How to outperform major university endowments

In theory, big institutions like top universities have advantages over ordinary investors. For example, they can afford to employ large teams of investment professionals.  A video on the Bloomsbury Wealth YouTube Channel.

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Transcript: Robin Powell & Mark Higgins / Financial historian.

RP: Big institutions, like top universities, in theory have advantages over ordinary investors. For example, they can afford to employ large teams of investment professionals.  A well-known example is the Yale University endowment, which performed very well for many years when the late David Swensen was its Chief Investment Officer.

MH: The Yale University endowment is generally regarded as the gold standard for institutional investing. So for endowments, foundations, pension plans, etc.. And during his 36 years, which was a long time, Yale returned roughly 13.7% versus per year versus about 10.3 for the average endowment. So that’s huge outperformance for a long period of time.

RP: Most large institutions around the world have to some extent tried to emulate. Yale’s success.. but the results have been generally disappointing.

MH: A lot of institutional investors and their consultants who advise them kind of insinuate or outright assert that the Yale model describes an investment philosophy which in which investors make use of skills, active management.  So they go heavy into active management and make large allocations to alternative asset classes such as venture capital buyout funds, hedge funds and what appears to be the latest craze private credit. The problem is that this only describes Yale’s portfolio at the surface.  The real secret is at the end of the day, not only was David a very talented investor, he was a great mentor and a great teacher.

RP: Research by Richard Ennis and others has shown that, by using active funds and alternative investments, institutions have consistently underperform.   David Swensen himself said that the vast majority of investors — both retail and institutional — are better off using index funds.

MH: He came out probably around 2010, somewhere around there, and started saying publicly there are essentially two strategies out there for individuals and importantly for institutions.  You can do the passive strategy with that that wins the majority of the time, or you can do this very active strategy and the vast majority of investors are better off steering the former by investing primarily, if not exclusive, we said exclusively in index funds.  And the funny thing about that statement is that’s what all of the great, maybe not all, but a lot of the great investors will say this and Warren Buffett says the same thing.  The great investors recognize how much of an anomaly they are.

RP: Why, then, do most investment consultants, and indeed many financial advisors, continue to recommend complex active strategies?  For Mark Higgins, there’s an obvious answer.

MH: They have business models that depend on the complexity. That’s just the bottom line. They believe and I’ve been in their shoes, so I understand the pressure. They believe that their clients, if they simplify their portfolios and rely only on index funds, they’re just not going to be needed anymore.  That existential question is something I dealt with as an investment consultant. But at the end of the day, I have a fiduciary responsibility to recommend what was right.  Long story short, they don’t have an incentive to make things more simple.  Simple because they’re scared. They’re scared of their own obsolescence.

RP: In short, by investing passively, in a disciplined way, even ordinary investors can outperform big institutions.  Don’t try to copy David Swensen or Warren Buffett.. Just follow their advice.

Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.