Thursday, February 9, 2012

College Endowment and Public Pension Fund Returns Are Not Good

Most college endowments and public pension funds are plowing more and more money into complicated and expensive "alternative investments" such as hedge funds and private equity in a failed effort to boost returns.  However, my analysis, combined with a recent study of college endowment fund returns and a study of public pension returns, proves most would  be better off if they simply indexed all their money.  In fact, my simulation of index fund returns would have placed easily in the top 25% of all college endowments.

     1-year      5-year    10-year
Median Public Pension Fund      21.6%        4.7%        5.7%
Median College Endowment 19.8% 4.6% 5.5%
Simulated Index Fund Returns* 22.3% 5.8% 6.2%

Perhaps a difference of 0.5% may not seem like much, but it is HUGE when one considers the dollar amounts involved.  A difference of just 0.5% per year over 10 years amounts to:

for a $100,000 401(k) the difference is $8,500
for a $1 million IRA the difference is $85,000
for a $1 billion endowment the difference is $85 million
for a $70 billion pension fund the difference is a staggering $6 Billion (yes, that's Billion - with a "B").

* My simulation includes annual re-balancing of Vanguard index funds using a simple 60/40 stock/bond recipe that comes from page 34 of my book, "The Rollover IRA Cookbook."  The above returns are all as of 6/30/2011.  Here's the simple recipe that beat 75% of all college endowment funds:

30% Vanguard 500 Index Fund
10% Vanguard Mid-Cap Index Fund
10% Vanguard Small-Cap Index Fund
10% Vanguard International Stock Index Fund
20% Vanguard Inflation-Protected Securities Fund
10% Vanguard Intermediate-Term Bond Index Fund
10% Vanguard Long-Term Bond Index Fund



  1. As a Brit living in the States and interested in investing, this whole concept of University "endowments" is fascinating to me. Its mind blowing that a Harvard has an endowment of 30 billion dollars, whilst even our best Universities would be lucky to have endowments of a tenth that size. It is equally amazing that endowments here rely on complex investments in hedge funds private equity when they should be well aware that the entire 2 and 20 model provides little or no value-added. Supposedly some of the brightest people work at these places, yet they seem like they are quite ignorant about some basic investing concepts like efficient markets.