Word Association

What's the first thing that pops in your head when I say "endowment style?" Is it this?

The "endowment" result is very close to red line VBAIX every year except 2020 when it lagged by almost 600 basis point and 2022 when it outperformed by about 500 basis points. If any of us had constructed this portfolio and implemented it for ourselves, it would have been a very acceptable result. The portfolio did just fine, it captured most of the upside and avoided the full brunt in 2022's large decline. It did worse in the 2020 Pandemic Crash by 200 basis points which isn't problematic for how quickly everything snapped back. In that event, I think doing better than the broad market probably just came down to luck in reiterates a point I should be making more often that fast declines, aka panics, aka crashes are not be feared anywhere near as much as slow declines which typically take much longer to recover. 

One thing lacking from the "Endowment ETF Model Portfolio" is any hint of endowment-like results. I'm not sure too many investors need endowment-like results and while we might have different ideas about what endowment-like even means, a tight correlation to a 60/40 benchmark isn't it. 

To me, endowment means some sort of relatively high absolute like return that includes equity exposure and global macro. The typical absolute return fund would be doing well to return 4-5% per year, or maybe 6% with rates a little higher through good times and bad. So maybe an endowment would be more like 8-9% through good times and bad. Maybe you disagree with that but I would not expect endowments to take the risk necessary to have lights out hedge fund performance due to the need to pay out a certain percentage every year.

There is a mutual fund niche where the objectives are CPI plus some return like another 2% or 5% on top of whatever CPI is doing so maybe endowments should be thought of in that realm? When I go to look for funds in the niche though, I don't find any, maybe they didn't work? Neither Google Gemini nor Grok on Twitter could find any in the US. I wonder if short dated TIPS combined with a little bit to a 2x S&P 500 ETF could do something close to CPI plus x% or maybe not 2xS&P 500 but maybe just high beta somehow. We've explored that a little in the past maybe that can be another post. 

I think what the Cambria Trinity ETF (TRTY) is trying to do is in the realm of endowment style. It might not be succeeding there, that's could be debated but I think the idea is close and there are others. 

The endowment profiled above allocates 53% to equities, 27% to fixed income and 20% split between six different alternative strategy ETFs. They did a good job with the alts, 5 of the 6 were up in 2022. The fixed income sleeve was 2/3 allocated to a fund with a highish duration so that was a drag on result. The equities had a lot of factor exposure as well as foreign. No beef there, those either work out or they don't relative to simpler market cap weighting but they still got decent upcapture. 

As we've talked about models a fair bit lately, we've tried to find differentiation. I've asked, do you want differentiation if you're going to implement someone's model? My bias is to want differentiation, model or not, that's pretty much the whole point of this site but I had a very cynical thought. Maybe the model providers don't really want their models to differentiate. 

Something like a 75/50 portfolio might fit in the discussion of endowment style. 75/50 seeks to capture 75% of the market's upside with only half the downside. Do the math, it would be a fantastic long term result but very difficult to pull off. If some sort of model provider could actually pull it off though, it would mean lagging every year that market is up which is of course about 72% of the time. "You're going to lag almost every year but your long term result will be good." There are a lot of advisors who would not be able explain the merits of those attributes to clients. Sorry but it's true. 

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