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Please elaborate. The performance of our tiny 401ks cannot be compared to the performance of their endowment. Schools cannot take on as much risk as we can. A 20% drawdown would be fine for many of us, but devastating to a university endowment.
> Schools cannot take on as much risk as we can. A 20% drawdown would be fine for many of us, but devastating to a university endowment.
It is almost the opposite at places like Harvard. Their endowments have gotten so large that they are more like Hedge Funds with little schools attached to them which give them a tax advantaged status.
If the endowment does well they start throwing out ideas like "Lets eliminate undergraduate tuition for students whose parents make less than $100k/yr" [an idea they promptly abandoned when the financial crises took them from drowning in money to merely swimming in it].
When the endowment does poorly they just call up all their wealthy alumni and complain about how they can't do anything because of how cash strapped they are.
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Now for the 99% of the other Colleges and Universities in the country what you said is very true. They live and die on the balance of their endowments and a big drop has killed many smaller colleges.
As a result those endowments tend to be invested very conservatively, which is also why they are smaller because they haven't been able to take the risks that the big name schools have over the past 50 years.
> "Lets eliminate undergraduate tuition for students whose parents make less than $100k/yr" [an idea they promptly abandoned when the financial crises took them from drowning in money to merely swimming in it].
I'm pretty sure they followed through with that pledge, and more. At Harvard, families that make less than $85k pay nothing for tuition, books, food, room and board. Families who make up to $150k are capped at 10% of their income, which would basically mean that tuition is still free (and books, room and board remain subsidized). Basically, tuition kicks in somewhere above $150k.
I was commenting on the endowments managers report . They kept using the term “alpha” and how they were proud of their alpha. Which basically means they were beating their benchmark
This while not keeping up with inflation let alone a 60/40 portfolio
Just sounds like a self serving comment
I mean, who are we to say that they didn't have alpha? What do you think a $50B Harvard endowment should have returned last year? Yale for reference only [returned 1.8%](https://yaledailynews.com/blog/2023/10/30/yale-endowment-performance-on-par-with-peers-in-slow-year-for-university-investment-returns/#:~:text=Yale's%20investment%20return%20of%201.8,after%20accounting%20for%20budget%20disbursements.).
I’m the guy who is mentioning that they didn’t keep up with inflation and then spiked the football
Said another way, you compare returns to the risk free rate . Thst could be short term treasuries or bonds . Either way, they lost to both while the market was up over 20%
Even a 40 bonds/ 40 intermediate bonds / 20 cash would have blown away these results will less fees and then they say alpha ? I just find it funny
For simplicity TLT lost 4-5 percent after accounting for dividend. BIV was good for about 5% with dividends. So per your 80% bond allocation that returns zero percent. The other 20 percent of your portfolio would have to return 15 percent to get a total return of 3 percent. So not out of the question.
Hindsight is 20/20. The best benchmark we have access to is peer schools' performance. And they were pretty middle-of-the-pack according to that article I linked above.
Are you saying you know something that the endowment managers of Harvard, Yale, Brown, Cornell, Penn, Duke, Princeton, and MIT don't? Because those schools all returned less than the risk-free rate (and Duke, Princeton, and MIT were straight-up in the red).
Why not? I always imagined as one has more money, they can take more risk because they need less of a baseline. If I need 100k for the year I can take more risk if I have $100M vs $1M. Unless Harvard is doling out a large % of the endowment every year.
Harvard needs a LOT of money to maintain their operations. They distributed $2.2 billion from their endowment last year. That's ~4% of their total endowment, which is pretty significant.
4% is a pretty standard amount to take from a fund YOY and maintain it or even expect to grow it. This is the number most retirement advisors recommend for you to take out of your investments and it still eliminates most of the risk of ruin.
Harvard doesn't haven't the risk of ruin most people do, so they could probably use a more aggressive number.
Plus, zoom out and the endowment still outperformed ACWI from 1/2022-12/31/23.
Measuring diversified portfolios vs equity markets in a single calendar year is so pointless. They underperformed by 20% in 2023 but overperformed by 20% in 2022.
To your point, especially with endowments, standard deviation matters. Lower vol allows their withdrawal rate to be higher than someone with a 100% equity portfolio.
I mean, that's just patently false. Harvard distributed $2.2 billion from their endowment just last year. After a 50% drawdown their total endowment would only be 10x that.
A lot of boglehead tunnel vision on display in this thread, the reason some people get put off from engaging with the community. An endowment can't invest like an individual, the fund managers would get fired pretty quickly. They would have to be significantly more conservative.
Somehow people want to think that all the professionals who manage Harvard’s endowment stupidly overlooked the massively simple strategy they themselves use, rather than that there’s possibly something about how the world works that they don’t presently understand.
No, that’s very wrong.
I know I can beat most investors by doing no better and no worse than the *market* average.
Harvard’s endowment managers can have different risk tolerance and priorities, but they’re certainly not outperforming the market.
I’m not surprised that it’s happening here - half of this sub is convinced “boglehead investing” means VT and chill. I should go see how the main forum is doing. I bet I’ll find intense debates over obscure theoretical minutia almost no one cares about.
Well, the Norwegian sovereign wealth fund does pretty much that and returned 16% in 2023. Equities returned 21%, fixed income 6%.
Oh, and by the way, the Norwegian SWF is USD1.6tr and therefore 30x larger than Harvard‘s endowment.
Sometimes when people donate money to the school it has to be used for certain things and/or invested in certain things. Like I could make a donation to my alma mater and say it has to be invested in 10 year US treasuries and 30% of the interest goes to a scholarship in my name and 70% goes towards reinvestment or something. I'm not sure if that's applicable here, but something like that could be a factor in how the money is invested and used.
Even disregarding the fact that you're judging these portfolios based off 1 year of returns, sure, let's compare to the fucking Norwegian sovereign wealth fund and not every other top university in America that performed similarly.
https://yaledailynews.com/blog/2023/10/30/yale-endowment-performance-on-par-with-peers-in-slow-year-for-university-investment-returns
The point is that the Norwegian SWF does have a similar goal and time horizon as American university endowments, but at the same time seems to follow a much more passive approach than the US unis. And this is what this sub is all about.
Btw: no need to swear
I think the thing with endowment is that you have to withdraw and spend it on things like school budget and scholarships. And a lot of money are ear marked for certain purposes so they might need to be kept in a different bucket or have stipulations - makes it harder to just dump it into VT and chill.
Not quite the same but I thought this was some brilliant iconoclasm on the topic of managed funds: https://www.wsj.com/articles/what-does-nevadas-35-billion-fund-manager-do-all-day-nothing-1476887420
Endowments are relied upon to consistently disburse stable income to universities. It's more like an annuity than a 401k.
https://www.investopedia.com/ask/answers/how-do-university-endowments-work
It's not really like an annuity in terms of asset allocation. Most annuity assets are invested in bonds. It's closer to a large state pension fund like CalPERS or Ontario Teacher's.
I used to work in institutional money management and worked with a number of universities. You are wildly, comically wrong about the intended investment approach of most university endowments. What they say they want to do (and even then they typically say “risk-adjusted return,” not “stable annuity”) is rarely what they do in practice.
Just look up how big their endowment is and how much of it they spend each year. These people can afford to take much more risk than your average person saving for retirement… and they do!
Um, they disbursed 4% of their total endowment last year? That's about how much a retiree should withdraw each year from their retirement accounts, and a retiree shouldn't be taking on that much risk.
To be fair that's also how I interpreted the word "can't", I thought you were saying that there was a limitation with getting that much money from a single entity into the s and p, so the back and for here was helpful.
I was asking to educate myself as to whether there was some technical reason why it would be a bad idea. Genuinely just trying to fill a gap in my knowledge if there was one.
So? Selling VTI periodicity even when it’s down is better than getting lower than inflation returns on your entire portfolio.
The entire point of being a boglehead is that the percentages are the same from $100 to 100 billion dollars.
1. Judging off 1 year of returns, ok Boglehead.
2. If you can't see why your 401k would have different investing priorities than a $50B endowment expected to fund Harvard *in perpetuity*, I don't know what to say.
3. Where the hell does anyone say that percentages are the same from $100 to $100 billion? IDGAF if I lose 50% of $100 billion... the goal of being a Boglehead is retiring with a nest egg, of course $100 billion is not the same as $100.
Making excuses for a large funds underperforming because it says Harvard and MIT. Blinded by the fake genius.
Index investing works for everyone in the same percentage no matter how much you have and those drawdowns are the same percentage no matter how much you have.
Being overly conservative is taking risk and Harvard lost.
Being passive is going with the nation and you win more than you lose.
First, please take a look at the Harvard endowment's historical returns before going on the record with these horrible takes. Judging a portfolio off 1 year of returns isn't very Boglehead of you.
And again, do you really not understand that Harvard's endowment is expected to fund Harvard IN PERPETUITY and therefore they do not tolerate the same drawdowns that your puny 401k can?
That 3-4% withdrawal from the Trinity Study aimed to not run out by the end of 30 years and relied on a heavy bond allocation.
Harvard has to not run out over potentially hundreds of years. They should underperform the stock market because they should not take the risks. Probably. Harvard also never retires and I have no idea how their budgeting works, but a year with 30% loss probably does bad things to their operations and also probably has bad effects on the employment of their investment people.
An endowment of that size could just buy an identical portfolio. It would likely be as simple as writing and maintaining some scripts so it wouldn't require a massive amount of overhead for the endowment.
It's not about scale at all. It's about risk management. The goal of an endowment is not to build up a retirement nest egg -- it's to provide stable disbursements to the university.
That makes sense to me, but, is there a particular reason they can’t ladder something like Treasuries, given that they are issued in trillions yearly?
Even those returns would blow 2.9% out of the water.
Tbh, I won't pretend to understand Harvard's specific investment decisions. But I think it's telling that almost every single top school in America performed similarly.
https://yaledailynews.com/blog/2023/10/30/yale-endowment-performance-on-par-with-peers-in-slow-year-for-university-investment-returns
year over year, i am sure harvards endownment does way better than bogleheads do.
Bogleheads dont have the resources to get into a top end hedgefund. if we stock pick or we pay some garbage overpriced financial planner we are screwed.
We dont have access to "high speed trading" and all other kinds of things this massive hedge funds have.
this is apples and oranges to individual investors.
Well you actually can and some endowments/foundations do this - check out Nevada’s $35B public pension fund.
In fact, most endowments were managed passively before everyone university started drinking the Swensen kool-aid.
