5 ms·

I’m on the investment committee of the board of a small school with a $300M endowment, and every year 4% is budgeted to be withdrawn to go towards school expens

I’m on the investment committee of the board of a small school with a $300M endowment, and every year 4% is budgeted to be withdrawn to go towards school expenses. I am new, but I find it silly they pursue this very active management, diversified across tons of different (managed) funds. I feel like they should be putting everything in whatever has the highest long term return (they have access to sequoia funds and those have consistently beat the market, yet only 1-2% goes to them), regardless of illiquidity, since their time horizon is infinite. And use borrowing to handle yearly distributions. But due to the management structure (40+ board members, 8 on the investment committee, a team of 6 professionals who manage the money), this sort of strategy would never be considered “prudent” enough to make it through all the approvals needed.

throw0101a 6y ago
Even most Ivey League endowments haven't beaten a 60/40 portfolio over the last ten years (the S&P 500 has been on a tear): * https://www.markovprocesses.com/blog/ivy-league-endowments-fail-to-make-the-grade-in-fiscal-2019/ https://www.markovprocesses.com/blog/ivy-league-endowments-f... A 2018 study: > Dahiya and Yermack found that the performance of the typical endowment fund [in 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever. * https://www.etf.com/sections/index-investor-corner/swedroe-when-endowments-lag https://www.etf.com/sections/index-investor-corner/swedroe-w... Study: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117
throwawaygh 6y ago
Harvey Mudd? 300M at a small college is actually a quite large endowment, and HMC is tiny even by small college standards. The institution I work with has less than 100M and is on the larger side of small. If we had 300M and a faculty/facilities layout built for ~700 instead of ~3000 then life would be completely different. I agree with you in general -- both that the active management is dumb and also the most probable reason small colleges pursue this strategy. But HMC can probably afford investment strategies that most others cannot.
- zhoujianfu 6y ago
  Yeah, but it seems like any sort of “permanent fund” where the timeline is infinite should be doing really aggressive, long-term, illiquid stuff, right? Investing like a 22 year old. And then any liquidity needs you need for annual distributions you handle via loans. I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever... but you can never get your original investment back. It seems like this would be a product all endowments/permanent funds would use. And then I just put it all in the s+p 500. I guess I’d need to be the government for endowments to trust me forever though.
  - ac29 6y ago
    Paying 4% of an initial investment would over time become a relatively worthless amount of money due to inflation. You could get about that return by just buying a ETF or mutual fund that focuses on dividends without having to give up the value of your principal (which would also grow over time).
  - smabie 6y ago
    Corporate debt often looks like what you're describing. The principle is rarely called and the loan can be extended virtually forever (unless the bank decides you're too risky). There are certainly other ways a school could run its endowment, sure. In fact, the way things are usually done is perhaps far from optimal. But you don't want to that guy who gets fired because you did some crazy stuff. These institutions are perversely risk adverse, and the investment through consensus model makes it hard to do anything different.
  - throw0101a 6y ago
    > I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever... It seems that you have heard about the "four percent rule", but probably have not needed to actually look up the details. It is from something called the Trinity study (also see Bengen and recent Wade Pfau) and there are important details about it: > The 4% refers to the portion of the portfolio withdrawn during the first year; it is assumed that the portion withdrawn in subsequent years will increase with the consumer price index* (CPI) to keep pace with the cost of living. * https://en.wikipedia.org/wiki/Trinity_study https://en.wikipedia.org/wiki/Trinity_study * https://en.wikipedia.org/wiki/William_Bengen https://en.wikipedia.org/wiki/William_Bengen Further it is/was focused only on thirty-year retirement time horizons, not the infinite-horizons of perpetual institutions. It is probably not even appropriate for the 'retire early' (FIRE) movement that is somewhat popular in recent years: * https://www.pwlcapital.com/the-4-rule-for-retirement-the-trick-is-in-the-timing/ https://www.pwlcapital.com/the-4-rule-for-retirement-the-tri... * https://www.youtube.com/watch?v=3BScK-QyWIo https://www.youtube.com/watch?v=3BScK-QyWIo

throw0101a 6y ago

Even most Ivey League endowments haven't beaten a 60/40 portfolio over the last ten years (the S&P 500 has been on a tear): * https://www.markovprocesses.com/blog/ivy-league-endowments-fail-to-make-the-grade-in-fiscal-2019/ https://www.markovprocesses.com/blog/ivy-league-endowments-f... A 2018 study: > Dahiya and Yermack found that the performance of the typical endowment fund [in 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever. * https://www.etf.com/sections/index-investor-corner/swedroe-when-endowments-lag https://www.etf.com/sections/index-investor-corner/swedroe-w... Study: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117

throwawaygh 6y ago

Harvey Mudd? 300M at a small college is actually a quite large endowment, and HMC is tiny even by small college standards. The institution I work with has less than 100M and is on the larger side of small. If we had 300M and a faculty/facilities layout built for ~700 instead of ~3000 then life would be completely different. I agree with you in general -- both that the active management is dumb and also the most probable reason small colleges pursue this strategy. But HMC can probably afford investment strategies that most others cannot.

zhoujianfu 6y ago
Yeah, but it seems like any sort of “permanent fund” where the timeline is infinite should be doing really aggressive, long-term, illiquid stuff, right? Investing like a 22 year old. And then any liquidity needs you need for annual distributions you handle via loans. I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever... but you can never get your original investment back. It seems like this would be a product all endowments/permanent funds would use. And then I just put it all in the s+p 500. I guess I’d need to be the government for endowments to trust me forever though.
- ac29 6y ago
  Paying 4% of an initial investment would over time become a relatively worthless amount of money due to inflation. You could get about that return by just buying a ETF or mutual fund that focuses on dividends without having to give up the value of your principal (which would also grow over time).
- smabie 6y ago
  Corporate debt often looks like what you're describing. The principle is rarely called and the loan can be extended virtually forever (unless the bank decides you're too risky). There are certainly other ways a school could run its endowment, sure. In fact, the way things are usually done is perhaps far from optimal. But you don't want to that guy who gets fired because you did some crazy stuff. These institutions are perversely risk adverse, and the investment through consensus model makes it hard to do anything different.
- throw0101a 6y ago
  > I feel like I could make an investment product where I pay you 4% of whatever you invest, per year, forever... It seems that you have heard about the "four percent rule", but probably have not needed to actually look up the details. It is from something called the Trinity study (also see Bengen and recent Wade Pfau) and there are important details about it: > The 4% refers to the portion of the portfolio withdrawn during the first year; it is assumed that the portion withdrawn in subsequent years will increase with the consumer price index* (CPI) to keep pace with the cost of living. * https://en.wikipedia.org/wiki/Trinity_study https://en.wikipedia.org/wiki/Trinity_study * https://en.wikipedia.org/wiki/William_Bengen https://en.wikipedia.org/wiki/William_Bengen Further it is/was focused only on thirty-year retirement time horizons, not the infinite-horizons of perpetual institutions. It is probably not even appropriate for the 'retire early' (FIRE) movement that is somewhat popular in recent years: * https://www.pwlcapital.com/the-4-rule-for-retirement-the-trick-is-in-the-timing/ https://www.pwlcapital.com/the-4-rule-for-retirement-the-tri... * https://www.youtube.com/watch?v=3BScK-QyWIo https://www.youtube.com/watch?v=3BScK-QyWIo