Endowments Are Struggling?

FT Alphaville wrote a doozy about The Death Of The Yale Model that included some harsh criticism about the way endowments and similar pools of capital use alternatives. Obviously they've evolved to go very heavy into illiquid alts and from the article, consultant Richard Ennis thinks it's a very bad idea. "Alts bring extraordinary costs but ordinary returns."

"A whopping 65 per cent of the average large US endowment fund is now invested in alternatives of some kind" which might seem like a lot but it's not like this just started last quarter. For the last few years, more than half has been common from my casual observation.

The article noted that "endowments lagged 70/30 indexed portfolio." If stocks are the thing that goes up the most, most of the time and you have more than half your portfolio, or endowment or whatever in something that goes up less than stocks, yeah, performance may not be what is hoped for. 

It wasn't clear to me where 70/30 came from as a benchmark but 80% S&P 500/20% client and personal holding BTAL looks pretty good against 70/30. In the backtest below, the VOO/BTAL combo outperformed 70/30 in eight out of 11 full and partial years.

This entire concept goes back to Jack Meyer who ran the Harvard Management Company and a little more famously to David Swensen at Yale but as the article points out, most investors have not been able to replicate Swensen’s more well known results.

Alts, here the context is always liquid alternatives, are precise tools as opposed to core allocations. Most of the alts we look at here are doing what I would hope they would do which is good although managed futures has struggled due to how choppy some of the bigger markets have been. 

Twenty years ago, yes it has been that long, I blogged about not going too heavy into REITs, MLPs or gold. Then a few years ago when managed futures became popular again, I had the same message, don't go too heavy, you never know when they won't "work." When the current event ends and we move on to the next adverse market event, maybe managed futures will be the star like in 2022 and things doing well now will struggle the way managed futures has been this year. Keep allocations small and diversify your diversifiers. 

Who knows if this will carry over into the regular session tomorrow but it's probably a good time to dust of an important concept. Every now and then the stock market goes down a lot (we are nowhere close to down a lot at this point) and scares the hell out of people. Then, it stops going down and works it's way back to make a new all time high. The only variable is how long that all takes. 

As far as what is going on now and appears to be moving markets, the logic is lost on me but at some point the event ends and the market goes back up.

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