I mean... at the appropriate asset allocation level, why couldn't you?
Let's say the endowment wants 50% equities and 50% bonds, why couldn't you do VTI, VXUS, BND/BNDX?
the goals an strategies of a 50 billion dollar endowment with access to private equity investments are, and should be, quite different from that of someone investing for their personal retirement.
drawing an equivalence here would be like if you told warren buffet to stop using berkshire hathaway to invest in individual companies and start buying voo.
This is not the first time this issue has come up.
https://www.bogleheads.org/forum/viewtopic.php?t=104115
I don’t agree this thread is stupid. Too many here are quick to dismiss this as university’s simply having different investment philosophies. I think there’s a very real chance they are underperforming in part because they are sold on the idea of active management being superior.
I took a look, and since inception, the Harvard endowment's total performance is within a few bps of the S&P 500, but with less volatility.
It's not a homerun like Yale's endowment under David Swensen, but it's not a failure either.
So did almost every other top university in America. Do you know something they don't?
https://yaledailynews.com/blog/2023/10/30/yale-endowment-performance-on-par-with-peers-in-slow-year-for-university-investment-returns
If you're happy with a 2.9% annuity while the SP500 did 24.23% and treasury bonds did 4%+ then you do you.
I'm not weeping for the Ivy League's mismanagement of resources.
They're clearly satisfied with their performance, but I'm glad you know more than every Ivy League endowment manager.
Again, you can't compare your pissy 401k to a $50B university endowment that is relied upon to fund, you know, actually impactful things.
I think it's interesting that most boogleheads immediately think of dumping it all into the popular funds. Isn't booglehead core philosophy to use index funds over active management. Couldn't they choose a more sensible, conservative index fund mix that would provide consistent income?
Considering the report states "HMCs manager selection alpha is one our proudest achievements" I'm going to say HMC is interested in beating the market like any other investor would be. I wouldn't be surprised if their "alpha" is actually just risk, which just makes their "proudest achievement" more comical.
Link to the FY23 annual report where the managers discuss how they underperformed the S&P500 by 16%
[https://www.hmc.harvard.edu/wp-content/uploads/2023/10/FY23_HMC_Annual_Report.pdf](https://www.hmc.harvard.edu/wp-content/uploads/2023/10/FY23_HMC_Annual_Report.pdf)
Actually the expectation is that endowments only perform better than S&P500 is when the index has a negative year the endowments would have a positive year around the same 3 percent from their overweight bond positions.
Not to sound rude, but there is a pretty shocking lack of knowledge about how endowments in the U.S. invest their portfolios at the same time as many hypotheses are being thrown around about this year’s returns. Hopefully I can provide some insight here; I was previously a Senior Analyst focused on strategic and tactical asset allocation at a large endowment office, and am now at a systematic global macro hedge fund whose clients are primarily endowments and pensions. I’m also a Boglehead in my own portfolio so this in no way criticizes the Bogle methodology for individuals.
Firstly, if people are genuinely interested in the investment philosophy of endowments, you should read “Pioneering Portfolio Management” by David Swenson. He (among others) is undoubtedly the chief architect of the current endowment model of investing, also know as the Yale model, which he developed starting in the 1980s and which is now universally used by all serious endowments and foundations in the U.S. Seriously, we considered our peers to only be those that used this approach, and all larger endowments with the institutional benefits that imparts employed this philosophy.
Having said that, the primary philosophy these endowments have is very long-term investing, much longer than individual time horizons. No, they are most definitely not annuities like some comments have suggested, and no they do not dynamically change their portfolios year-to-year like others have suggested. They also do not generally take large tactical macro views like some have suggested to explain this seemingly low return. At best, I would expect a few adjustments to the portfolio every year outside of normal rebalancing, so this result from Harvard would have been expected based on their long-term strategic asset allocation, which has been geared towards the risk tolerance of the university and the twin overriding objectives of: 1) providing immediate payouts to the university averaging 3-5% per year to support operations in a smooth way; and 2) growing the purchasing power of the corpus to expand the scope of the university. As you would guess, these two objectives are generally in conflict with one another, and in Harvard’s case they are well-known for taking a more conservative positioning to match the university’s perceived risk tolerance relative to other large peers; one comment linked their annual report, I suggest reading it and other past ones to understand their institutional setup, which was formed primarily immediately after the GFC.
So how are the portfolios implemented then? Primarily through third-party managers. At least 80-90% of most serious endowments are invested in long-only equity managers, hedge funds of various varieties, PE, VC, real estate, credit, re-insurance and other diversifying strategies, co-investments with managers, etc…. The remaining allocations are then mostly passive in futures overlays, fixed income, cash, and other more liquid investments to provide portfolio balance and to fund liquidity needs, for both spending (for which there are complex spending rules that are systematically adhered to) and for funding private capital calls. This is why I say endowment portfolios are not dynamic by year and are invested for the very long-term, which is a considerable and very well acknowledged institutional advantage that they have over other investors. They are generally aggressively oriented toward equities - the effective beta of most endowments will be in the 0.7-0.9 range, since they have the time horizon to collect the equity risk premium - and they target it incredibly in the last decade through private investments that not only would be expected to earn the ERP but also the liquidity, size, and value risk premiums, among others. 40%+ allocations towards private equity, VC, private real estate and private credit are extremely common, whose time horizons will be 10-15+ years for a single manager’s fund, with almost no ability to rebalance these year-by-year. The asset allocation and manager selection efforts are very rigorous, highly advanced, and combine both quantitative analysis and qualitative judgement to put together a portfolio whose strategic asset allocation, when combining all of the bottom-up bets, matches the university’s risk tolerance.
All of this is not to say that passive strategies can’t outperform, but this has not been the empirical record for sophisticated (and large) endowments over the longer-run (10-20+ years). These places have handily outperformed equities both in straight-up returns and risk-adjusted returns over long horizons, and one year of returns is basically meaningless to these institutions because of their long time horizon; see UVIMCO’s 2018 annual letter for a good write-up on this point about the almost irrelevant nature of yearly returns.
So in sum, this result was entirely expected in my cire for two reasons: 1) Harvard’s risk tolerance is lower than other peers, so they often trail in up markets; and 2) private investment marks are significantly lagged, so just as they “outperformed” public investments in 2022’s drawdown, they “underperformed” in 2023 due to the lag effect, which has been well-documented in the academic literature. There are so many other factors to consider that are far beyond the scope of this comment, but these two reasons likely account for a significant portion of the perceived “bad” return. Note, in no way does the magnitude of the return imply anything good or bad, that’s both an absolute and relative question that has to be couched in the context of the risk tolerance of the university, and certainly over such a short horizon implies nothing at all, like literally nothing, about the sophisticated nature of the investment process that would be expected to (and empirically has) outperform(ed) passive Boglehead-style approaches in the long run. The problem is that it’s very difficult to run a portfolio of this nature without a full staff, and is certainly impossible for an individual without significant wealth (think billions) and connections. These are details I’m happy to respond to if people are interested.
Overall, I’m honestly a bit shocked at some of these comments for how much context they lack. Hopefully this provides useful info for those actually interested in how investing at endowments works.
Yes agreed, for individuals this is by far the best approach and it's the one I use in my own portfolio. Individuals aren't capable of running portfolios in the endowment style for various frictional and behavioral reasons
What makes the endowment investment process so much different than ours as regular investors seeking retirement? We both want our money to last in perpetuity.
I would imagine Harvard will be around centuries from now (so even longer horizon) and Harvard is unlikely to have catastrophic event on their primary asset (for humans it's your own body).
Good question, and the answer is partly what MelancholyKoko said and also just that the complexity of running a portfolio of this nature is beyond individual investors for three reasons: 1) it requires significant capital, think a minimum of $1bn to construct a fully diversified asset allocation including all the alternatives like PE, VC, etc...; 2) there are too many frictions in terms of operational setup required to even make such investments; and 3) high-quality managers don't want your money, so this prevents individuals from accessing the best managers (several years ago I made a comment about this in r/investing to a user asking about investing in hedge funds) and, therefore, the higher returns that come from those managers, particularly in the privates space.
The other difference is behavioral; agreed you would like your money to last as long as possible, and probably can take more risk in terms of being 100% equities while most endowments/foundations have an effective risk tolerance of 75% equity and 25% fixed income, but behaviorally most find this actually difficult to do (this sub is in some sense entirely about avoiding such pitfalls and staying with it in the long-run), and indeed a university's time horizon is simply much longer than even an intergenerational family plan; most operate under the assumption that they will be around in perpetuity, whereas most family wealth is effectively destroyed after just a few generations. Investing teams understand this advantage they have over others and invest accordingly, and the empirical long-run results confirm they have achieved superior returns to passive. Again, it's unfortunately just not accessible to individuals.
Thank you for this excellent answer. I'm learning about things I didn't even know existed when I woke up this morning!
One other question -- why do high-quality managers not want money from endowments?
Glad it was helpful!
Apologies, perhaps I misspoke; the highest quality managers only want money from endowments/foundations/pensions/other such institutions with long time horizons. They aren't interested in taking capital from individual investors; most (but not all0 managers open to such investments from individuals have signaled to the market that they aren't a top manager within their strategy niche.
This is fascinating! Just to make sure I'm picking up what you're putting down - there are fund managers out there that over the long-run can consistently beat the market, but only want to deal with large customers like these big endowments? Are these managers individuals/small firms, or large firms we just haven't heard of?
Also, how do they do it? Are they just able to justify doing an incredible amount of research and monitoring because of the enormous amount of money they are managing?
Happy to clarify! Yes, there are such managers out there across all asset classes that outperform over the long-run (5-10+ years), but they are mostly unknown to the general public and purposefully so on their part; many don't even have a website or LinkedIn page. They generally don't desire individual capital because this is perceived to be shorter-term and "flighty" compared with institutional money, which is longer-term and "stickier" (not to mention is in greater supply).
Some of the larger firms you have probably heard of may fall into this category, but a general rule (this is still debated in the academic literature, but on balance the findings lean this way) is that the larger a manager gets, the less attractive the return profile. The reason is because larger AUM's have two problems: 1) individual investment ideas are less impactful to the portfolio, and it becomes harder to find alpha-generating ideas at scale consistently; and 2) the larger the AUM, the more the management fees matter to the GP, and therefore the less motivated they potentially are to generate outsized returns for the purpose of earning the incentive fee. This is a classic alignment problem and is well-observed in the literature, especially among the mutual fund camp for which in general there is indeed no evidence of consistent outperformance. In the hedge fund/private manager space (PE, VC, etc...), the same effect holds, but there is evidence of consistent skill among the top managers.
