressed these criticisms a few years ago. He explains in dollar amounts the difference between the Yale endowment's ability to support the university compared to a passive blend of 60/40 or, as Buffet apparently prefers, 90/10. For the trailing 30 year period from when he wrote about it, the actively managed endowment (plus cash used for the annual spend) would be $28bn smaller if they just had a 60/40. Further, it would be $26.4bn smaller if it was invested 90/10.

Link to the annual report below. Page 18 where he spells this out. Page 16 provides an overview on the spending policy, which may help explain why the example above won't really work, especially when you consider that every dollar donated is supposed to be managed such that it does not lose purchasing power parity. Those dollars have to be invested in a way that allows the endowment to keep pace with the higher-education inflation rate, even after they pay out ~5% per year.

https://static1.squarespace.com/static/ ... ent_16.pdf
In that case why does not Wall Street pursue similar strategies to Yale and make all of us rich?
I'm confused by the question. Who are you defining as Wall Street? Not sure who you are asking to do similar things to how Yale is invested.
OK then. Investment managers. With such large out performance I'm sure there will be lots of investors seeking annuities, for example.
Yale invests with investment managers, so how can you be asking investment managers to do similar things to how Yale is invested? See how this is circular logic?
palanzo
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by palanzo »

BJJ_GUY wrote: Wed Jul 22, 2020 1:54 am
palanzo wrote: Wed Jul 22, 2020 1:14 am
BJJ_GUY wrote: Wed Jul 22, 2020 1:05 am
palanzo wrote: Wed Jul 22, 2020 12:33 am
BJJ_GUY wrote: Tue Jul 21, 2020 10:17 pm Swensen addressed these criticisms a few years ago. He explains in dollar amounts the difference between the Yale endowment's ability to support the university compared to a passive blend of 60/40 or, as Buffet apparently prefers, 90/10. For the trailing 30 year period from when he wrote about it, the actively managed endowment (plus cash used for the annual spend) would be $28bn smaller if they just had a 60/40. Further, it would be $26.4bn smaller if it was invested 90/10.

Link to the annual report below. Page 18 where he spells this out. Page 16 provides an overview on the spending policy, which may help explain why the example above won't really work, especially when you consider that every dollar donated is supposed to be managed such that it does not lose purchasing power parity. Those dollars have to be invested in a way that allows the endowment to keep pace with the higher-education inflation rate, even after they pay out ~5% per year.

https://static1.squarespace.com/static/ ... ent_16.pdf
In that case why does not Wall Street pursue similar strategies to Yale and make all of us rich?
I'm confused by the question. Who are you defining as Wall Street? Not sure who you are asking to do similar things to how Yale is invested.
OK then. Investment managers. With such large out performance I'm sure there will be lots of investors seeking annuities, for example.
Yale invests with investment managers, so how can you be asking investment managers to do similar things to how Yale is invested? See how this is circular logic?
Not at all. If Yale can outperform 60/40 index funds then why are others not achieving the same results?
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by BJJ_GUY »

palanzo wrote: Wed Jul 22, 2020 2:43 am Not at all. If Yale can outperform 60/40 index funds then why are others not achieving the same results?
For the same reason Lebron James can go to the championship every year, but that doesn't mean everyone can do that.

I'm still kind of confused about what point you're trying to make. Are you wondering why retail investors, on average, can't beat a 60/40 over the long-run? Or are you asking why other university endowments don't invest like Yale?

If you are asking the latter, then you'll be pleasantly surprised to know that there are several very capable endowment teams who have demonstrated the ability to beat passive blends over 10, 20, 30 year periods. I'd say, with strong conviction, that they have favorable odds to outperform those blends over the next 25 years as well.

So yeah, there aren't a lot of groups that are likely to beat passive blends consistently, but there are a lot more than just Yale.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by international001 »

BJJ_GUY wrote: Wed Jul 22, 2020 3:24 am

For the same reason Lebron James can go to the championship every year, but that doesn't mean everyone can do that.

