Thursday, February 9, 2017

Endowment models - Bogle simplicity a winner

Everyone likes to follow what endowments are doing because there is the assumption that they represent smart money. If universities are where the smart people are, then it stands to reason that their money managers are also smart. The return numbers suggest that endowments don't have a lock on good performance. In fact, simple allocations have proven to be more effective at generating return. The Bogle model which is a simple variation on the classic 60/40 stock/bond mix is a perfect example. This asset allocation in made up of 40% US equities (total US stock index), 20% international equities (total international stock index) and 40% bonds (total bond index). 

The Bogle allocation works when compared with endowment allocations which have been tilted to alternatives and away from equities; however, there are no guarantees to its future success. It may have been lucky, but it is worth, at the least, being used as a straw man for comparison. Endowments are dynamic and have all of the information of market changes at their fingertips. The Bogle model was a static allocation.

This allocation has benefited from the strong stock rally and the rate declines since the Great Financial Crisis, but it serves as a good baseline for future discussion. A simple question can be asked. If you change allocations from this simple approach, are there good reasons to justify the new allocation? An allocator can compare their active shares against this simple model and provide a reason for the change. 

Source information from Ben Carlson and "A Wealth of Finance"

A quick review shows that the Bogle allocation would have been in the top quartile for 3-year and 5-years and the top decile for the last 10-years. Some may argue that the simple model just got lucky and will not represent future performance. There is no question that we may have turned the corner on easy returns in equities and the big bond rally may be over. I may be more biased to the 50/30/20 world of equities/bonds/alternatives, but it is still critical to look at some simple allocations as a base.

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