Even Ivy Leaguers can't beat index funds
The brightest minds at top university endowments were unable to match the returns of a rather boring portfolio of stocks and bonds.
By Jeff Reeves
If you haven't read the preponderance of data out there showing the power of passive management, you haven't been paying attention.
Year after year, index funds that track the Standard & Poor's 500 Index ($INX) or a similar benchmark outperform most active managers picking individual stocks.
The latest proof of this trend comes from the storied endowments of Ivy League colleges including Harvard, Yale and Stanford. Because based on the latest numbers, even the smarty-pants investors at these big-name schools managed to lag a rather boring portfolio of 60% stocks and 40% bonds during the past five years.
According to a ranking from recruitment firm Charles A. Skorina & Co., only one Ivy League school -- Columbia -- managed to beat the returns of a 60/40 fund. The rest tinkered with private equity and hedge funds and other kinky vehicles, only to underperform.
Now remember, a Harvard endowment fund track record is different than a Harvard alumnus running a hedge fund, and there assuredly are some market-beating money managers who attended Ivy League schools.
But the results are pretty telling nevertheless. You'd think that the Harvard endowment fund, which is the largest in the U.S. at more than $30 billion, would hold its managers to a higher standard.
Of course, major endowments of schools like Notre Dame and the University of Chicago were also tracked and performed just as poorly.
It just goes to show the power of passive management. A select few managers can beat what the market gives you. . . but the rest of us should stick with index funds and a balanced approach to succeed in the long term.
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Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here.
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