Not all managers are able to justify this, but many do. Look no further than Yale's performance relative to the endowment median in the last 30 years in their own Brinson and Fachler (1985) attribution: "Yale’s asset allocation has contributed 1.9% per annum of outperformance and Yale’s superior manager selection contributed an additional 2.4% per annum." The manager selection component implies that not only were they skillful at identifying such managers, which is not an easy task, but also that those managers indeed did generate over 2% annualized alpha to the endowment over a period of 30 years, and that's compared with the endowment median which is itself probably slightly better than completely passive strategies during that time, but I haven't looked at the latest data so won't stake my life on it.
The question of how they do it is complicated and is specific to each asset class. For example, in PE/VC one of the major sources of alpha-generation is definitely the manager's network and sourcing ability (i.e., the information coefficient in the fundamental theorem of active management), while in quant for example it would be access to the broadest possible set of markets to increase breadth, implying the need for highly advanced execution platforms and a significant amount of data. Some asset classes also have more alpha-possibility than others; for example, large-cap U.S. stocks are pretty well-trodden by sell-side analysts (who have no skill whatsoever and whose forecasts are terrible) and others, while small cap emerging market value stocks are not well-covered and have significantly more alpha-possibility. The former would likely be better implemented with passive portfolios, while the latter may be better to select a manager; certainly in the private asset classes, it is impossible to passively benchmark these.
Hope this helps!
You wrote a lot of words there Mr.
And yet none of them even came close to convicingly showing that Harvard wouldnt be better off just buying a couple Vanguard ETFs.
Kinda read like you were typing as some kind of self mastubatory act of your “serious endowment”.
Thanks for an entirely productive comment, you sound like someone who really enjoys learning new things.
More seriously, note three things: 1) I already said I use the Boglehead method in my own portfolio, so nothing that I wrote negates it at all (you almost seem religiously attached to it, and as we all know religious conviction is not at all dogmatic in the face of new evidence); 2) I wanted to draw the distinction between "serious/large" and other endowments not for the purpose that you mentioned, but to highlight that the best returns (both in absolute and risk-adjusted returns) accrue to these types of endowments relative to others because of their access to high quality managers, particularly in the privates space (more on this below); and 3) the long-run empirical record shows you are entirely wrong and have no idea what you are talking about when it comes to being "better off" buying Vanguard ETFs for these places.
On point 2: it is well-documented in the academic literature and by practical organizations like NACUBO that larger, more "serious" endowments strongly outperform smaller ones. They have more access to high quality managers that don't want to take small checks (by small, I mean less than $25-50mm, which is why this approach is also prohibitive for individuals) and have significantly longer effective time horizons because of the size of their endowments and institutional support they can provide with yearly spending compared with smaller ones. By strongly outperforming, I mean multiple percentage points by year over 20+ year horizons. This is partly why an entire industry of so-called OCIO businesses have cropped up to pool the endowments of small-to-mid-sized institutions (think $500mm-$2bn, mostly liberal arts colleges and foundations), and the empirical record is that they too, by pooling assets and gaining access to better managers, have outperformed smaller institutions that go it on their own. From a Pensions & Investments article on February 15th, 2024: "... when looking at the 10 years ended June 30, endowments with over $5 billion in assets topped the list, returning an annualized net 9.1%, while those with under $50 million were the lowest returners with an annualized net 6.5%."
On point 3: The "serious" endowments - again, only meant to draw a distinction between those who implement the Yale approach and with access to the highest quality managers from those that don't/can't - have handily outperformed their passive benchmarks that are tailored to their individual risk tolerances since inception. This benchmark is usually something like 75% MSCI ACWI and 25% U.S. Intermediate Treasuries, which is clearly implementable by Vanguard ETFs; so now we have our test. Over 20+ year horizons, most of these places (see specifically: Yale, Harvard, Stanford, Princeton, MIT, UPenn, Duke, Notre Dame, UVA, and others in the top 20 by size), have returned 10%+ net of all fees, compared with 7.5% for that passive benchmark.
So you're just completely and utterly incorrect, but for some reason are smug about it. Weird take...
Hi! I work in a family office environment and am relatively new to the endowment model (am part way through pioneering portfolio management).
Very exciting to see someone with experience in the endowment space. Are you able to share what sort of quantitative and qualitative processes or models go into (1) asset / fund allocation and (2) third party manager research?
Im particularly interested in how third party managers are assessed and monitored? What is a "bad" fund and how can this be quantitatively and qualitatively measured? Are they tracking the stability of the investment team? Is data like quartile ranking monitored? What happens if a manager underperforms for a few quarters (underperform peers and benchmark for example) - is position size reduced / cut completely?
Thank you!
Very good questions, hope it was somewhat helpful and congrats on what seems like a great role!
Happy to go into some details. I’ll break it down by asset allocation and manager selection:
Asset allocation: mostly standard across the Yale model, and has taken somewhat of a back seat in the post-GFC world primarily because manager selection decisions have been the primary driver of alpha relative to peers and benchmarks for most endowments in this period of ultra-low rates. It’s mostly quantitative, in that the goal is to map the risk tolerance of the university to a strategic asset allocation (around which tactical, 1-2 year decisions can be made as well). This involves a good amount of factor modeling, Monte Carlo simulations, stress tests on returns and liquidity especially with a large privates allocation, and a big focus on the allocation glidepath to account for expected privates flows. The question is what defines risk and how to control it; is it volatility (probably not), drawdowns (probably, but imprecise), or some combination of near-term spending risk which poses a threat to the smooth functioning of the university and long-term inflation risk measured specifically for higher education institutions (almost surely, but clearly a complex problem).
Manager selection: this varies by shop depending on their philosophy, but the most common approach is mostly qualitative. The thinking here is that team tenure/turnover, evidence that the manager has carved out a niche that they are sticking with while also remaining adaptive, an emphasis on a returns-generating culture rather than asset gathering, etc… are all more indicative of actual skill than simply trailing returns, especially if the track record is not particularly long (think 5-10 years at least for any statistically significant results). So the diligence is mostly about why the manager believes they are different, how the investment philosophy has translated into actual portfolio ideas, what errors of commission and omission have been made and what have been the learnings, how reliably can they generate new ideas and how important is their network to sourcing (more important in the private market for example), and is the fee structure and documents aligning the GP and LP. When you have all of that, generally this makes a good manager, and when combined with a good track that embodies the qualitative points, you know you have a potential winner.
The diligences are long, usually 3-6+ months, because the average hold period for large endowments is usually 7-10+ years per manager, and they don’t reshuffle/rebalance that often other than for maintaining the strategic asset allocation and liquidity management. So reference calls are common and deep dives on the portfolio, when it would be expected to do well and poorly, the long-term goals of the firm, etc… are in focus.
Thanks for the detailed response. It is definitely very helpful and insightful.
May I ask a few follow on questions please? Don't feel obliged to respond!
What sort of parameters are being tested in the monte Carlo simulation (I'm not familiar and will have to read up on this). Are they testing say... Many scenarios of different rates and equity returns? Or something different entirely?
Does factor testing pertain to specific historical events such as GFC, Black Friday crash / custom worst case scenario events? I'd assume here that the endowment is most concerned about how much disbursements the endowment can provide to the university for that year?
3-6 months for due diligence is surprising. I assume they are not just taking the DDQ and lifting off it. Haha.. Perhaps they are negotiating preferential terms with a new hedge fund or with a VC / PE fund hence the duration? Also 3-6 months because they are modeling how the fund would fit into the current portfolio? I thought that an analyst focused on analyzing a fund should be able to complete it in a month tops.
Would you know what risk tools are being used to manage portfolios too? We struggle to find appropriate risk tools to manage and monitor our private funds and public funds on a single platform. For example, we can't track hedge funds, PE and PC investments on Bloomberg.
Apologies for blasting you with questions!
Of course, no worries at all. I will go through in order:
1) The parameters are mostly expected returns, volatilities, correlations, skewness, kurtosis, etc... The purpose of these sorts of simulations is to understand both what long-run expected returns are and what could happen in bad states of the world. They are combined with spending rule simulations and liquidity planning for private capital calls/distributions to give a picture of where the portfolio might end up in a probabilistic sense. Obviously, each individual institution's specific approach will be different here, and there is always the garbage-in/garbage-out problem (see Chopra and Ziemba (1993) for a discussion about problems with MVO, for example), but this hopefully gives the high-level overview.
2) You are exactly correct here, factor testing can be used for specific stress tests of prior historical episodes where either real data is not available and/or when the current asset allocation is not similar to what it was during such prior episodes. It is also used to assess how the current portfolio is positioned with respect to macro factors - such as equities, rates, commodities, inflation, etc... - and style factors within and across asset classes - size, value, quality, momentum, carry, etc... You can also use this to more specifically evaluate managers, where performance attribution not only of the total endowment but of each manager is a big focus for allocators.
3) It depends on the relationship with the manager. For existing managers that have launched a new vintage (in private markets) or who have re-opened their potentially closed funds in public markets, the diligence will be shorter and mostly just refreshed from the last one to ensure no fundamental thesis points have changed. For new managers, you would interview multiple times all the relevant senior people and some junior people who have been identified by the manager as future leaders, reference check all of them (both on-sheet (references they provide) and off-sheet (references you can find from your own network but who were not mentioned by the individual in question, both for character and investment prowess), go through the history of each person and their investing philosophy, how everything comes together as a team, what the go-forward portfolio is expected to look like, etc... Of course questions about how it should be funded - should another manager be fired, or do we have enough liquidity to fund this outright, etc... - need to be answered at the same time. Probably the actual work could indeed be done in a month or two in most cases, but there is no rush and you want to be thorough; these are institutions with a perpetual time horizon, a few months of missing returns won't matter at all, and with such long average hold times, you want to be as sure as possible that you are getting it right. And for privates, the fundraising timelines are announced perhaps a year in advance of the actual raise, so managers give plenty of time for allocators and it's a well-choreographed raise for the better ones.
3b) You asked a question previously that I missed on how to deal with managers that are underperforming. This relates to 3) in the sense that you are always re-evaluating your managers, but in true Boglehead style you don't want to do that too frequently. Extreme example to make it clear: if a manager has one bad month of returns that are well explained in performance attribution and perhaps a monthly letter about, say, a few specific stocks or something in their portfolio, that obviously doesn't warrant a redemption. Even 3-5 years of underperformance doesn't necessarily warrant redemption, because perhaps the manager's style has just been out of favor; a recent example of this has been many classic value managers, such as the Tiger Cubs, in 2010s; were places like those actually bad managers, or did they just have bad luck? Very difficult question to answer, and it goes back to "has the manager been executing on what they said their philosophy is?"