I'm still kind of confused about what point you're trying to make. Are you wondering why retail investors, on average, can't beat a 60/40 over the long-run? Or are you asking why other university endowments don't invest like Yale?

If you are asking the latter, then you'll be pleasantly surprised to know that there are several very capable endowment teams who have demonstrated the ability to beat passive blends over 10, 20, 30 year periods. I'd say, with strong conviction, that they have favorable odds to outperform those blends over the next 25 years as well.

So yeah, there aren't a lot of groups that are likely to beat passive blends consistently, but there are a lot more than just Yale.
Real question is how many? 50% ? ;-)
The golden rule is that they are able to outperform by 2% for 36 years, then it's a two sigma chance it's not just luck.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by nisiprius »

1) I don't think the S&P 500 is a reasonable benchmark, and that is probably what will make it difficult to sue successfully--no objective way to choose what the benchmark should be. Off the top of my head I'd have said "60/40 stocks/bonds" would be the appropriate benchmark, but how can there be sufficiently unanimous agreement to successfully sue such a fund? If publicize-and-shame doesn't work, I can't imagine the courts will.

2)
02nz wrote: Tue Jul 21, 2020 6:06 pm...For example, income from the endowment funds operations, and so it shouldn't be 100% in equities...
I don't know anything about how it works or whether that's standard or not. I hope it's not true. I don't think it should be true. I thought universities were supposed to keep their operating funds separate from the endowment and that it was a something of a scandal that Harvard didn't. I still haven't read Swensen's book, does he address this? Certainly the rhetoric surrounding endowment funds and their use of alternatives and expensive investment active investment managers is always based on the assumption of a superhuman time scale and holding period, like the story (alas, apocryphal) about Oxford having a stand of trees ready to replace the oak beams in a college hall when they needed replacement after four hundred years. (Does Swensen mention that as an inspiration for his investments in timber?)
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by BJJ_GUY »

international001 wrote: Wed Jul 22, 2020 5:53 am
BJJ_GUY wrote: Wed Jul 22, 2020 3:24 am

For the same reason Lebron James can go to the championship every year, but that doesn't mean everyone can do that.

I'm still kind of confused about what point you're trying to make. Are you wondering why retail investors, on average, can't beat a 60/40 over the long-run? Or are you asking why other university endowments don't invest like Yale?

If you are asking the latter, then you'll be pleasantly surprised to know that there are several very capable endowment teams who have demonstrated the ability to beat passive blends over 10, 20, 30 year periods. I'd say, with strong conviction, that they have favorable odds to outperform those blends over the next 25 years as well.

So yeah, there aren't a lot of groups that are likely to beat passive blends consistently, but there are a lot more than just Yale.
Real question is how many? 50% ? ;-)
The golden rule is that they are able to outperform by 2% for 36 years, then it's a two sigma chance it's not just luck.
It's a good question, and I purposely did not put a number or percentage that are high probability to outperform a 60/40 blend over long time periods. I was pretty vague about that for two reasons: 1.) I don't think 60/40 is really a good passive public market benchmark for the various parameters and goals that guide/inform the way in which endowment's invest; and 2.) The recent run for 60/40 has been so strong that it's easily misinterpreted as 'proof' that it's a better and/or more appropriate way for every institution to invest, and I was trying to avoid the rabbit hole that could lead me down.

I think most endowments (and foundations for that matter) adequately staffed with high caliber professionals are likely to outperform 60/40 - always talking about over long time periods - going forward too. But that doesn't mean they are necessarily generating that performance with the same concept of the various risks/trade-offs associated with their portfolios, when compared to a simple and liquid 60/40. These professional teams have the structural benefit of investing in private markets, and other investment arenas that are not otherwise available to us retail folks.

So, bottom line, endowments and foundations with talented professional teams are likely to outperform a passive alternative, but a material percentage of those outperforming groups will get there largely on access and exposure to non-retail markets. I think there are fewer teams (than most might guess) in the upper echelon where I'd make a meaningful bet that relative outperformance was due to excellence, or skill, however we might label it.

