Blindly shoving all your money into Vanguard ETFs is a strategy that works well for almost every individual who's retirement period maxes out at 70 years (for the MMM types).

An endowment is a fund of money designed to sustain operations of it's benefactor forever. Not 10 years. Not 50 years. Literally forever. When you're operating on an indefinite timescale your idea of "risk" changes considerably.

Take a look at the Harvard Endowment report[1], specifically the table on page 2. They are incredibly well diversified, across domestic and international public equities, as well as private equity, commodities, fixed income securities (bonds, etc), real estate, and a category they call "absolute return", which is where they've placed money into external hedge funds. If the US economy tanks, they'll be fine. If Europe falls apart, they'll be fine. A bunch of start up unicorns fail in Silicon Valley? Fine.

My point is that the article completely misses the goals of an endowment. They don't particularly care about matching or beating an index, nor do they care about risk (as measured by volatility). They care about wipe out risk, on the scale of centuries.

[1]: http://www.hmc.harvard.edu/docs/Final_Annual_Report_2014.pdf

Anyone who looked at investing knows that you don't compare pure returns, you compare return per risk (say Sharpe ratio or some other measure). 10% return might be truly impressive if it does not involve much risk.

EDIT: For people who look first at comments - the article compared some endowment funds returns with broad market returns and found that funds did not outperform the market. My argument that this is flawed comparison since it ignored risk.

Be wary of reading this as "if endowments fired their managers and invested in Vamguard funds, they'd on average boost their returns". Perhaps true of the smaller, consistently-underperforming ones. But at the endowment side, a lot of planning goes into avoiding your size being felt by the markets.

Index fund are a market basket of funds. The Index 500 fund is stock in the 500 largest companies in the US. It's intent is to give you the average across all those companies.

Lets look another way. If you are a golfer, the "average" score for a golf round is called PAR. Ask the regular golfer what would they do to be able to play par rounds all the time, most would sell you a beloved grand parent. The index funds are a way to play / invest in the market and get "average" returns.

The leverage that Vanguard has is that these index funds are pretty easy to manage, so they don't charge a lot of fees. Presently on the Index 500 fund, it's 17 basis points. So not much of your capital or your profit is going back to Vanguard. On the other side the big investment places are taking fees anywhere from 2 to 10 times what Vanguard gets. That can make a big difference in your annual rate of return.

Vanguard also has the advantage that in some cases Fund XYZ will be selling a stock while Fund ABC is buying a stock. So it ends up being an in-house purchase, so there is no brokerage fee, lower cost to both funds.

Mutual funds, and specifically index based mutual funds are a good way to get average results across a long period of time. Sure run wild some with that Gold Fund investment and those Oil funds, but be prepared for the downside)

(disclaimer: Long time Vanguard customer)

You have to consider a few things:

1) one may be interested in the opportunity of above-average returns. If the average vanguard return is 7%, and the average self-managed return is 6.9%, on average of course vanguard is in your best interest. But what if you think you can do better? Harvard's ran a 12% return for 20 years, for example. Should they forgo it because the average is a more guaranteed, safe, and on average, better bet? Probably not. Does it signal to weaker funds to simply go with the Vanguard option? Yes.

e.g. check out this report: http://www.hmc.harvard.edu/docs/Final_Annual_Report_2015.pdf

2) looking at just returns is myopic. You need to look at risk-adjusted returns, for which finance has proposed a whole bunch of measures. I would not be surprised if the endowment funds were less risky than the vanguard, although it's hard to tell. And guess which years generate brilliant performance for risky portfolios that are heavy on stocks? Post-crisis years where the market rebounds. Risk isn't the only thing, there are all kinds of objective funds can set. Most colleges for example set liquidity limits that would be unworkable for traditional hedge funds that invest in high-potential returns in illiquid assets. Limiting yourself like this changes your roi.

That having been said, there's obviously a lot of value in this simple perspective. And it completely confirms a new reality: outperformance is getting harder and harder and investors are less likely to beat the market and add value with their investing know-how. It's pretty recent that this has been happening to this extent.

