The Road Less Traveled – Simple Alternatives
Market movements constantly drive changing, often complex asset allocation and investment fund recommendations.
As we’ve written about before, this advice to pivot then brings up this age-old question.
Should we react or should we take the road less traveled by maintaining a steady course?
Everyone should evaluate new ideas – prudence demands it.
When considering change, though, we continue to urge investors to test the data and, based on the consistency of the results, ask this:
Is Change and The Complexity It May Bring Worth It?
As a test, we have long tracked the performance of index fund portfolios as compared to leading endowments, which tend to tilt allocations and employ new alternative strategies from well-resourced in-house investment teams that receive advice from leading institutional investment consulting firms.
Our analysis of how simple portfolios have performed in comparison to top quartile endowments now spans 14 consecutive 10-year periods, ending each June 30th fiscal year-end, as reported by the National Association of College and University Business Officers (NACUBO).
The NACUBO studies continue to provide better and better asset allocation detail, and with this information, we have worked to update our simple global index fund portfolios over time to try to match the long-term macro allocations of endowments. As an example, to reflect that endowments have increased equity allocations over the years, we moved our weighting to global equities up from 70%, to 75%, and then 80% for the last four rolling 10-year periods and increased our allocations to U.S. stocks due to increased endowment allocations to various private investments that tend to be U.S. based and equity focused.*
Our allocation comparisons are far from perfect, but they do follow similar work done by research teams at firms like MPI and papers by seasoned institutional consultants like Richard Ennis.
What Does Our Analysis Continue to Show?
Investors who placed assets in a completely liquid, low-cost, diversified portfolio of index funds have been consistent top performers.
As the following chart highlights, over periods that include the bursting of the internet bubble, the great financial crisis, the market drop during COVID, the downturn in 2022, and many strong rallies in between, a Simple Global Index Fund Portfolio that was rebalanced back to allocation targets only once a year on January 1st has produced returns that consistently rank among the top 25% of endowments – 14 out of 14 consecutive 10-year periods in a row.
Top Quartile Endowments vs. Simple Global Index Fund Portfolio *
(10-Year Rolling Periods Ending Fiscal June 30th Year Ends)
Sources: MPI Stylus software, Morningstar, and NACUBO-TIAA 2023 Study of Endowments. See Important Disclosures at the end of this post.
Index fund portfolios are not necessarily the correct solution for every institution or individual, and we are not suggesting that more complex endowment fund portfolios are inappropriate. Everyone wants to produce top results and investors should keep an eye out for approaches that consistently add value.
In this vein, we are just offering what may be thought of as a different type of edge – a simple alternative.
Finding the best path requires hard work and once found, staying the course can be even harder. In striving to do so, our research continues to bring us to this question:
Rather than hard work translating into more complex solutions, should we work harder on keeping it simple?
The consistent top quartile performance of simple portfolios continues to suggest so.
Related Reading:
Unexceptional Endowment Performance – Richard Ennis, CFA
How Can Trustees Be Prudently Passive? – Preston McSwain – Trust and Estates Journal
What Needs to Change? – Tommi Johnsen, PhD
Elusive Alpha, Corrosive Costs – Richard Ennis, CFA
Are Selectors Good at Selecting? – Elisabetta Basilico, PhD, CFA
The Simple Alternative – Charlie Henneman, CFA
Are Alternative Funds Prudent for Taxable Investors? – Preston McSwain – Trust and Estates Journal
One Hit Wonders – Nayan Brainerd-Gosh
* Important Disclosures:
This analysis is provided for informational purposes only and does not reflect an endorsement or recommendation by FWP and should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments or portfolios mentioned in it. This analysis specifically should not be used for making investment decisions. Investors are advised to consult their own financial professionals for advice on asset allocation and the selection of funds. For more information on the use of this analysis, please visit https://fwpwealth.com/disclosures-and-social-media/
The Simple Global Index Portfolio (SGP) portfolio is not an actual fund, index, portfolio, or security. The following are the SGP asset mixes of the over various time-periods:
SGP allocations represent the mixes of the funds shown above over each 10-year period illustrated in the Top Quartile Endowments vs. Simple Global Index Fund Portfolio performance comparison chart. As an example, the 2021-2023 asset mix represents the fund allocations used for a period that spans rolling ten-year periods that start in 2010. The prior 2010-2020 asset mix represents 10-year rolling periods that start in 2000.
The performance of the endowments was based on data as reported by the National Association of College and University Business Officers (https://www.nacubo.org/Research/2023/NACUBO-Commonfund-Study-of-Endowments).
The returns of the SGP are based on the historical results of actual Vanguard index funds (as calculated by MPI software using data feeds from Morningstar) re-balanced back to conform with the allocations illustrated above once a year on January 1st. SGP returns also assume reinvestment of all distributions at NAV, the deduction of fund expenses, and 10-year returns are annualized.
Both the NACUBO Endowment returns and SGP would be lower if third-party consulting and advisory fees were applied. To the extent that such fees were greater or less for NACUBO or SGP, such fees would alter the comparative results. Actual returns might differ, and future returns may be higher or lower. Importantly, the SGP does not reflect an actual investor portfolio.
According to NACUBO, the approximate allocations of endowments have been trending higher over the last 10 years or more. The comparison of the SGP portfolio returns to the NACUBO Index of Top Quartile Endowment returns may not be an apples-to-apples representation, however, and this presentation should not be relied upon to make any investment decisions. For more information on historical endowment allocation targets and performance, please click here to reference the complete details from NACUBO.
Past performance does not guarantee or indicate future results.
All data and return calculations are from third-party sources mentioned below under Return Data Sources. Fiduciary Wealth Partners, LLC does not guarantee the accuracy of any data in this presentation and does not take responsibility for reliance on it. All data and opinions are subject to change at any time.
Return Data Sources: NACUBO-Commonfund Study of Endowments and Foundations (NCSE), Morningstar and MPI Software.
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