(I agree with your 'golden rule' point, I'm basically just saying that I think a lot will be false positives without proper tools to begin determining luck versus skill.)
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by BJJ_GUY »

nisiprius wrote: Wed Jul 22, 2020 6:54 am 1) I don't think the S&P 500 is a reasonable benchmark, and that is probably what will make it difficult to sue successfully--no objective way to choose what the benchmark should be. Off the top of my head I'd have said "60/40 stocks/bonds" would be the appropriate benchmark, but how can there be sufficiently unanimous agreement to successfully sue such a fund? If publicize-and-shame doesn't work, I can't imagine the courts will.

2)
02nz wrote: Tue Jul 21, 2020 6:06 pm...For example, income from the endowment funds operations, and so it shouldn't be 100% in equities...
I don't know anything about how it works or whether that's standard or not. I hope it's not true. I don't think it should be true. I thought universities were supposed to keep their operating funds separate from the endowment and that it was a something of a scandal that Harvard didn't. I still haven't read Swensen's book, does he address this? Certainly the rhetoric surrounding endowment funds and their use of alternatives and expensive investment active investment managers is always based on the assumption of a superhuman time scale and holding period, like the story (alas, apocryphal) about Oxford having a stand of trees ready to replace the oak beams in a college hall when they needed replacement after four hundred years. (Does Swensen mention that as an inspiration for his investments in timber?)
There is zero basis in this whole lawsuit. It wouldn't be surprising if this was a spite lawsuit from a disgruntled donor. The allegation would have to be gross negligence or fraud etc. The actions would have to be obvious and damaging to the institution.

60/40 as a benchmark is better than S&P 500, but also not all that great. If you read Yale's annual endowment letter, or really any of the top tier endowment's annual reports, they actually provide the blended benchmark used to best proxy their underlying risks. At a really high level the endowments that are both large and highly sophisticated tend to have a very strong orientation toward equity-like assets, to the point where a 2 asset proxy would be closer to 80/20 or 90/10. (But they tend to use a blend of 6-8 benchmarks in their policy benchmark.)
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Re: University Endowments vs. Total Market Index Fund

Post by Dottie57 »

ResearchMed wrote: Tue Jul 21, 2020 7:44 pm
Taylor Larimore wrote: Tue Jul 21, 2020 7:21 pm mjs:

Thank you for your post.

Last year (2019) college endowments earned an average of 5.3% after expenses (most are managed). Meanwhile, Vanguard Total Market Index Fund returned 30.8% after expenses. No wonder they are being sued. It's about time they use index funds which Bogleheads learned many years ago.

Endowment Returns Solid in 2019

Bogleheads know a better way. Thank you Jack!

Best wishes
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I'm not sure that comparing a full college/university endowment to just a Total Market Index is the best comparison to make.
Should one compare only the Total Market Index to one's entire portfolio, year after year?
No bonds?
No international?
No cash/emergency fund? No other categories that might be suitable for very long-term holding?
Even the simple "3-fund" recommendation often given here wouldn't appropriately be compared with just this one fund.

I realize that not everyone includes international, but to have 100% equities?
What if there are unexpected major expenses (er, for something like a pandemic?), and the equity market is seriously down?

I am NOT making any argument about what *is* the best (or even "an appropriate") portfolio for a university endowment, but I'm not sure 100% equities is the best comparison.

RM
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by dodecahedron »

tibbitts wrote: Tue Jul 21, 2020 7:56 pm
MJS wrote: Tue Jul 21, 2020 5:57 pm A few endowments -- Nevada retirement, Carthage College -- have move to index funds. So far, they seem to be doing well. Is it possible for very very large and very very long-term investors with fixed annual expenses to switch to something as simple as a 1 or 3 or 10 fund portfolio? If one donates or contributes to an endowment is holding it responsible for at least meeting the SP500 reasonable? My alma mater has not been highly successful at growing their endowment.

