How A Small Foundation Trounced The Big Guys

June 08, 2017

A foundation I work with asked me to compare its performance with that of other foundations using the most recent data available. The news was quite good.

This relatively small foundation (“Foundation X”) managed to beat the return averages for all size foundations and even the top 10 percentile of performance of all foundations. Yet it is the story of how it achieved this that is most compelling, as any individual or foundation can do the same.

 

 

I started working with the Foundation in late 2008, shortly after the stock plunge. At the time, Foundation X had three active managers. Rather than benchmark its performance against other foundations, I benchmarked against the broad stock and bond ETFs. Specifically, the key benchmarks were:

What happened over the subsequent few years was that two of the three active managers were let go due to substantial underperformance. Not surprisingly, those were the two with the highest fees. Rather than find new managers, Foundation X decided instead to own the benchmarks itself, giving it a huge cost advantage over other foundations.

An Update

Foundation X still has roughly 40% of its assets in the low-cost active manager and, over the five-year period, that active manager did underperform the benchmarks by a bit. This foundation also owns a REIT index fund, a low-cost precious metals and mining fund, and a very tiny investment in a private equity fund.

The core of the passive portfolio was in these three ETFs originally selected as benchmarks, with one minor change. That change was switching from the Vanguard FTSE All World Ex-US to the Vanguard Total International fund (VXUS) shortly after the ETF was launched, since it was a bit broader, owning small-caps.

It would be logical to assume that in the up market that occurred during the five-year period, taking on more risk would be part of the explanation for achieving top-decile performance. But Foundation X had a much greater percentage of its portfolio in high-quality bonds than other foundations. This allowed the foundation to get an extra boost from rebalancing, meaning it was buying stock funds on dips and selling on surges.

 

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