Think the Smartest People in the World Are Big Time Investment Advisers? Think Again

Harvard’s $35 billion endowment loses 2.2% when S&P Rose 4%

Houghton College (who?) Beats the Pants Off of the Ivies

One of the great myths of American Finance is that there are a bunch of really smart people out there who can consistently beat the market.  This is not true for two reasons.  The first is that the random nature of markets is such that consistently beating them is very difficult, and the second is that the fees these so called smart people charge mans that in order just to tie the market they need to beat the market.

So it is no surprise that Harvard with its huge number of very highly paid investment folks did terrible in 2016.

Harvard said its investments declined by 2 percent, and its endowment total dropped by $2 billion because of the investment losses and spending. Harvard is now shaking up its endowment management.

What about Yale.  Well a lot better but still below the market average.

Yale did much better than many of its peers, gaining 3.4 percent. But that still lagged the 4 percent return over the same period for the Standard & Poor’s 500-stock index and wasn’t enough to offset spending. Yale’s total endowment dropped by $200 million, to $25.4 billion.

So who was the big winner?  Why Houghton College of course.

Compare the results with those of Houghton College, a liberal arts institution affiliated with the Wesleyan Church in the Genesee Valley in western New York. Houghton has just over a thousand students and an endowment of $46.4 million.

Houghton emerged in the top quartile of all endowments, according to Nacubo, with a return of 11.85 percent for the year ended Sept. 30. (Houghton uses a different fiscal year.) For the calendar year, the results were also impressive, at 7.54 percent. Houghton has been able to lower its spending rate — the amount it withdraws each year to fund operations — to an enviable 4.5 percent, and may be able to lower it further, to 4 percent.

And how did hey do it?  Simple

The answer is pretty simple: Houghton got out of hedge funds and all alternative investments a year and a half ago, and moved the entire portfolio to a mix of low-cost index funds and mutual funds at the fund giant Vanguard.

Houghton’s endowment is now invested in a simple mix of 76 percent in stocks, evenly divided between United States and foreign, and 24 percent in fixed income, according to Vincent Morris, who joined Houghton last year as its vice president for finance after a stint in risk management at the insurance broker Arthur J. Gallagher. Roughly half the endowment is in low-cost index funds, and the rest is in actively managed mutual funds.

See this person paid attention in college.

Houghton’s investment committee met this week, and is likely to move even further from active management, Mr. Morris said. “I went to the University of Chicago, where I sat in a lot of investment classes,” he told me. He learned how difficult it was for active managers to outperform market averages, “especially year after year,” he said, adding, “I’m a big believer in passive investment.”

As for hedge funds and other high-cost alternatives, “the whole two-and-20 model” — in which investors typically pay 2 percent of assets under management and 20 percent of any gains — “is ridiculous,” Mr. Morris said. “The cost structure is outrageous. As they say on Wall Street, ‘Where are the customers’ yachts?’ I’m not going to play that game.”