"A 94-year-old donor is taking on the University of Colorado Foundation over active investing."
https://www.institutionalinvestor.com/a ... -amp-P-500
I'm not an expert but would say it would be irresponsible for an endowment to not hold many asset classes including both domestic and international equities, debt, real estate, etc. So I don't see comparisons with the S&P500 are appropriate in any way.
ResearchMed wrote: Tue Jul 21, 2020 7:44 pm

I am NOT making any argument about what *is* the best (or even "an appropriate") portfolio for a university endowment, but I'm not sure 100% equities is the best comparison.

RM
I agree S&P 500 or 100% equities is not the right benchmark, but the last time I checked, Vanguard´s 60/40 balanced index fund had outperformed the vast majority of endowments over an extended period of time.

However, universities and other nonprofits persist in throwing vast quantities of money at very highly paid managers who do stupid pet tricks with complicated portfolios of opaque, nontransparent, and often illiquid investments.

Being the emperor´s new clothes person to point this out makes one very unpopular with wealthy trustees and major alumni donors who have made their personal fortunes selling their Wizard of Oz talents on Wall Street, also with the big Wall Street firms that hire graduates at high salaries to work in this dubious industry, which in turn allows the college to attract applicants.
Last edited by dodecahedron on Wed Jul 22, 2020 7:45 am, edited 1 time in total.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by aristotelian »

texasdiver wrote: Tue Jul 21, 2020 8:31 pm It would be simple enough to model the ideal endowment asset allocation for a 50 or 100 year time frame just like is commonly done for retirement accounts and come up with something like 60/40. In fact, we can probably look at existing endowments and determine where they come down on the equity vs fixed income scale and start there. And then just buy whatever Vanguard or Black Rock 3-fund portfolio matches your target asset allocation.

Then come up with a safe long-term withdrawal rate. I think 5% is used, at least by some universities. Which is a little more aggressive than the 4% retirement number, but also takes into account the fact that endowments tend to continue to grow via contributions while retirement funds do not. If you can achieve a long term average donation rate of 1% of your endowment per year then your 4% becomes 5%.

I expect what really happens at most schools is that there is a very cozy small club of associates with the trustees and endowment managers, who probably also cross paths on corporate boards and such. And they either just look the other way or assume that the 2%+ fees charged are just who things are done.
What portfolio has a 5% SWR over infinite timeframe? The problem is that there is none. The more bonds you add and the longer your timeframe, the lower your SWR. 60/40 would probably have something like 3% SWR. That is why they end up in hedge funds and active management. The only way to get the return they are seeking is to outperform the market. My foundation is in 90% risk assets (stocks, hedge funds, and private equity). Fortunately we have outperformed the market and use a VWR methodology that stings in a down market but will never put us out of business.

I am not saying that I believe in active management but I can see how these institutions end up in that game.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by dodecahedron »

aristotelian wrote: Wed Jul 22, 2020 7:44 am
texasdiver wrote: Tue Jul 21, 2020 8:31 pm It would be simple enough to model the ideal endowment asset allocation for a 50 or 100 year time frame just like is commonly done for retirement accounts and come up with something like 60/40. In fact, we can probably look at existing endowments and determine where they come down on the equity vs fixed income scale and start there. And then just buy whatever Vanguard or Black Rock 3-fund portfolio matches your target asset allocation.

Then come up with a safe long-term withdrawal rate. I think 5% is used, at least by some universities. Which is a little more aggressive than the 4% retirement number, but also takes into account the fact that endowments tend to continue to grow via contributions while retirement funds do not. If you can achieve a long term average donation rate of 1% of your endowment per year then your 4% becomes 5%.