There is a statistics smell that he initially shows also 1y and 3y performance for the endowments, but then doesn't show these for his alternative. Probably he cherry-picked the data that supported his point and hid the rest.

The headline is misleading. The vanguard portfolio beats the average of all small endowments (under $1B) and is beaten by average of the large endowments. Endowment performance is impressively correlated to size.

This is true, both my bosses worked for a larger well respected endowment about a year ago. The firms are not doing well and at least this one is not and there is talk if going to the strategy here.

Basically a fund of funds with a bunch of mutual funds. They are facing competition for PE deals and maintaining higher risk trading desks with high cap costs.

I would note that while the numbers in the article did beat performance now could be the best time to have a trade desk. Most indices look like this

    /\/\/?

Not / / /

So having a group work on minimizing that could be profitable

That only beats half of the endowments, I'd be more impressed if it be something like 75% to indicate it was truly a top tier product instead of just better than average.

I wonder if the returns quoted for endowments properly subtract out the salaries, build space, etc for the employees of the institution with the endowment, or just the explicit costs from outside management?

(See my clarification below. I'm talking about the costs only for the employees making investment decisions.)

This would be more interesting if he had proposed the portfolio 10 years ago, rather than to do so in retrospect.

The overlooked discussion is that universities are supposed to make money by selling quality education. Their goal shouldn't be to make money by risking money.

Perhaps the lower return simply reflects the less aggressive nature of their portfolio. But ironically while waiting in the lobby of a prominent VC I met a college endowment fund manager who was currently using machine learning to trade options. I believe part of the endowment is now traded using his system (not 100% sure about this).

When I asked why his approach won't suffer the same fate as LTCM, an algorithm-based options-trading system run by Noble-prize winner Robin Scholes, he claimed that his approach relied on less leverage. But he didn't address the point on how his system would have predicted the Asian flu and Russian default that ended LTCM. I guess it would have been harmful but not fatal.

What's acceptable risk for a Wall Street fund isn't necessarily appropriate for an endowment fund regardless of the upside.

The site is blocked in Russia citing national law. Wonder what they've published.

I work in investing and take issue with the standard deviation of returns being taken as equivalent to "risk". For example there were many quant funds that had great Sharpe ratios up until 2008, after which they got completely annihilated. But I have nothing else to add. It is hard to measure risk.

I'd be surprised if the actively managed funds had less risk than the market.

How do you respond to the Fama and French paper on luck versus skill in mutual fund performance? They showed that on average, active managers hold a market portfolio, and since they take a cut, ETF portfolios make more money; there was no evidence of skilled managers getting better returns for the investor. Do you believe that institutional managers are better than mutual fund managers?

It gave a handwavy argument that risk for the endowments was higher, but no numbers.

You would think that these massive funds can afford to take on more risk than your average Vanguard investor. So they should be seeing better returns. If they truly have less risk than Vanguard then they're investing too conservatively.

Warren Buffet made a similar bet 8 years ago on a 10 year horizon, betting on Vanguard against some top hedge funds.

Buffett is very likely to win that bet.

http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his...

http://longbets.org/362/

Proponents of index funds have been proposing exactly this sort of portfolio for about 40 years. (Well, okay, 40 years ago was the origin of the first index fund, Vanguard's S&P 500 tracker; a portfolio amalgamating three market segments like this would only have become possible somewhat later.) The specific 60/40 stock/bond mix here (with moderate international exposure) is solidly in the "bog standard investment advice" category, too: I wouldn't be surprised if it's what most people would choose if they wanted to avoid accusations of post hoc selection bias. (In fact, that's my only point of concern with the choice: it's a distribution that I associate more with mildly cautious middle aged families than with major institutions. But I think that's the point.)

I think that just about any indexing fan would be perfectly content to say, "Yeah, please feel free to track this mix into the future, too." It's one size fits all investment advice, but again, that's pretty close to what index funds are all about.

That's a great point, however his comparison is actually the "standard" 60/40 index fund split, which means he's not retroactively picking a winning mix - he's comparing them to the control group, so to speak.