Ten Thousand Men of Harvard.

Harvard is a bastion of knowledge.  A pillar to higher education.  A fortress for the educational elite.   John Adams, FDR, JFK and George W. Bush have walked the Old Yard.  Bill Gates, Tommy Lee Jones and Ralph Waldo Emerson may have slept in Hollis, Grays or Weld Hall.  Harvard consistently ranks number one in most, if not all, educational categories.

The Harvard endowment managed by the Harvard Management Company is no slouch.  The endowment fund is a behemoth with assets north of $35 billion.   The performance has done well over time and according to the Harvard Management Company the endowment fund has averaged a 10% average annual return over the past twenty years. [1]  However, their last fiscal year did not go well.  The fund endured a loss of 2% underperforming their benchmark by 300 basis points or 3%.[2]   Their posted five-year average annual return ending in June of this year was .5%.[3]  Harvard is blessed with educational fire power and financial resources so you’d think they’d be able to outperform all markets on a regular basis.

Harvard is not alone in this camp.   Long Term Capital almost brought the financial world to its knees in 1998.   Long Term Capital only had a couple of Harvard alumni on their roster.  To be fair to Harvard, the Long Term Capital team also included alumni from MIT, Stanford and the University of Chicago.  In addition to these storied schools LTC also employed two Nobel Laureate’s.   In 2016 Perry Capital is closing their doors after losing 12% last year.   Perry Capital is a hedge fund with over $4 billion in assets.   Perry Capital had been in business for 28 years.[4]

The resources of Goldman Sachs, Morgan Stanley, Bridgewater Associates, Blackrock and Citadel are unparalleled.  Besides managing trillions of dollars they hire the finest minds the Ivy League has to offer.  The employees, many with Ph.D.’s, constantly search for the needle in the haystack.  The algorithms and quant models run 24/7 looking for an investment edge a luxury not afforded to Farmer John.

The underperformance of active money managers is contagious.  According to Morningstar’s Active/Passive Barometer Mid-Year 2016 Report 93% of large cap money managers failed to survive ten years and outperform their passive benchmark.[5]

What if, instead, you owned the whole haystack?  Who cares if you never find the needle?  I’d rather have a bale of hay anyways.    The haystack in financial terms is the stock market.   Let’s say you owned the following five Vanguard Exchange Traded Funds – S&P 500 (VOO), Mid Cap (VO), International (VXUS), Real Estate (VNQ) and Bonds (BND).  This equally weighted portfolio delivered a one-year return of 11.15%.[6]  The five-year average annual return for this haystack portfolio averaged 10.25%!   In addition to superior returns your fees would’ve been microscopic coming in at .09%.[7]

As you look to invest your hard earn cash my suggestion is for you to send your kid to Harvard and your money to an index fund!

Red, I should have been a farmer. ~ Pop Fisher, The Natural.

 

[1] http://www.hmc.harvard.edu/investment-management/performance-history.html, accessed 9/28/16.

[2] http://www.hmc.harvard.edu/docs/Final_Annual_Report_2016.pdf

[3] Ibid.

[4] http://www.businessinsider.com/report-iconic-hedge-fund-perry-capital-is-closing-its-flagship-fund-2016-9, Business Insider, Rachel Levy, 9/26/16.

[5] Morningstar Active/Passive Barometer, August 2016, Ben Johnson and Alex Bryan.

[6] Morningstar Office Hypothetical Tool – 8/31/2015 to 8/31/2016.

[7] Morningstar Office Hypothetical Tool – 8/31/2011 to 8/31/2016.

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