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March 15, 2016

How to invest like the top endowments

The endowment investment model, as implemented by institutions such as Harvard and Yale universities, has demonstrated excellent long-term returns. This leaves many investors wondering how they can mimic the endowment strategy and generate similar results. But is this even possible since endowments employ a vast number of highly skilled professionals and have access to investments that are typically out of reach for individual investors?

What we want to demonstrate here is that individual investors can actually achieve similar results.

Assessing endowment performance

Every year the National Association of College and University Business Officers (NACUBO) publishes the investment performance of college endowment funds.(1) We can thus compare the results of the average endowment fund (sorted by size) over the last 5 and 10 years. At the end of the table, we can add a simple portfolio consisting of three mutual funds (40% US equities, 20% international equities and 40% bonds) – basically representing a 60/40 balanced portfolio.(2)

The table shows that:

  • Over the past 5 years, the mutual funds would have beaten the average endowment fund
  • Over the past 10 years, the mutual funds would have beaten the average endowment fund except the group with more than $1bn AUM. But even there the difference was only 0.4% p.a.
Assets5y performance10y performance
> $1bn10.4%7.2%
$501m - $1bn9.9%6.7%
$101m - $500m9.5%6,2%
$51m - $100m9.4%5.9%
$25m - $50m9.8%5.6%
Below $25m10.6%6.0%
Mutual funds with 60/40 mix10.7%6.8%

What are the implications for investors?

We see 4 key points:

  1. Private investors can generate similar returns to large institutions. Actually, the table shows that private investors can even do slightly BETTER than the average endowment fund. The investment landscape has become so competitive that it is getting very difficult after costs to consistently outperform the markets. Even Warren Buffett, who is seen as one oft he best long-term investors, has been struggling to generate excess returns in the last few years (see here).
  2. Arguably the comparison is not entirely fair – the results of a simple portfolio of mutual funds is even better if you consider the fact that your typical endowment model resembles more a 80% equity and 20% fixed income asset mix. If we adjust the asset allocation of the mutual fund portfolio accordingly, we would get an annualized 5y return of 12.9% and 10y return of 7.4%, i.e. vastly superior to the much lauded endowment model.
  3. Less is more. Simplicity often wins. A simple portfolio consisting of equities and bonds is enough for most private investors. There is no need to invest in alternative funds such as hedge funds or private equity funds. Alternative funds tend to come with leverage, concentrated holdings, limited holding transparency, poor liquidity and higher-than-average-fees.
  4. Investors should focus on what is really driving long-term success: identify their long-term goals and match it with the right asset allocation, keep costs under control and be aware how emotions can ruin even the best investment plan.



(1) http://www.nacubo.org/Research/NACUBO-Commonfund_Study_of_Endowments/Public_NCSE_Tables.html

(2) http://awealthofcommonsense.com/2016/02/bogle-vs-golitath/

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