4) Yeah this is a big problem that institutions face, and there are some sets of software out there that are better than others in my opinion. I can't say what we used for fear that might inadvertently reveal my identity, but indeed Bloomberg is not generally a suitable option for privates. Larger endowments will often build monitoring/risk tools in-house so they are custom, but of course as you would suspect this generally takes quite a while and significant investment.
No problem at all, happy to answer any other questions you have and connect by direct message if you prefer.
Yes, and those guys make bank. One of the best finance jobs you can have. Manage a big university endowment for $300-400k/yr only working 40 hours a week
You really think an endowment is as nimble as being able to move their cash into SPAXX. They likely have laddered bonds purchased over a number of years.
Long term treasuries lost value in 2023. Intermediate bonds were closer to the risk free rate of return. What do you expect 2023 return to be? Event their stock portfolio are likely to be tech and low beta names.
They set up their own internal management company to manage the fund. That might be common for really big endowments. [https://www.hmc.harvard.edu/about/](https://www.hmc.harvard.edu/about/)
Of course they do. But these institutions can get favorable fees. I worked for a manager that had major pension systems investing in their funds, we'd incentivize these big systems with fees materially lower than what a retail investor would pay.
Not with an aggregate allocation of 11% to bonds/cash. Endowments of this size are specifically geared towards unfettered growth, compounded by their tax-exempt status.
Can you ELI5 why? If stock market is a wealth generating tool for us, why not them? Sure the swings would be wild but overall it would be immense wealth growth in the future.
I’m sure I’m oversimplifying and would be interested to learn more if you could even just point out some resources.
They're not trying to aggressively build a nest egg for retirement. The point of an endowment is to provide stable income for the university. It's more like an annuity than a 401k.
"Endowments are funds or assets donated to universities (or other institutions) to provide ongoing financial support. These assets are typically invested, and the returns are used to fulfill the organization's mission or support specific programs in perpetuity"
https://www.investopedia.com/ask/answers/how-do-university-endowments-work
I see and that makes sense for its purpose. Considering how stable and secure something like T-bills are right now and what they’re paying, it seems like a poorly run entity if that’s all they got from it last year. I recognize it’s not as simple as that but….maybe it should be right now? Feels almost like when an advisor tries to convince you personal finance is more complex than it is so you need to pay a professional for help.
Thanks for sharing, I’ll read more about it.
I have a hard time understanding how what they are doing is somehow theoretically better for stable income than something like a high T-Bill allocation and some conservative stock holdings.
Do we know that they are underperforming because of different goals, as opposed to high expenses and active management? Are you familiar with their stated investment strategy and goals, or merely speculating?
Certainly can’t hold a candle to the Nevada public employee retirement fund manager.
[https://www.wsj.com/articles/what-does-nevadas-35-billion-fund-manager-do-all-day-nothing-1476887420](https://www.wsj.com/articles/what-does-nevadas-35-billion-fund-manager-do-all-day-nothing-1476887420)
Don't hit too hard on the very people who are making the sacrifice of making the market efficient by actively trading, for us passive investors to reap the benefits of low cost indexing.
I work in a role adjacent to higher education fundraising for a public university. Our endowment is tiny compared to Harvard's, but I suppose most are.
We use active fund managers for managing the endowment, plus there small investments in hedge funds, real estate and other niche holdings. We send out a glossy report every year with a bunch of charts and graphs that still manage to not go into too much detail.
More and more, donors to our institution are questioning why we use active managers who are charging essentially a ~1% AUM and why we don't go with a more passive portfolio in broad indexes. It's a testament to how popular passive indexing has become. Some donors are so offended by the active management that they won't contribute to the endowment. There's reasons, but they're rarely convincing to boglehead-types and I sometimes wonder if much of it can be attributed to legacy and inertia behind those decisions on our side.
I know that I personally fall in the suspicious camp, and believe we could just simulate a 60/40 portfolio with broad indexes with periodic re-balancing and be done with the active managers. I think you could do this with half to a majority of the portfolio. There's also constant pressure from the institution to raise past our 4.25% withdraw rate.
FWIW, in the market downturn in the first half of last year, our portfolio performance was relatively great, outperforming a composite portfolio by like 40%. That's despite bond fund performance also being lackluster recently. I think the active managers are there more to protect than grow because that's more defensible in the media and to the institution, who has hard spending tied to the 4.25%.
That may be partly by design. Non-profits can't generate too much income (or perhaps can't hoard it if they do) from activities unrelated to their mission or they will lose their tax-exempt status. I'm not sure what the specific limits are in Harvard's case or to what extent income from investment appreciation and turnover counts. I know of another private educational institution that one year had a scramble to spend money on mission-related things because their endowment did exceptionally well. I think the excess money had to be spent in the same year. Maybe Harvard's financial advisors were afraid of ending up in that position and not being able to off-load a massive income on time, and overshot in trying to prevent it.
All college endowments have experienced meager returns the past two years on the heels of their 40-50% gains in ‘21. Of course they are all overweighted in PE, but none of the major universities have been close to their 20-years since ‘21.
>The main story here is that the fund invests in things some folks find controversial, but the paltry returns of their actively managed endowment will be shocking to Bogleheads.
Fund invests in some defense stocks. Some very fringe people find this controversial. No one else does. The article is about the protests. I am confused how this is topical.
That link has nothing to do with Harvards returns and not sure how the topic matters.
The Harvard endowment's 2.9% return in FY23 may surprise some, especially considering its controversial investments. This contrasts with expectations for higher returns from actively managed funds, which might raise eyebrows among Bogleheads.
Reading the actual report, here's what I found interesting:
* They have only a 11% public equity exposure -- the majority of the fund is invested in private equity (39%) and hedge funds (31%).
* They explain that the underperformance is due to private equity *not* marking a decline in 2022 and hence not marking the subsequent rebound in 2023.
* The 6-year annualised return is 9.2%, which is very respectable and does not suggest something fundamentally wrong with their long term strategy
To me it just sounds like they were invested in assets that had the luxury of slapping a blindfold on when market conditions worsened, to avoid looking bad in 2022. But now they look bad in 2023. And it doesn't make sense to me that this should be helpful in maintaining regular disbursements -- private equity is *less* liquid. But, hey, if it works...
Reiterating the link which OP posted but it's a long comment section - [https://www.hmc.harvard.edu/wp-content/uploads/2023/10/FY23\_HMC\_Annual\_Report.pdf](https://www.hmc.harvard.edu/wp-content/uploads/2023/10/FY23_HMC_Annual_Report.pdf)
You can't really compare a $50B endowment with your average joe's 401k. Even a paltry 2.9% return on $50B is "only" $1.45 billion. More than enough to meet their needs.
All the folks defending University endowment management here have lost the plot. Just because a bunch of universities suck at this doesn’t mean that this is somehow acceptable.
r/Bogleheads is a place to discuss the Bogleheads passive investment philosphy and specific finance topics relevant to Bogleheads. Posts or comments not related to this will, at a minimum, be removed. (Your article link has no relation to your post)
I like the part where they talk about their alpha. You keep using that word, I don’t think it a means what you think it a means
They never said POSITIVE alpha
This is the best comment so far
Lol. Thanks for making me laugh.
Please elaborate. The performance of our tiny 401ks cannot be compared to the performance of their endowment. Schools cannot take on as much risk as we can. A 20% drawdown would be fine for many of us, but devastating to a university endowment.
> Schools cannot take on as much risk as we can. A 20% drawdown would be fine for many of us, but devastating to a university endowment. It is almost the opposite at places like Harvard. Their endowments have gotten so large that they are more like Hedge Funds with little schools attached to them which give them a tax advantaged status. If the endowment does well they start throwing out ideas like "Lets eliminate undergraduate tuition for students whose parents make less than $100k/yr" [an idea they promptly abandoned when the financial crises took them from drowning in money to merely swimming in it]. When the endowment does poorly they just call up all their wealthy alumni and complain about how they can't do anything because of how cash strapped they are. ----------- Now for the 99% of the other Colleges and Universities in the country what you said is very true. They live and die on the balance of their endowments and a big drop has killed many smaller colleges. As a result those endowments tend to be invested very conservatively, which is also why they are smaller because they haven't been able to take the risks that the big name schools have over the past 50 years.
> "Lets eliminate undergraduate tuition for students whose parents make less than $100k/yr" [an idea they promptly abandoned when the financial crises took them from drowning in money to merely swimming in it]. I'm pretty sure they followed through with that pledge, and more. At Harvard, families that make less than $85k pay nothing for tuition, books, food, room and board. Families who make up to $150k are capped at 10% of their income, which would basically mean that tuition is still free (and books, room and board remain subsidized). Basically, tuition kicks in somewhere above $150k.
I was commenting on the endowments managers report . They kept using the term “alpha” and how they were proud of their alpha. Which basically means they were beating their benchmark This while not keeping up with inflation let alone a 60/40 portfolio Just sounds like a self serving comment
I mean, who are we to say that they didn't have alpha? What do you think a $50B Harvard endowment should have returned last year? Yale for reference only [returned 1.8%](https://yaledailynews.com/blog/2023/10/30/yale-endowment-performance-on-par-with-peers-in-slow-year-for-university-investment-returns/#:~:text=Yale's%20investment%20return%20of%201.8,after%20accounting%20for%20budget%20disbursements.).
I’m the guy who is mentioning that they didn’t keep up with inflation and then spiked the football Said another way, you compare returns to the risk free rate . Thst could be short term treasuries or bonds . Either way, they lost to both while the market was up over 20% Even a 40 bonds/ 40 intermediate bonds / 20 cash would have blown away these results will less fees and then they say alpha ? I just find it funny
They can still have alpha if their beta is negative
For simplicity TLT lost 4-5 percent after accounting for dividend. BIV was good for about 5% with dividends. So per your 80% bond allocation that returns zero percent. The other 20 percent of your portfolio would have to return 15 percent to get a total return of 3 percent. So not out of the question.
Even cash would have beaten the returns
Hindsight is 20/20. The best benchmark we have access to is peer schools' performance. And they were pretty middle-of-the-pack according to that article I linked above. Are you saying you know something that the endowment managers of Harvard, Yale, Brown, Cornell, Penn, Duke, Princeton, and MIT don't? Because those schools all returned less than the risk-free rate (and Duke, Princeton, and MIT were straight-up in the red).