I expect what really happens at most schools is that there is a very cozy small club of associates with the trustees and endowment managers, who probably also cross paths on corporate boards and such. And they either just look the other way or assume that the 2%+ fees charged are just who things are done.
What portfolio has a 5% SWR over infinite timeframe? The problem is that there is none. The more bonds you add and the longer your timeframe, the lower your SWR. 60/40 would probably have something like 3% SWR. That is why they end up in hedge funds and active management. The only way to get the return they are seeking is to outperform the market.
Unfortunately, for many colleges the most important thing about the size of the endowment seems to be about winning a ¨mine is bigger than yours¨ bragging rights contest with competitors rather than a longterm sustainable withdrawal rate. Opaque illiquid hard-to-value investments can be very useful for that purpose. Such investments are also very difficult to liquidate during a turn down.

It´s like winning a bowl game. Alumni donors give more when the football team does well and when the endowment does well. In fact, some proud alum donors even *invest* their wealth with the college´s endowment through some kind of split-gift shared lifetime income stream arrangement.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by aristotelian »

dodecahedron wrote: Wed Jul 22, 2020 7:49 am
Unfortunately, for many colleges the most important thing about the size of the endowment seems to be about winning a ¨mine is bigger than yours¨ bragging rights contest with competitors rather than a longterm sustainable withdrawal rate. Opaque illiquid hard-to-value investments can be very useful for that purpose. Such investments are also very difficult to liquidate during a turn down.
Fair enough. A more sympathetic take would be that a few successful endowments become the benchmark, and then the whole sector feels pressure to match their results. Private foundations have a legal 5% spending *requirement* which pushes them into risk assets and active management. Then their investment experts publish articles on non-correlated risk etc. If you are on a university board, are you going to go with the expert that says 3% SWR using index funds or 5% using active management?

I would also say in the universities' defense that the donors probably support >5% spending policy. When you give to the university you want the money to have impact. Most donors are not Bogleheads, although apparently that is starting to change!
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by BJJ_GUY »

dodecahedron wrote: Wed Jul 22, 2020 7:49 am Unfortunately, for many colleges the most important thing about the size of the endowment seems to be about winning a ¨mine is bigger than yours¨ bragging rights contest with competitors rather than a longterm sustainable withdrawal rate. Opaque illiquid hard-to-value investments can be very useful for that purpose. Such investments are also very difficult to liquidate during a turn down.

It´s like winning a bowl game. Alumni donors give more when the football team does well and when the endowment does well. In fact, some proud alum donors even *invest* their wealth with the college´s endowment through some kind of split-gift shared lifetime income stream arrangement.
Regardless of the size of the endowment compared to peers, the more troubling (or challenging is maybe a better word) exercise is the short-term performance comparisons between endowments. This is silly, and can be damaging as it alters behavior. Many CIOs and senior staff have part of their compensation tied to relative performance to peers. This does not account for different mandates, goals, and general expectations agreed to between the investment team and the board.

That said, I'm not sure why you say (paraphrasing, so maybe a misunderstanding) that illiquid non-marketable investments are 'useful' as it relates to the "mine is bigger than yours" attitude.

As for the problem illiquid assets introduce, especially in market downturns, you are correct, but this is (hopefully) accounted for in asset allocation and risk management exercises. Most endowments hold at least 5-10% in US Govt bonds for liquidity purposes. This immediate US Treasury liquidity, along with semi-liquid hedge funds, provide the endowment the ability to rebalance (into equities etc. which have dislocated) during drawdowns, but they also serve the purpose of providing a source of capital for their spending needs -- which, importantly allows the endowment to avoid selling equities and private assets at low valuations and foregoing the substantial upside potential when valuations/prices normalize over a longer period of time
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by 02nz »

nisiprius wrote: Wed Jul 22, 2020 6:54 am 1) I don't think the S&P 500 is a reasonable benchmark, and that is probably what will make it difficult to sue successfully--no objective way to choose what the benchmark should be. Off the top of my head I'd have said "60/40 stocks/bonds" would be the appropriate benchmark, but how can there be sufficiently unanimous agreement to successfully sue such a fund? If publicize-and-shame doesn't work, I can't imagine the courts will.

