University endowments have flocked to an investment model pioneered by David Swensen of Yale that involves heavy concentration in “alternative” investments. Swensen’s success, like most others, is of course hard to replicate.
This interesting post by Ben Carlson highlight how a simpler approach to investing, using index funds – called the Bogle Model after Vanguard founder John Bogle – consistently outperformed the much more complex and costly alternative model.
“the fact that the Bogle Model portfolio was in the top quartile and even top decile of endowment returns is insane when you consider the depths these universities will go try to beat the market and how sophisticated they are in the eyes of other professional investors.
These funds are invested in venture capital, private equity, infrastructure, private real estate, timber, the best hedge funds money can buy; they have access to the best stock and bond fund managers; they use leverage; they invest in complicated derivatives; they use the biggest and most connected consultants, and the vast majority of these funds still fail to beat a low-cost Vanguard index fund portfolio.”
Why would Colleges and Universities continue to spend wildly in chase of excess performance when they can access the majority of the returns of most investments via ultra cheap index funds? Answer – no one wants simple advice. Imagine how many endowment management jobs would be eliminated – not something any of them want to contemplate.