It’s hard to make predictions – especially about the future.
—Robert Storm Petersen, Danish cartoonist, writer, humorist
Reporter Chris Flood at the Financial Times ran an article a few weeks ago that parsed our latest endowment performance report and pounced on the fact that that none of the sixty funds we featured performed as well as Vanguard’s VFIAX, a large-cap U.S. equity fund, over the last 10 years.
Our newsletter gave an early peek at endowment investment performance for fiscal 2019, including a ranking by 10-year returns.
The VFIAX returned 14.7 percent net of fees for the decade while the top 10-year endowment investor on our list was Paula Volent at Bowdoin College, who racked up an excellent 12.0 percent.
Mr. Flood’s observation makes a good story-hook but, comparing diversified endowment or foundation portfolios to the VFIAX – or to any similar pure-play equity index makes little sense in the real world.
Retrospectively (looking backwards from 2019), placing all your chips on a cheap equity-only index fund looks like genius, but prospectively (forwards from 2009) it would have been insane for any prudent institutional investor.
Endowments and foundations are long-term global investors with horizons extending out fifty, a hundred years and more, and the trustees and CIOs build portfolios to last for generations.
The job of CIO at an endowment or any financial institution is not to beat the VFIAX, but to meet the objectives set by the board who view capital preservation and steady cash flows as paramount.
The sages speak: Omaha vs. New Haven
In our letter we quoted an anonymous board member who was ready to throw up his hands and index his institution’s endowment, thereby avoiding a lot of fees.
We know this board chair and he’s an able and experienced financial exec.
But some bigger and more eminent investors have also taken positions both for and against a passive strategy.Read More »