2)
02nz wrote: Tue Jul 21, 2020 6:06 pm...For example, income from the endowment funds operations, and so it shouldn't be 100% in equities...
I don't know anything about how it works or whether that's standard or not. I hope it's not true. I don't think it should be true. I thought universities were supposed to keep their operating funds separate from the endowment and that it was a something of a scandal that Harvard didn't. I still haven't read Swensen's book, does he address this? Certainly the rhetoric surrounding endowment funds and their use of alternatives and expensive investment active investment managers is always based on the assumption of a superhuman time scale and holding period, like the story (alas, apocryphal) about Oxford having a stand of trees ready to replace the oak beams in a college hall when they needed replacement after four hundred years. (Does Swensen mention that as an inspiration for his investments in timber?)
My point was that endowments are a source of income for operating expenses and so 100/0 is not an appropriate benchmark. Of course as an accounting matter operating funds and endowments should be separate and probably are in most if not all cases. Incidentally I looked up the endowment report for my alma mater and it uses a few different benchmarks, but one of them is indeed 60/40 stocks/bonds.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by dodecahedron »

BJJ_GUY wrote: Wed Jul 22, 2020 8:26 am
dodecahedron wrote: Wed Jul 22, 2020 7:49 am Unfortunately, for many colleges the most important thing about the size of the endowment seems to be about winning a ¨mine is bigger than yours¨ bragging rights contest with competitors rather than a longterm sustainable withdrawal rate. Opaque illiquid hard-to-value investments can be very useful for that purpose. Such investments are also very difficult to liquidate during a turn down.

It´s like winning a bowl game. Alumni donors give more when the football team does well and when the endowment does well. In fact, some proud alum donors even *invest* their wealth with the college´s endowment through some kind of split-gift shared lifetime income stream arrangement.
Regardless of the size of the endowment compared to peers, the more troubling (or challenging is maybe a better word) exercise is the short-term performance comparisons between endowments. This is silly, and can be damaging as it alters behavior. Many CIOs and senior staff have part of their compensation tied to relative performance to peers. This does not account for different mandates, goals, and general expectations agreed to between the investment team and the board.

That said, I'm not sure why you say (paraphrasing, so maybe a misunderstanding) that illiquid non-marketable investments are 'useful' as it relates to the "mine is bigger than yours" attitude.
The reason is that the valuation of illiquid non-marketable investments is very subjective and not easy to scrutinize. If you are trying to window-dress the optics of your endowment, it is tempting to mis-value them opportunistically.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by CardioMD »

I was under the impression most universities do not touch their endowment. If that’s the case why is a simple S&P 500 fund (plus whatever RE, etc.) considered silly? Seems rational to me.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by 02nz »

CardioMD wrote: Wed Jul 22, 2020 9:20 am I was under the impression most universities do not touch their endowment. If that’s the case why is a simple S&P 500 fund (plus whatever RE, etc.) considered silly? Seems rational to me.
I don't believe that's true. In many, probably most cases, income from the endowment's investments do help fund the university's operations. The endowment is not supposed to just grow and grow; the 2017 TCJA imposed investment income taxes on endowments over $500K per student.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by afan »

Universities use money from the endowments to support their spending. At the universities with huge endowments, money from that source accounts for a large share of total spending.

Reports of the performance of endowments do not support the idea that they do better than a simple passive approach. Not true for endowments overall and not true for the largest university endowments. Everyone talks about Yale. They forget that for a long time everyone talked about the amazing performance of the Harvard endowment. Smells like reversion to the mean.

But l, as a non lawyer, I don't see how this guy has standing. Is he complaining about low income from an annuity with the university? If not, how is he hurt by poor performance?
Last edited by afan on Wed Jul 22, 2020 9:53 am, edited 1 time in total.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by aristotelian »

CardioMD wrote: Wed Jul 22, 2020 9:20 am I was under the impression most universities do not touch their endowment. If that’s the case why is a simple S&P 500 fund (plus whatever RE, etc.) considered silly? Seems rational to me.
Quite the opposite. Most have a spending policy in the 5% to 6% range.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by Oicuryy »

The University of Colorado Foundation's benchmark is 80/20 world stocks / U.S. bonds. They could easily match that benchmark with a couple of index funds. But they use active managers and alternative investments to try to beat the benchmark. Here is a two-page summary of their returns, portfolio and benchmark.

https://giving.cu.edu/sites/default/fil ... report.pdf

It will be interesting to see if a court rules that this approach is a breach of fiduciary duty.

