Another important trend to note is the deterioration of the relative performance of the larger endowments. And while they did outperform the simple 60/40 benchmark over the long term, the evidence from the two studies we examined earlier this week indicates that much of the outperformance was before accounting for risks.
The superior results of some of the larger endowments generated great interest in the so-called Yale model, which included large allocations to alternatives. The reality for small and medium endowments is that, as their allocations to alternatives increased, performance has been disappointing.
For example, while the underperformance by small endowments versus the 60/40 benchmark was less than 1 percentage point over the past 20 and 25 years, as their allocations to alternatives increased, that relative underperformance rose to more than 1 percentage point over the past 10 years and to 2 percentage points over the past five years.
The trends are similar for medium and large endowments. As their allocations to alternatives increased, their relative performance deteriorated. And it's important to keep in mind that the evidence demonstrates that if we were looking at risk-adjusted returns, the relative performance of the endowments would look even worse.
Wanted: Greater Focus On Factors
The bottom line is that the evidence clearly indicates endowments in general would be better off focusing their efforts on deciding which factors and return sources they want to gain exposure, and in what amounts.
Once those decisions are made, they should use low-cost, publicly available investment vehicles with strategies that are based on evidence (not opinions), that are transparent and that are implemented in a systematic manner.
After all, the research clearly shows that that would be better than the alternative.
Larry Swedroe is the director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.