The Road Less Traveled – Simple Alternatives
It’s that time of year again. The time of new asset allocation and new investment fund recommendations.
As we have written about before, it brings up this age-old question.
Should we take a new fork in the road, or should we take the road less traveled by maintaining a simple steady course?
Investors should always consider new ideas – prudence requires it. When considering changes, though, we continue to suggest that investors test data and, based on the consistency of the results, ask this:
Are they worth it?
As food for thought, below is an update on another report we get this time of year – the annual investment performance rankings of top endowments from the National Association of College and University Business Officers (NACUBO).
In keeping with our annual tradition of reviewing the results of leading endowments, which often make tactical allocation and fund changes based on analysis from seasoned strategists and institutional consultants, below are updates for the fiscal year ending June 30, 2022.
The charts test the rolling long-term performance of a portfolio of index funds as compared to the reported performance of top quartile endowments – now spanning 13 consecutive 10-year periods.
These comparisons are not perfect, but the NACUBO studies continue to provide better and better asset allocation details, and the target macro equity and fixed income allocations of the simple global index fund portfolio generally match the recent long-term allocations of endowments.
What does our analysis continue to show?
Investors that simply placed assets in readily available index funds, and only rebalanced allocations back to long-term targets once a year, have been consistent top performers over many up and down markets that include the bursting of the internet bubble, the great financial crisis, the market drop during COVID, and the latest downturn in 2022.
As the illustrations below highlight, a Simple Global Index Fund Portfolio has produced returns that rank among the top 25% of Endowments for 13 ten-year periods in a row.
Simple Global Index Fund Portfolio Target Allocation Weightings
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 2022 Study of Endowments. See Important Disclosures at the end of this post.
The index fund portfolio we highlight is not the correct solution for everyone and by posting these comparisons we are not suggesting that endowment fund portfolios, which tend to be complex with large amounts of alternative investments, are inappropriate. Every investor has different goals and objectives.
The investment field is competitive and everyone wants to feel like they are maximizing opportunities to achieve top performance. Families and institutions alike should keep an eye open for alternative approaches and always strive to add value.
We are just continuing to offer what may be thought of as a different type of edge – a simple alternative.
The best path forward can require hard work, but in investing should we consider this road less traveled more often:
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 suggests so.
Related Reading:
What Needs to Change? – Tommi Johnsen, PhD
Is Top Manager Performance A Random Walk? – Charlie Henneman, CFA
Should We Be Tactical? – Elisabetta Basilico, PhD, CFA
How to Actively Add Value – Joachim Klement, CFA
NACUBO-TIAA Study of Endowments – The National Association of College and University Business Officers
Important Disclosures:
Return Data Sources: NACUBO-Commonfund Study of Endowments and Foundations (NCSE), Morningstar and MPI Software
Past performance does not guarantee or indicate future results.
All data and return calculations are from third party sources. Fiduciary Wealth Partners, LLC (“FWP”) 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.
The returns of the Simple Global Index Fund Portfolio (SGP) are based on the historical results of actual Vanguard index funds, but represent hypothetical returns of the SGP portfolio re-balanced back to the allocations illustrated above once a year on January 1st. SGP returns would be lower if outside investment advisory fees were applied and would change depending on how the funds were implemented and re-balanced. SGP returns assume reinvestment of all distributions at NAV, the deduction of fund expenses, and 10-year returns are annualized. Actual investor returns might differ and the future returns of the SGP may be higher or lower and the SGP does not reflect an actual investor portfolio at FWP.
According to NACUBO, the approximate allocations of endowments have been trending higher over the last 10 years or more. The allocations used for the SGP portfolio represent lower allocations to equities than has been recently reported by NACUBO. Importantly, however, the comparison of the SGP portfolio returns to the NACUBO Index of Top Quartile Endowment returns may not be an apples-to-apples representation, and this presentation should not be relied upon to make any investment decisions. For more information on historical allocation targets, please click here to reference the complete details from NACUBO.
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.
The Road Less Traveled – Simple Alternatives 
Is Top Manager Performance A Random Walk?