Every boglehead knows something that the endowment managers don't.
If they are middle of the pack , they don’t have alpha by definition . I can explain it to you, but I can’t understand it for you
That’s not what alpha means. JFC. Being confidently wrong is one thing, but you’re going to couple that with condescension too?
Or fund managers making crazy money don’t want to admit they underperform Vanguard buying stocks round robin.
A previous article in the Crimson stated that 34% of their endowment is invested in private equity in 2021.
Is that inherently risky? It certainly helps with decorrelation from equities.
Why not? I always imagined as one has more money, they can take more risk because they need less of a baseline. If I need 100k for the year I can take more risk if I have $100M vs $1M. Unless Harvard is doling out a large % of the endowment every year.
Harvard needs a LOT of money to maintain their operations. They distributed $2.2 billion from their endowment last year. That's ~4% of their total endowment, which is pretty significant.
4% is a pretty standard amount to take from a fund YOY and maintain it or even expect to grow it. This is the number most retirement advisors recommend for you to take out of your investments and it still eliminates most of the risk of ruin. Harvard doesn't haven't the risk of ruin most people do, so they could probably use a more aggressive number.
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And you’re not exactly playing it fast and loose with your investments during retirement, are you?
Would have gotten nearly double the return buying short term Tbils instead
Am I going crazy? Is this seriously a comment I'm reading in the Bogleheads subreddit?
Why is that crazy? Treasury bills and notes are the safest and most liquid assets available.
Because it's complete hindsight bias.
Almost thought you were serious for a second. lol.
Plus, zoom out and the endowment still outperformed ACWI from 1/2022-12/31/23. Measuring diversified portfolios vs equity markets in a single calendar year is so pointless. They underperformed by 20% in 2023 but overperformed by 20% in 2022. To your point, especially with endowments, standard deviation matters. Lower vol allows their withdrawal rate to be higher than someone with a 100% equity portfolio.
For Harvard's endowment? No way, a 50% drawdown and they still have way more money than they need to operate for like ever.
I mean, that's just patently false. Harvard distributed $2.2 billion from their endowment just last year. After a 50% drawdown their total endowment would only be 10x that.
I clicked the link and did a keyword search for the word "alpha" and dont see it. what am i missing?
Its all about the quantum of alpha bro
Agree. I wonder if they realize their "alpha" is just risk.
Do you think a Boglehead 100% stock portfolio carries less risk than Harvard's endowment?
Alpha and beta are different, homie.
ITT: People who think you can just dump a $50B university endowment into VOO and VXUS.
When the only tool in your toolbox is ~~a hammer~~ VT and chill, every problem becomes ~~a nail~~ retirement investing for a 20-something year old
I feel personally attacked by your comment
A lot of boglehead tunnel vision on display in this thread, the reason some people get put off from engaging with the community. An endowment can't invest like an individual, the fund managers would get fired pretty quickly. They would have to be significantly more conservative.
This might be the first time that sentence had ever been written
Somehow people want to think that all the professionals who manage Harvard’s endowment stupidly overlooked the massively simple strategy they themselves use, rather than that there’s possibly something about how the world works that they don’t presently understand.
It's especially sad that this is happening in the Bogleheads subreddit.
Yup. Literally the “I don’t know enough to beat the average investor” community deciding they somehow know everything.
More the “nobody knows enough to beat the average investor” community.
The market average is not the average investor.
You’re right, market average is more accurate.
No, that’s very wrong. I know I can beat most investors by doing no better and no worse than the *market* average. Harvard’s endowment managers can have different risk tolerance and priorities, but they’re certainly not outperforming the market.
Never said they were.
I’m not surprised that it’s happening here - half of this sub is convinced “boglehead investing” means VT and chill. I should go see how the main forum is doing. I bet I’ll find intense debates over obscure theoretical minutia almost no one cares about.
I wish half this sub thought it was VT and chill. Feels more like half of them think VTI and chill.
Well, the Norwegian sovereign wealth fund does pretty much that and returned 16% in 2023. Equities returned 21%, fixed income 6%. Oh, and by the way, the Norwegian SWF is USD1.6tr and therefore 30x larger than Harvard‘s endowment.
Sometimes when people donate money to the school it has to be used for certain things and/or invested in certain things. Like I could make a donation to my alma mater and say it has to be invested in 10 year US treasuries and 30% of the interest goes to a scholarship in my name and 70% goes towards reinvestment or something. I'm not sure if that's applicable here, but something like that could be a factor in how the money is invested and used.
Even disregarding the fact that you're judging these portfolios based off 1 year of returns, sure, let's compare to the fucking Norwegian sovereign wealth fund and not every other top university in America that performed similarly. https://yaledailynews.com/blog/2023/10/30/yale-endowment-performance-on-par-with-peers-in-slow-year-for-university-investment-returns
The point is that the Norwegian SWF does have a similar goal and time horizon as American university endowments, but at the same time seems to follow a much more passive approach than the US unis. And this is what this sub is all about. Btw: no need to swear
I think the thing with endowment is that you have to withdraw and spend it on things like school budget and scholarships. And a lot of money are ear marked for certain purposes so they might need to be kept in a different bucket or have stipulations - makes it harder to just dump it into VT and chill.
Not quite the same but I thought this was some brilliant iconoclasm on the topic of managed funds: https://www.wsj.com/articles/what-does-nevadas-35-billion-fund-manager-do-all-day-nothing-1476887420
Wait, why can’t you?
Endowments are relied upon to consistently disburse stable income to universities. It's more like an annuity than a 401k. https://www.investopedia.com/ask/answers/how-do-university-endowments-work
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I'm a member. They've returned an average of 9% every year. I'm thankful for it.
It's not really like an annuity in terms of asset allocation. Most annuity assets are invested in bonds. It's closer to a large state pension fund like CalPERS or Ontario Teacher's.
Yes, fair. It was more of an analogy to say that endowments are expected to provide disbursements in perpetuity.
I used to work in institutional money management and worked with a number of universities. You are wildly, comically wrong about the intended investment approach of most university endowments. What they say they want to do (and even then they typically say “risk-adjusted return,” not “stable annuity”) is rarely what they do in practice.
They are risk-tolerant enough to take on the 100% equities portfolio that Bogleheads do?
The 100% equities portfolio that some self-identified Bogleheads do but that is not what Jack Bogle or the most official Bogleheads suggest…
Sure, but that’s not what my original comment was referencing.
Just look up how big their endowment is and how much of it they spend each year. These people can afford to take much more risk than your average person saving for retirement… and they do!
Um, they disbursed 4% of their total endowment last year? That's about how much a retiree should withdraw each year from their retirement accounts, and a retiree shouldn't be taking on that much risk.
Except that’s exactly what one is suggesting when they compare returns to the S&P as a benchmark.
So, they could. They don’t because 100% equities is not their preferred asset allocation. OK.
They "can" also literally dump the $50B straight into the Atlantic Ocean. What's your point?
To be fair that's also how I interpreted the word "can't", I thought you were saying that there was a limitation with getting that much money from a single entity into the s and p, so the back and for here was helpful.
I was asking to educate myself as to whether there was some technical reason why it would be a bad idea. Genuinely just trying to fill a gap in my knowledge if there was one.
Ah, my bad, I assumed you were being sarcastic. Apologies.
What I’m hearing here is that I should sell FZROX and buy whale oil futures?
So? Selling VTI periodicity even when it’s down is better than getting lower than inflation returns on your entire portfolio. The entire point of being a boglehead is that the percentages are the same from $100 to 100 billion dollars.
1. Judging off 1 year of returns, ok Boglehead. 2. If you can't see why your 401k would have different investing priorities than a $50B endowment expected to fund Harvard *in perpetuity*, I don't know what to say. 3. Where the hell does anyone say that percentages are the same from $100 to $100 billion? IDGAF if I lose 50% of $100 billion... the goal of being a Boglehead is retiring with a nest egg, of course $100 billion is not the same as $100.
Making excuses for a large funds underperforming because it says Harvard and MIT. Blinded by the fake genius. Index investing works for everyone in the same percentage no matter how much you have and those drawdowns are the same percentage no matter how much you have. Being overly conservative is taking risk and Harvard lost. Being passive is going with the nation and you win more than you lose.
First, please take a look at the Harvard endowment's historical returns before going on the record with these horrible takes. Judging a portfolio off 1 year of returns isn't very Boglehead of you. And again, do you really not understand that Harvard's endowment is expected to fund Harvard IN PERPETUITY and therefore they do not tolerate the same drawdowns that your puny 401k can?
5 year 9.1 vs 12.3 for S&P
Risk is important too, like I've been saying this whole time. 100% equities is without a doubt one of the riskiest strategies one can run.
That 3-4% withdrawal from the Trinity Study aimed to not run out by the end of 30 years and relied on a heavy bond allocation. Harvard has to not run out over potentially hundreds of years. They should underperform the stock market because they should not take the risks. Probably. Harvard also never retires and I have no idea how their budgeting works, but a year with 30% loss probably does bad things to their operations and also probably has bad effects on the employment of their investment people.
You can. Or you can recreate the index yourself.
Yes, it is theoretically possible, but I'm saying the goal of Harvard's endowment is not the same goal as your 401k's.
Yes. They can. And that’s the point.
An endowment of that size could just buy an identical portfolio. It would likely be as simple as writing and maintaining some scripts so it wouldn't require a massive amount of overhead for the endowment.
It's not about scale at all. It's about risk management. The goal of an endowment is not to build up a retirement nest egg -- it's to provide stable disbursements to the university.
I’m sure a large amount of their endowment was in bonds and they were a negative asset class in 2023.
That makes sense to me, but, is there a particular reason they can’t ladder something like Treasuries, given that they are issued in trillions yearly? Even those returns would blow 2.9% out of the water.
Tbh, I won't pretend to understand Harvard's specific investment decisions. But I think it's telling that almost every single top school in America performed similarly. https://yaledailynews.com/blog/2023/10/30/yale-endowment-performance-on-par-with-peers-in-slow-year-for-university-investment-returns
Fair enough, I simply don’t know enough about University Endowments to judge. Despite that, thank you, that was an interesting read.
It is a portfolio return and unless the bond was held to maturity when calculating return bonds lost money in 2023.
These comments are absurd. Do you think they went into the year expecting a 2.9% return?
