This article was originally published by Trusts & Estates, an industry journal for trustees and wealth management professionals serving the needs of high-net-worth clients, family business owners, family offices, charitably inclined donors and non-profit corporations. It was updated with new return comparisons and article links in 2019.
This is a strong statement, and when presented to trustees and individuals, it can be emotionally compelling.
It implies that to be a good fiduciary of trusts, or your family, you “need-to” construct complex endowment-like portfolios that can include large amounts of alternatives and private investments.
Taking a line from Mark Twain, even though “need to-do” proclamations can be persuasive, the evidence consistently says this “just ain’t so.”
For the last few years, I have written similar articles for Trust & Estates titled, Can I Do Better? and How To Do Better? They both questioned the need for endowment-style portfolios for family trusts and individuals.
I’m going to keep it relatively short this time, but unlike past years, the title of this piece doesn’t include a question mark.
The Evidence Is Consistent
Pictures often speak louder than words and so does the following table.
As in our previous article, it compares the returns of a tax efficient, liquid, transparent, daily valued and net of manager fees global portfolio of index funds, which includes a equal weighting both U.S. and non-U.S. stocks, to the top 25% of U.S. endowments and foundations (what some might consider the best of the best in terms of resources and access top managers and funds).
This year the comparisons span even longer time periods, and highlight consistency, looking at annualized 10-year returns that date back to the year 2000, which is as far back as the data allows (10-year records for some of the funds don’t exist prior to this time period).
Simple Consistently Wins
As the return chart illustrates in green, consistently over multiple 10-year periods (9 out of 9), which includes multiple up and down markets, keeping it simple, even to the point of only re-balancing this global mix of funds only once a year, has produced returns that rank in the top 25% of all U.S. endowments.
In writing about this again, my point isn’t to win the complex versus simple debate or to suggest that alternative and private investments commonly seen in endowment style portfolios aren’t good. Some are.
I just hope this will help investors step back from what are often emotionally compelling presentations and bring more light to what might be another path forward.
An approach that investors could have easily implemented to produce top-quartile returns in a manner that’s 100% liquid, completely transparent, low cost, tax-efficient and relatively easy for everyone to understand.
A Simple Question
The next time you hear a “need-to-do” pitch, consider asking the question that my now 12- and 14-year-old children continue to ask me all the time:
Over multiple long-term time periods, simple strategies have performed just as well, if not better, than many complex endowment style strategies.
How do I think more trustees, families and individuals should invest to do better?
Return Data Sources: NACUBO-Commonfund Study of Endowments and Foundations (NCSE) and Morningstar
Past performance does not guarantee or indicate future results.
The Index Only – 60/40 Global Approach (IOGA) returns are based on historical results of the funds listed, but represent hypothetical returns. IOGA returns could be lower if outside investment advisory fees were applied and, depending on how the funds were implemented and re-balanced, actual client returns might differ.
Future returns may be higher or lower. IOGA returns assume reinvestment of all distributions at NAV & deduction of fund expenses. 10-year returns are annualized.
This complete document is for informational purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it.