LUTZ BUSINESS INSIGHTS
Outsmarting the Ivy League?
JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL
Each year, the National Association of College and University Business Officers and Common Fund Institute produce a study on the returns of college endowments. This study tracks the results of University investment portfolios by size of their endowments. Of the schools participating in the study in 2016, more than 93 had endowment assets exceeding $1-billion.² Schools such as Harvard, Yale, Stanford, Princeton and Notre Dame all have endowments over $1-billion and their returns were contributed to the study.
Obviously, the Universities with endowments over $1 billion have many resources, alumni, faculty and trustees to help them guide their investment decisions. It is probably also safe to assume they employ the most-esteemed consultants, money managers and portfolio strategists that money can buy.
One would then guess that those institutions should be outperforming the market on a relative basis if they have all of the best and smartest resources at their disposal. However, it turns out that is not the case.
Consider these returns for all Universities with endowments over $1 billion:
|Average Annual Returns for US Higher Education Endowments For Periods Ending June 30,2016|
|Size of Endowment||1-Year||3-Years||5-Years||10-Years|
These returns are pretty decent, all things considered. However, for comparison purposes, here are the indices for those periods as well.
|MSCI World ex U.S. (in U.S. $)||-9.8%||1.9%||1.2%||1.6%|
|Barclays US Aggregate Bond||6.0%||4.1%||3.8%||5.1%|
|CPI – U||0.7%||1.0%||1.6%||2.0%|
While at face value it is hard to compare one asset class to a diversified portfolio, if we extrapolate a weighting to each index we can show what a blended portfolio of indices would have done against a blended portfolio of endowments.
To come up with a relative portfolio blend, let’s assume a 75% equity and 25% bond portfolio. Of that, let’s assume approximately 25% of the equity component is international. So, a blended index portfolio we could assume would consist of 55% Russell 3000 (US Broad Market), 20% MSCI World ex U.S., and 25% Barclays US Aggregate Bond. This hypothetical allocation would not be unreasonable for funds with a very long-term time horizon looking to grow. In contrast, the group of endowment over $1 billion carried a 13% US equity, 10% bond, 19% international equity, and 58% alternative asset allocation. Alternative assets is a very broad space, but generally consists of hedge funds, private equity funds, private real estate and other assets such as art. If we compare these returns we get the following:
|Comparison Returns for Periods Ending June 30,2016|
|Endowments Over $1-Billion||-1.9%||6.0%||6.1%||5.7%|
So in three of the four time periods, the blended index won and in the longer 10 year figure, it was a dead heat. I always say that if you show me portfolio returns for anything, I can mix and match a portfolio that will beat it with the ability of hindsight. We did not do that, in this instance. We carried a slightly higher weight to international equities, which had a dismal 10 years and also carried more bonds in the allocation, which carry lower degrees of risk than equities (and thus lower expected returns).
This is not a complex portfolio, but one we all could replicate because of the advent of index funds. You can bet, however, if someone would have walked into Yale’s investment committee with a straight forward 55% US equities, 20% International equities, and 25% blended bond allocation proposal, they would have been laughed out of the room. Does that mean the advice would have been wrong? Using simple, diversified, low-cost investments and taking the time to control what you can. Controlling behavior, allocation, goals, and taxes in the context of a financial plan isn’t bad advice, it is just not complex.
The truth of the matter is the market does not care how smart you are, how many initials you have behind your name, or how much money you have to invest. The capital markets deal in absolutes. Adding complexity doesn’t necessarily increase returns as we see in this comparison. Keep in mind, the more complex something is the higher degrees of monitoring, understanding, costs, and potential tax implications there may be. These institutions have some of the brightest minds in finance on their committees overseeing those complexities and an organizational framework to monitor. While they search out complexity, I think it is our goal to make the complex simpler. We all still need to plan, monitor, and understand, but it all doesn’t have to be uber-complex to generate return. We’ll see what the next 10 years brings, but don’t make the mistake of assuming complex is always better.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.
ABOUT THE AUTHOR
JUSTIN VOSSEN, CFP®, NAPFA + INVESTMENT ADVISER, PRINCIPAL
Justin Vossen is an Investment Adviser and Principal at Lutz Financial. With 21+ years of relevant experience, he specializes in providing wealth management and financial planning services for high net-worth families, business owners in transition, endowments and foundations. He lives in Omaha, NE, with his wife Nicole, and children Max and Kate.
AREAS OF FOCUS
- Investment Advisory Services
- Comprehensive Financial Planning
- Business Owner Planning & Succession
- High Net Worth Families
AFFILIATIONS AND CREDENTIALS
- CERTIFIED FINANCIAL PLANNER™
- National Association of Personal Financial Advisors, Member
- Financial Planning Association, Member
- BSBA in Economics and Finance, Creighton University, Omaha, NE
- St. Augustine Indian Mission, Board Member
- Nebraska Elementary and Secondary School Finance Authority, Board Member
- St. Patrick's Church, Trustee
- Mount Michael Booster Club Board
- Lutz Gives Back, Committee Chair
- March of Dimes Nebraska, Past Board Member
- A 100-Year Bet Gone Bad
- Am I Ready to Retire? Finding Your Sweet Spot
- 5 Retirement Strategies for Small Business Owners
- Outsmarting the Ivy League?
- An Investor's Year-End Wrap Up & Tax Prep
- Nobody Knows Anything
- Add "Brexit" to the Long List of Uncertainty
- Financial Planning for College Grads
- Fight or Flight - Lesson Learned
- Social Security: The New Rules
- Putting Volatility in Context
- The Asian and European Fronts
- Bubble Looming or a Bubble Popped
- Re-Emerging Markets?
- A Market Perspective
- Timing is Not Everything
- "Yellen" at the Fed
- Mind What Matters...Focus Efforts On What You Can Control
- What to do With a Financial Windfall
- Love Indexes - Hate the Indexes
- Do I Own a Market?
- A Practical Primer On Volatility
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