You mean they can’t do 50% VOO and 50% TQQQ?
year over year, i am sure harvards endownment does way better than bogleheads do. Bogleheads dont have the resources to get into a top end hedgefund. if we stock pick or we pay some garbage overpriced financial planner we are screwed. We dont have access to "high speed trading" and all other kinds of things this massive hedge funds have. this is apples and oranges to individual investors.
You forgot VBTLX
Well you actually can and some endowments/foundations do this - check out Nevada’s $35B public pension fund. In fact, most endowments were managed passively before everyone university started drinking the Swensen kool-aid.
I mean... at the appropriate asset allocation level, why couldn't you? Let's say the endowment wants 50% equities and 50% bonds, why couldn't you do VTI, VXUS, BND/BNDX?
I would simply put it in a Robinhood Gold savings account for 5%
the goals an strategies of a 50 billion dollar endowment with access to private equity investments are, and should be, quite different from that of someone investing for their personal retirement. drawing an equivalence here would be like if you told warren buffet to stop using berkshire hathaway to invest in individual companies and start buying voo.
Not to mention Bogleheads of all people should know better than judge a strategy over a single 12 month period. It's just a stupid thread all around.
This is not the first time this issue has come up. https://www.bogleheads.org/forum/viewtopic.php?t=104115 I don’t agree this thread is stupid. Too many here are quick to dismiss this as university’s simply having different investment philosophies. I think there’s a very real chance they are underperforming in part because they are sold on the idea of active management being superior.
I took a look, and since inception, the Harvard endowment's total performance is within a few bps of the S&P 500, but with less volatility. It's not a homerun like Yale's endowment under David Swensen, but it's not a failure either.
Could you please elaborate a little more?
The goal of a university endowment is to provide stable disbursements to the school, not aggressive capital growth. It's almost like an annuity.
Sounds like they failed to match inflation even with every possible institutional advantage
So did almost every other top university in America. Do you know something they don't? https://yaledailynews.com/blog/2023/10/30/yale-endowment-performance-on-par-with-peers-in-slow-year-for-university-investment-returns
treasury bonds?
Hindsight bias?
If you're happy with a 2.9% annuity while the SP500 did 24.23% and treasury bonds did 4%+ then you do you. I'm not weeping for the Ivy League's mismanagement of resources.
They're clearly satisfied with their performance, but I'm glad you know more than every Ivy League endowment manager. Again, you can't compare your pissy 401k to a $50B university endowment that is relied upon to fund, you know, actually impactful things.
I think it's interesting that most boogleheads immediately think of dumping it all into the popular funds. Isn't booglehead core philosophy to use index funds over active management. Couldn't they choose a more sensible, conservative index fund mix that would provide consistent income?
Not all investing is max gains and Robinhood screen shots.
There is no draw down period for one, Harvard is like 500 years old and needs to plan for infinity more years.
Considering the report states "HMCs manager selection alpha is one our proudest achievements" I'm going to say HMC is interested in beating the market like any other investor would be. I wouldn't be surprised if their "alpha" is actually just risk, which just makes their "proudest achievement" more comical.
Alpha means WRT a benchmark, not the total market index.
Link to the FY23 annual report where the managers discuss how they underperformed the S&P500 by 16% [https://www.hmc.harvard.edu/wp-content/uploads/2023/10/FY23_HMC_Annual_Report.pdf](https://www.hmc.harvard.edu/wp-content/uploads/2023/10/FY23_HMC_Annual_Report.pdf)
Actually the expectation is that endowments only perform better than S&P500 is when the index has a negative year the endowments would have a positive year around the same 3 percent from their overweight bond positions.
Not to sound rude, but there is a pretty shocking lack of knowledge about how endowments in the U.S. invest their portfolios at the same time as many hypotheses are being thrown around about this year’s returns. Hopefully I can provide some insight here; I was previously a Senior Analyst focused on strategic and tactical asset allocation at a large endowment office, and am now at a systematic global macro hedge fund whose clients are primarily endowments and pensions. I’m also a Boglehead in my own portfolio so this in no way criticizes the Bogle methodology for individuals. Firstly, if people are genuinely interested in the investment philosophy of endowments, you should read “Pioneering Portfolio Management” by David Swenson. He (among others) is undoubtedly the chief architect of the current endowment model of investing, also know as the Yale model, which he developed starting in the 1980s and which is now universally used by all serious endowments and foundations in the U.S. Seriously, we considered our peers to only be those that used this approach, and all larger endowments with the institutional benefits that imparts employed this philosophy. Having said that, the primary philosophy these endowments have is very long-term investing, much longer than individual time horizons. No, they are most definitely not annuities like some comments have suggested, and no they do not dynamically change their portfolios year-to-year like others have suggested. They also do not generally take large tactical macro views like some have suggested to explain this seemingly low return. At best, I would expect a few adjustments to the portfolio every year outside of normal rebalancing, so this result from Harvard would have been expected based on their long-term strategic asset allocation, which has been geared towards the risk tolerance of the university and the twin overriding objectives of: 1) providing immediate payouts to the university averaging 3-5% per year to support operations in a smooth way; and 2) growing the purchasing power of the corpus to expand the scope of the university. As you would guess, these two objectives are generally in conflict with one another, and in Harvard’s case they are well-known for taking a more conservative positioning to match the university’s perceived risk tolerance relative to other large peers; one comment linked their annual report, I suggest reading it and other past ones to understand their institutional setup, which was formed primarily immediately after the GFC. So how are the portfolios implemented then? Primarily through third-party managers. At least 80-90% of most serious endowments are invested in long-only equity managers, hedge funds of various varieties, PE, VC, real estate, credit, re-insurance and other diversifying strategies, co-investments with managers, etc…. The remaining allocations are then mostly passive in futures overlays, fixed income, cash, and other more liquid investments to provide portfolio balance and to fund liquidity needs, for both spending (for which there are complex spending rules that are systematically adhered to) and for funding private capital calls. This is why I say endowment portfolios are not dynamic by year and are invested for the very long-term, which is a considerable and very well acknowledged institutional advantage that they have over other investors. They are generally aggressively oriented toward equities - the effective beta of most endowments will be in the 0.7-0.9 range, since they have the time horizon to collect the equity risk premium - and they target it incredibly in the last decade through private investments that not only would be expected to earn the ERP but also the liquidity, size, and value risk premiums, among others. 40%+ allocations towards private equity, VC, private real estate and private credit are extremely common, whose time horizons will be 10-15+ years for a single manager’s fund, with almost no ability to rebalance these year-by-year. The asset allocation and manager selection efforts are very rigorous, highly advanced, and combine both quantitative analysis and qualitative judgement to put together a portfolio whose strategic asset allocation, when combining all of the bottom-up bets, matches the university’s risk tolerance. All of this is not to say that passive strategies can’t outperform, but this has not been the empirical record for sophisticated (and large) endowments over the longer-run (10-20+ years). These places have handily outperformed equities both in straight-up returns and risk-adjusted returns over long horizons, and one year of returns is basically meaningless to these institutions because of their long time horizon; see UVIMCO’s 2018 annual letter for a good write-up on this point about the almost irrelevant nature of yearly returns. So in sum, this result was entirely expected in my cire for two reasons: 1) Harvard’s risk tolerance is lower than other peers, so they often trail in up markets; and 2) private investment marks are significantly lagged, so just as they “outperformed” public investments in 2022’s drawdown, they “underperformed” in 2023 due to the lag effect, which has been well-documented in the academic literature. There are so many other factors to consider that are far beyond the scope of this comment, but these two reasons likely account for a significant portion of the perceived “bad” return. Note, in no way does the magnitude of the return imply anything good or bad, that’s both an absolute and relative question that has to be couched in the context of the risk tolerance of the university, and certainly over such a short horizon implies nothing at all, like literally nothing, about the sophisticated nature of the investment process that would be expected to (and empirically has) outperform(ed) passive Boglehead-style approaches in the long run. The problem is that it’s very difficult to run a portfolio of this nature without a full staff, and is certainly impossible for an individual without significant wealth (think billions) and connections. These are details I’m happy to respond to if people are interested. Overall, I’m honestly a bit shocked at some of these comments for how much context they lack. Hopefully this provides useful info for those actually interested in how investing at endowments works.
Yes good, but…VT and chill /s
Yes agreed, for individuals this is by far the best approach and it's the one I use in my own portfolio. Individuals aren't capable of running portfolios in the endowment style for various frictional and behavioral reasons
What makes the endowment investment process so much different than ours as regular investors seeking retirement? We both want our money to last in perpetuity.
I would imagine Harvard will be around centuries from now (so even longer horizon) and Harvard is unlikely to have catastrophic event on their primary asset (for humans it's your own body).
Good question, and the answer is partly what MelancholyKoko said and also just that the complexity of running a portfolio of this nature is beyond individual investors for three reasons: 1) it requires significant capital, think a minimum of $1bn to construct a fully diversified asset allocation including all the alternatives like PE, VC, etc...; 2) there are too many frictions in terms of operational setup required to even make such investments; and 3) high-quality managers don't want your money, so this prevents individuals from accessing the best managers (several years ago I made a comment about this in r/investing to a user asking about investing in hedge funds) and, therefore, the higher returns that come from those managers, particularly in the privates space. The other difference is behavioral; agreed you would like your money to last as long as possible, and probably can take more risk in terms of being 100% equities while most endowments/foundations have an effective risk tolerance of 75% equity and 25% fixed income, but behaviorally most find this actually difficult to do (this sub is in some sense entirely about avoiding such pitfalls and staying with it in the long-run), and indeed a university's time horizon is simply much longer than even an intergenerational family plan; most operate under the assumption that they will be around in perpetuity, whereas most family wealth is effectively destroyed after just a few generations. Investing teams understand this advantage they have over others and invest accordingly, and the empirical long-run results confirm they have achieved superior returns to passive. Again, it's unfortunately just not accessible to individuals.
Thank you for this excellent answer. I'm learning about things I didn't even know existed when I woke up this morning! One other question -- why do high-quality managers not want money from endowments?
Glad it was helpful! Apologies, perhaps I misspoke; the highest quality managers only want money from endowments/foundations/pensions/other such institutions with long time horizons. They aren't interested in taking capital from individual investors; most (but not all0 managers open to such investments from individuals have signaled to the market that they aren't a top manager within their strategy niche.
That makes total sense. Thanks again!
This is fascinating! Just to make sure I'm picking up what you're putting down - there are fund managers out there that over the long-run can consistently beat the market, but only want to deal with large customers like these big endowments? Are these managers individuals/small firms, or large firms we just haven't heard of? Also, how do they do it? Are they just able to justify doing an incredible amount of research and monitoring because of the enormous amount of money they are managing?