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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by afan »

It would be fun to see an endowment report that included the total fees paid in excess of what a three fund portfolio would have cost. A couple percent per year really adds up over time.
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Re: "University Endowment Sued for Underperforming the S&P 500"

Post by NYCPete »

I'm confused by some of the posts here. Are people actually reading the article?

The plaintiff has donated heavily to the endowment, and has formerly served on the investment committee of the endowment. They are not some cranky outsider with no knowledge of what's been going on. They seem to have good reason to take issue with the management of the endowment

The current asset allocation of the CU endowment has only 5% cash and fixed income. It has 15% in hedge funds, 10% in "real assets" and 25% in "global private capital." The long term asset allocation target is 80% global stocks 20% fixed income.

https://giving.cu.edu/sites/default/fil ... -08-16.pdf

The plaintiff may well be taking issue with why the endowment is bothering with expensive alternative investments.

Additionally, donors to the endowment are entitled to seeing the investment results, and they get to say how distributions are used. It's stated right on the CU website.

https://giving.cu.edu/sites/default/fil ... wments.pdf

If they gave to the endowment to fund a scholarship fund, and the scholarship can't do as much because of poor management, it's understandable they'll take issue with decisions to invest in expensive under performing options. Someone who's given over $5MM? Gifts at that level are papered up. They're not an instance of "thanks for the check, we'll take it from here."

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Gems from "Unconventional Success"

Post by Taylor Larimore »

Nisiprius wrote: "I still haven't read Swensen's book."

Nisiprius:
David Swensen's book "Unconventional Success" is a very good book. You can read many of Mr. Swensen's "Investment Gems" here:
"Without a rock-solid belief in the fundamental principles that undergird an intelligently crafted portfolio, weak-kneed investors face the likelihood of a disastrous whipsaw."

"Poor asset allocation, ill-considered active management, and perverse market timing lead the list of errors made by individual investors."

"Asset-allocation decisions play a central role in determining investor results."

"From March 2000 to May 2003, bond market returns bested stock market returns by a whopping 68.7 percentage points."

"Instead of concentrating on the central issue of creating sensible long-term asset-allocation targets, investors too frequently focus on the unproductive diversions of security selection and market timing."

"The behavioral benefits of diversification loom larger than the financial benefits."

"Only by regularly rebalancing portfolios to long-term targets do investors realize the results that correspond to the policy asset-allocation decision."

"Rational market participants take maximum advantage of tax-advantage investing."

"Overly precise estimates of the future may prove of little use, while more general concepts might serve a useful purpose."

"Survivorship bias represents a pervasive problem for gathers of historical return data."

"Roger Ibbotson's 78 years of data show stocks earning 10.4% per annum. No other asset class possesses such an impressive record of long-term performance."

"Sensible investors prepare for a future that differs from the past, with diversification representing the most powerful protection against errors in forecasts of expected asset-class attributes."

"Investor surveys show that a large majority of individual investors fail to grasp even the most basic elements of bond math."

"No other asset type comes close to matching the diversifying power created by long-term, noncallable, default-free, full-faith-and-credit obligations of the U.S. government."

"TIPS constitute a compelling addition to the tool-set available to investors."

"By following a disciplined policy of maintaining a well-diversified set of portfolio exposures, regardless of market zigs and zags, investors establish the conditions for long-run success."

"Sensible investors avoid speculating on currencies."

"A modest allocation to emerging markets stocks contains the potential to enhance the risk and return characteristics of most investment portfolios."

"As the preeminent practitioner of indexing for individual investors, Vanguard stands atop the industry in terms of excellence in tracking a wide variety of markets."