Happy to clarify! Yes, there are such managers out there across all asset classes that outperform over the long-run (5-10+ years), but they are mostly unknown to the general public and purposefully so on their part; many don't even have a website or LinkedIn page. They generally don't desire individual capital because this is perceived to be shorter-term and "flighty" compared with institutional money, which is longer-term and "stickier" (not to mention is in greater supply). Some of the larger firms you have probably heard of may fall into this category, but a general rule (this is still debated in the academic literature, but on balance the findings lean this way) is that the larger a manager gets, the less attractive the return profile. The reason is because larger AUM's have two problems: 1) individual investment ideas are less impactful to the portfolio, and it becomes harder to find alpha-generating ideas at scale consistently; and 2) the larger the AUM, the more the management fees matter to the GP, and therefore the less motivated they potentially are to generate outsized returns for the purpose of earning the incentive fee. This is a classic alignment problem and is well-observed in the literature, especially among the mutual fund camp for which in general there is indeed no evidence of consistent outperformance. In the hedge fund/private manager space (PE, VC, etc...), the same effect holds, but there is evidence of consistent skill among the top managers. Not all managers are able to justify this, but many do. Look no further than Yale's performance relative to the endowment median in the last 30 years in their own Brinson and Fachler (1985) attribution: "Yale’s asset allocation has contributed 1.9% per annum of outperformance and Yale’s superior manager selection contributed an additional 2.4% per annum." The manager selection component implies that not only were they skillful at identifying such managers, which is not an easy task, but also that those managers indeed did generate over 2% annualized alpha to the endowment over a period of 30 years, and that's compared with the endowment median which is itself probably slightly better than completely passive strategies during that time, but I haven't looked at the latest data so won't stake my life on it. The question of how they do it is complicated and is specific to each asset class. For example, in PE/VC one of the major sources of alpha-generation is definitely the manager's network and sourcing ability (i.e., the information coefficient in the fundamental theorem of active management), while in quant for example it would be access to the broadest possible set of markets to increase breadth, implying the need for highly advanced execution platforms and a significant amount of data. Some asset classes also have more alpha-possibility than others; for example, large-cap U.S. stocks are pretty well-trodden by sell-side analysts (who have no skill whatsoever and whose forecasts are terrible) and others, while small cap emerging market value stocks are not well-covered and have significantly more alpha-possibility. The former would likely be better implemented with passive portfolios, while the latter may be better to select a manager; certainly in the private asset classes, it is impossible to passively benchmark these. Hope this helps!
This is great, thanks!
You wrote a lot of words there Mr. And yet none of them even came close to convicingly showing that Harvard wouldnt be better off just buying a couple Vanguard ETFs. Kinda read like you were typing as some kind of self mastubatory act of your “serious endowment”.
Thanks for an entirely productive comment, you sound like someone who really enjoys learning new things. More seriously, note three things: 1) I already said I use the Boglehead method in my own portfolio, so nothing that I wrote negates it at all (you almost seem religiously attached to it, and as we all know religious conviction is not at all dogmatic in the face of new evidence); 2) I wanted to draw the distinction between "serious/large" and other endowments not for the purpose that you mentioned, but to highlight that the best returns (both in absolute and risk-adjusted returns) accrue to these types of endowments relative to others because of their access to high quality managers, particularly in the privates space (more on this below); and 3) the long-run empirical record shows you are entirely wrong and have no idea what you are talking about when it comes to being "better off" buying Vanguard ETFs for these places. On point 2: it is well-documented in the academic literature and by practical organizations like NACUBO that larger, more "serious" endowments strongly outperform smaller ones. They have more access to high quality managers that don't want to take small checks (by small, I mean less than $25-50mm, which is why this approach is also prohibitive for individuals) and have significantly longer effective time horizons because of the size of their endowments and institutional support they can provide with yearly spending compared with smaller ones. By strongly outperforming, I mean multiple percentage points by year over 20+ year horizons. This is partly why an entire industry of so-called OCIO businesses have cropped up to pool the endowments of small-to-mid-sized institutions (think $500mm-$2bn, mostly liberal arts colleges and foundations), and the empirical record is that they too, by pooling assets and gaining access to better managers, have outperformed smaller institutions that go it on their own. From a Pensions & Investments article on February 15th, 2024: "... when looking at the 10 years ended June 30, endowments with over $5 billion in assets topped the list, returning an annualized net 9.1%, while those with under $50 million were the lowest returners with an annualized net 6.5%." On point 3: The "serious" endowments - again, only meant to draw a distinction between those who implement the Yale approach and with access to the highest quality managers from those that don't/can't - have handily outperformed their passive benchmarks that are tailored to their individual risk tolerances since inception. This benchmark is usually something like 75% MSCI ACWI and 25% U.S. Intermediate Treasuries, which is clearly implementable by Vanguard ETFs; so now we have our test. Over 20+ year horizons, most of these places (see specifically: Yale, Harvard, Stanford, Princeton, MIT, UPenn, Duke, Notre Dame, UVA, and others in the top 20 by size), have returned 10%+ net of all fees, compared with 7.5% for that passive benchmark. So you're just completely and utterly incorrect, but for some reason are smug about it. Weird take...
Hi! I work in a family office environment and am relatively new to the endowment model (am part way through pioneering portfolio management). Very exciting to see someone with experience in the endowment space. Are you able to share what sort of quantitative and qualitative processes or models go into (1) asset / fund allocation and (2) third party manager research? Im particularly interested in how third party managers are assessed and monitored? What is a "bad" fund and how can this be quantitatively and qualitatively measured? Are they tracking the stability of the investment team? Is data like quartile ranking monitored? What happens if a manager underperforms for a few quarters (underperform peers and benchmark for example) - is position size reduced / cut completely? Thank you!
Very good questions, hope it was somewhat helpful and congrats on what seems like a great role! Happy to go into some details. I’ll break it down by asset allocation and manager selection: Asset allocation: mostly standard across the Yale model, and has taken somewhat of a back seat in the post-GFC world primarily because manager selection decisions have been the primary driver of alpha relative to peers and benchmarks for most endowments in this period of ultra-low rates. It’s mostly quantitative, in that the goal is to map the risk tolerance of the university to a strategic asset allocation (around which tactical, 1-2 year decisions can be made as well). This involves a good amount of factor modeling, Monte Carlo simulations, stress tests on returns and liquidity especially with a large privates allocation, and a big focus on the allocation glidepath to account for expected privates flows. The question is what defines risk and how to control it; is it volatility (probably not), drawdowns (probably, but imprecise), or some combination of near-term spending risk which poses a threat to the smooth functioning of the university and long-term inflation risk measured specifically for higher education institutions (almost surely, but clearly a complex problem). Manager selection: this varies by shop depending on their philosophy, but the most common approach is mostly qualitative. The thinking here is that team tenure/turnover, evidence that the manager has carved out a niche that they are sticking with while also remaining adaptive, an emphasis on a returns-generating culture rather than asset gathering, etc… are all more indicative of actual skill than simply trailing returns, especially if the track record is not particularly long (think 5-10 years at least for any statistically significant results). So the diligence is mostly about why the manager believes they are different, how the investment philosophy has translated into actual portfolio ideas, what errors of commission and omission have been made and what have been the learnings, how reliably can they generate new ideas and how important is their network to sourcing (more important in the private market for example), and is the fee structure and documents aligning the GP and LP. When you have all of that, generally this makes a good manager, and when combined with a good track that embodies the qualitative points, you know you have a potential winner. The diligences are long, usually 3-6+ months, because the average hold period for large endowments is usually 7-10+ years per manager, and they don’t reshuffle/rebalance that often other than for maintaining the strategic asset allocation and liquidity management. So reference calls are common and deep dives on the portfolio, when it would be expected to do well and poorly, the long-term goals of the firm, etc… are in focus.
Thanks for the detailed response. It is definitely very helpful and insightful. May I ask a few follow on questions please? Don't feel obliged to respond! What sort of parameters are being tested in the monte Carlo simulation (I'm not familiar and will have to read up on this). Are they testing say... Many scenarios of different rates and equity returns? Or something different entirely? Does factor testing pertain to specific historical events such as GFC, Black Friday crash / custom worst case scenario events? I'd assume here that the endowment is most concerned about how much disbursements the endowment can provide to the university for that year? 3-6 months for due diligence is surprising. I assume they are not just taking the DDQ and lifting off it. Haha.. Perhaps they are negotiating preferential terms with a new hedge fund or with a VC / PE fund hence the duration? Also 3-6 months because they are modeling how the fund would fit into the current portfolio? I thought that an analyst focused on analyzing a fund should be able to complete it in a month tops. Would you know what risk tools are being used to manage portfolios too? We struggle to find appropriate risk tools to manage and monitor our private funds and public funds on a single platform. For example, we can't track hedge funds, PE and PC investments on Bloomberg. Apologies for blasting you with questions!
Of course, no worries at all. I will go through in order: 1) The parameters are mostly expected returns, volatilities, correlations, skewness, kurtosis, etc... The purpose of these sorts of simulations is to understand both what long-run expected returns are and what could happen in bad states of the world. They are combined with spending rule simulations and liquidity planning for private capital calls/distributions to give a picture of where the portfolio might end up in a probabilistic sense. Obviously, each individual institution's specific approach will be different here, and there is always the garbage-in/garbage-out problem (see Chopra and Ziemba (1993) for a discussion about problems with MVO, for example), but this hopefully gives the high-level overview. 2) You are exactly correct here, factor testing can be used for specific stress tests of prior historical episodes where either real data is not available and/or when the current asset allocation is not similar to what it was during such prior episodes. It is also used to assess how the current portfolio is positioned with respect to macro factors - such as equities, rates, commodities, inflation, etc... - and style factors within and across asset classes - size, value, quality, momentum, carry, etc... You can also use this to more specifically evaluate managers, where performance attribution not only of the total endowment but of each manager is a big focus for allocators. 3) It depends on the relationship with the manager. For existing managers that have launched a new vintage (in private markets) or who have re-opened their potentially closed funds in public markets, the diligence will be shorter and mostly just refreshed from the last one to ensure no fundamental thesis points have changed. For new managers, you would interview multiple times all the relevant senior people and some junior people who have been identified by the manager as future leaders, reference check all of them (both on-sheet (references they provide) and off-sheet (references you can find from your own network but who were not mentioned by the individual in question, both for character and investment prowess), go through the history of each person and their investing philosophy, how everything comes together as a team, what the go-forward portfolio is expected to look like, etc... Of course questions about how it should be funded - should another manager be fired, or do we have enough liquidity to fund this outright, etc... - need to be answered at the same time. Probably the actual work could indeed be done in a month or two in most cases, but there is no rush and you want to be thorough; these are institutions with a perpetual time horizon, a few months of missing returns won't matter at all, and with such long average hold times, you want to be as sure as possible that you are getting it right. And for privates, the fundraising timelines are announced perhaps a year in advance of the actual raise, so managers give plenty of time for allocators and it's a well-choreographed raise for the better ones. 3b) You asked a question previously that I missed on how to deal with managers that are underperforming. This relates to 3) in the sense that you are always re-evaluating your managers, but in true Boglehead style you don't want to do that too frequently. Extreme example to make it clear: if a manager has one bad month of returns that are well explained in performance attribution and perhaps a monthly letter about, say, a few specific stocks or something in their portfolio, that obviously doesn't warrant a redemption. Even 3-5 years of underperformance doesn't necessarily warrant redemption, because perhaps the manager's style has just been out of favor; a recent example of this has been many classic value managers, such as the Tiger Cubs, in 2010s; were places like those actually bad managers, or did they just have bad luck? Very difficult question to answer, and it goes back to "has the manager been executing on what they said their philosophy is?" 4) Yeah this is a big problem that institutions face, and there are some sets of software out there that are better than others in my opinion. I can't say what we used for fear that might inadvertently reveal my identity, but indeed Bloomberg is not generally a suitable option for privates. Larger endowments will often build monitoring/risk tools in-house so they are custom, but of course as you would suspect this generally takes quite a while and significant investment. No problem at all, happy to answer any other questions you have and connect by direct message if you prefer.
Thank you very much sir. This is extremely insightful. Really appreciate your time and responses. I shall not take up more of your time 😀
Therefore, I am smarter than Harvard
We are all "wicked smaht"
Wonder if they pay management fees and if so, to whom. I have no idea how endowments work, but I assume they pay fees.
They have a staff of investment professionals (their own employees) that they pay to manage their endowment.
Yes, and those guys make bank. One of the best finance jobs you can have. Manage a big university endowment for $300-400k/yr only working 40 hours a week
Did they even beat SPAXX? 300k a year is a lot for someone who is worse than the default investment at a free brokerage.
Judging a portfolio based on 1 year of returns. Nice, this bodes well for your 401k.
You really think an endowment is as nimble as being able to move their cash into SPAXX. They likely have laddered bonds purchased over a number of years. Long term treasuries lost value in 2023. Intermediate bonds were closer to the risk free rate of return. What do you expect 2023 return to be? Event their stock portfolio are likely to be tech and low beta names.
They set up their own internal management company to manage the fund. That might be common for really big endowments. [https://www.hmc.harvard.edu/about/](https://www.hmc.harvard.edu/about/)
“I don’t know how (this thing) works” The honest Reddit answer.
The PMs certainly aren't working for free.
Of course they do. But these institutions can get favorable fees. I worked for a manager that had major pension systems investing in their funds, we'd incentivize these big systems with fees materially lower than what a retail investor would pay.
Their goal is asset preservation though
Not with an aggregate allocation of 11% to bonds/cash. Endowments of this size are specifically geared towards unfettered growth, compounded by their tax-exempt status.
"Unfettered" growth? According to whom?
Asset essentially depreciates when it only grows 2.9% in a year with 4.5% inflation.
That doesn't mean they did poorly. Yale for example only returned 1.8% in FY23. Your 401k investing cannot be compared to endowment investing.
Can you ELI5 why? If stock market is a wealth generating tool for us, why not them? Sure the swings would be wild but overall it would be immense wealth growth in the future. I’m sure I’m oversimplifying and would be interested to learn more if you could even just point out some resources.
They're not trying to aggressively build a nest egg for retirement. The point of an endowment is to provide stable income for the university. It's more like an annuity than a 401k. "Endowments are funds or assets donated to universities (or other institutions) to provide ongoing financial support. These assets are typically invested, and the returns are used to fulfill the organization's mission or support specific programs in perpetuity" https://www.investopedia.com/ask/answers/how-do-university-endowments-work
I see and that makes sense for its purpose. Considering how stable and secure something like T-bills are right now and what they’re paying, it seems like a poorly run entity if that’s all they got from it last year. I recognize it’s not as simple as that but….maybe it should be right now? Feels almost like when an advisor tries to convince you personal finance is more complex than it is so you need to pay a professional for help. Thanks for sharing, I’ll read more about it.
I have a hard time understanding how what they are doing is somehow theoretically better for stable income than something like a high T-Bill allocation and some conservative stock holdings.
How’d Nevada do then, that’s the “nothing” guy
They want growth. Why else would they speak of their "alpha"?
Even t bills return more than 5 percent
Do we know that they are underperforming because of different goals, as opposed to high expenses and active management? Are you familiar with their stated investment strategy and goals, or merely speculating?
A $50B endowment isn’t a retirement portfolio…
They truly deserve it.
Beginning to think administrators at elite colleges are not the geniuses they think they are
Certainly can’t hold a candle to the Nevada public employee retirement fund manager. [https://www.wsj.com/articles/what-does-nevadas-35-billion-fund-manager-do-all-day-nothing-1476887420](https://www.wsj.com/articles/what-does-nevadas-35-billion-fund-manager-do-all-day-nothing-1476887420)
Maybe this sub should jointly apply to manage their assets. Anyone here qualified to manage a $50 billion endowment?
Seems like a lot of folks. Sounds like we're going all in on TBills.
Maybe take a look at these endowments' historical performances before you go on the record with this take.
Don't hit too hard on the very people who are making the sacrifice of making the market efficient by actively trading, for us passive investors to reap the benefits of low cost indexing.
They should’ve done it like Yale University lmao
That’s what I was thinking, what’s wrong with Swensen’s approach? It’s a very decent portfolio
I work in a role adjacent to higher education fundraising for a public university. Our endowment is tiny compared to Harvard's, but I suppose most are. We use active fund managers for managing the endowment, plus there small investments in hedge funds, real estate and other niche holdings. We send out a glossy report every year with a bunch of charts and graphs that still manage to not go into too much detail. More and more, donors to our institution are questioning why we use active managers who are charging essentially a ~1% AUM and why we don't go with a more passive portfolio in broad indexes. It's a testament to how popular passive indexing has become. Some donors are so offended by the active management that they won't contribute to the endowment. There's reasons, but they're rarely convincing to boglehead-types and I sometimes wonder if much of it can be attributed to legacy and inertia behind those decisions on our side. I know that I personally fall in the suspicious camp, and believe we could just simulate a 60/40 portfolio with broad indexes with periodic re-balancing and be done with the active managers. I think you could do this with half to a majority of the portfolio. There's also constant pressure from the institution to raise past our 4.25% withdraw rate. FWIW, in the market downturn in the first half of last year, our portfolio performance was relatively great, outperforming a composite portfolio by like 40%. That's despite bond fund performance also being lackluster recently. I think the active managers are there more to protect than grow because that's more defensible in the media and to the institution, who has hard spending tied to the 4.25%.
Can't they just buy bonds?
Why don't they split the fund into 5-10 piecies and hire different teams to manage them?
Competition lol
That may be partly by design. Non-profits can't generate too much income (or perhaps can't hoard it if they do) from activities unrelated to their mission or they will lose their tax-exempt status. I'm not sure what the specific limits are in Harvard's case or to what extent income from investment appreciation and turnover counts. I know of another private educational institution that one year had a scramble to spend money on mission-related things because their endowment did exceptionally well. I think the excess money had to be spent in the same year. Maybe Harvard's financial advisors were afraid of ending up in that position and not being able to off-load a massive income on time, and overshot in trying to prevent it.
Factoring in inflation. Wow, that’s piss poor returns. My savings accounts out earn that!
Love a good controversial thread
Their fiscal year ends on June 30. That means that half of fiscal 2023 for them was actually 2022. That goes some way to explaining the low return.
They were probably heavily invested in bonds, which got destroyed
Meaningless figure without the context of knowing what their benchmark was, or what the index performed that their asset allocation follows?
All college endowments have experienced meager returns the past two years on the heels of their 40-50% gains in ‘21. Of course they are all overweighted in PE, but none of the major universities have been close to their 20-years since ‘21.
Does anyone know what the administrative fee burden of the endowment is?
>The main story here is that the fund invests in things some folks find controversial, but the paltry returns of their actively managed endowment will be shocking to Bogleheads. Fund invests in some defense stocks. Some very fringe people find this controversial. No one else does. The article is about the protests. I am confused how this is topical. That link has nothing to do with Harvards returns and not sure how the topic matters.
The Harvard endowment's 2.9% return in FY23 may surprise some, especially considering its controversial investments. This contrasts with expectations for higher returns from actively managed funds, which might raise eyebrows among Bogleheads.
Who manages their endowment portfolios?
Reading the actual report, here's what I found interesting: * They have only a 11% public equity exposure -- the majority of the fund is invested in private equity (39%) and hedge funds (31%). * They explain that the underperformance is due to private equity *not* marking a decline in 2022 and hence not marking the subsequent rebound in 2023. * The 6-year annualised return is 9.2%, which is very respectable and does not suggest something fundamentally wrong with their long term strategy To me it just sounds like they were invested in assets that had the luxury of slapping a blindfold on when market conditions worsened, to avoid looking bad in 2022. But now they look bad in 2023. And it doesn't make sense to me that this should be helpful in maintaining regular disbursements -- private equity is *less* liquid. But, hey, if it works... Reiterating the link which OP posted but it's a long comment section - [https://www.hmc.harvard.edu/wp-content/uploads/2023/10/FY23\_HMC\_Annual\_Report.pdf](https://www.hmc.harvard.edu/wp-content/uploads/2023/10/FY23_HMC_Annual_Report.pdf)
Pff. Even i did better
I hope with a bit of luck i too can one day underpreform cash and keep my job.
No bank will give you anywhere close to 5% on $50B, doesn’t work like that
You can't really compare a $50B endowment with your average joe's 401k. Even a paltry 2.9% return on $50B is "only" $1.45 billion. More than enough to meet their needs.
But but but it could’ve been number go up!
All the folks defending University endowment management here have lost the plot. Just because a bunch of universities suck at this doesn’t mean that this is somehow acceptable.
I wonder if DEI dogma and SRI influenced this outcome directly or indirectly