"With its inflation-sensitive nature, real estate provides powerful diversification to investor portfolios."

"Thousands upon thousands of professionally managed funds routinely fall short of producing even market-matching results."

"Overconfidence contributes to a litany of investor errors, including inadequate diversification, overzealous security selection, and counterproductive market timing."

"Sensible investors avoid non-core asset classes."

"As a general rule of thumb, the more complexity that exists in a Wall Street creation, the faster and farther investors should run."

"Foreign bonds offer little of value to U.S. Investors."

"Buying yesterday's winners and selling yesterday's losers inevitably hurts tomorrow's performance."

"When markets make radical moves, investors demonstrate either the courage or cowardice of their convictions."

"Regression to the mean, one of the most powerful influences in the world of finance, explains the tendency for reversal of fortune."

"Rebalancing to long-term policy targets plays a central role in the portfolio management process."

"Individuals who attempt to compete with resource-rich money management organizations simply provide fodder for large institutional cannon."

"Sensibly constructed indices, such as the S&P 500 and the Wilshire 5000, exhibit low implementation costs and high tax efficiency."

"ETFs promise real-time pricing and superior tax efficiency, but suffer from the necessity of dealing with the brokerage industry to make purchases and sales."

"Unfortunately, as asset size increases, active portfolio management becomes increasingly difficult."

"The transactions cost advantage enjoyed by index funds joins a long list of reasons to prefer the rock-solid certainty of market-mimicking returns over the will-o'-the-wisp possibility of market-beating results."
Best wishes.
Taylor
Jack Bogle's Words of Wisdom (book's endorsement): "Coming from the mind and heart of one of America's most successful and integrity-laden money managers, this is a book that will change the way you think about mutual funds. It's high time for you to follow the elegantly simple advice he presents in this wonderful book."
"Simplicity is the master key to financial success." -- Jack Bogle
Topic Author
MJS
Posts: 580
Joined: Sat Aug 05, 2017 10:55 pm

Re: "University Endowment Sued for Underperforming the S&P 500"

Post by MJS »

I'm glad to see that others feel the S&P 500 isn't a reasonable benchmark. Nevertheless, donors would benefit from having some reasonable benchmark for judging their alma mater's endowment. Universities with endowments under ($50million? $500million ? $1billion) could use that benchmark as a sensible low cost investment.

Looking further into endowments, especially universities', they are under very considerable pressure -- from students and even donors -- to invest in socially responsible ways. So would something like Vanguard FTSE Social Index Fund Investor Shares (VFTSX) [edit: plus 40% bonds] be a fair metric? This has been very educational!
Last edited by MJS on Wed Jul 22, 2020 10:27 am, edited 1 time in total.
KeystoneK
Posts: 12
Joined: Wed Jul 10, 2019 3:38 pm

Re: "University Endowment Sued for Underperforming the S&P 500"

Post by KeystoneK »

Is there a reason that endowments need to stray away from a standard Bogleheads approach? Seems to be a few posters here saying that they cannot do that. Why does an endowment need special investment strategies to be successful in the long term.

I just researched my alma mater and am very confused by their asset allocation:

20% US equity
15% International Equity
15% US Bonds
2% International Bonds
8% Cash
14% Hedge Funds
11% Real Estate
15% Private Equity

This asset allocation doesn't make any sense to me. I am also looking at some of their expenses and they are outrageous. Why someone from that university would need this large of a travel budget to figure out their investments is beyond me. On top of that we are spending a boat load on the general administration of the funds, enough to give another 50 students full rides every year.

It's interesting that they also have a spending rate larger than their return since inception :oops: . So the endowment is only sustainable because of on-going donations.
02nz
Posts: 5558
Joined: Wed Feb 21, 2018 3:17 pm

Re: "University Endowment Sued for Underperforming the S&P 500"

Post by 02nz »

Most endowments would probably be better off with a LifeStrategy fund. That would be pretty hilarious to see on the endowment annual report. Of course no manager could justify their (and their staff's) salary that way! :moneybag
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