Many people think the smarter you are and the more sophistication you bring to your portfolio, your performance will be better. This is a big reason that hedge funds continue to attract assets. Well, what if we had a chance to look at the smartest people in the world, with nearly unlimited resources, to see if that theory holds water? That’s exactly what we’ve done when looking at the Harvard Endowment Fund. The $39 billion funds publish their results each year, and we can compare how they’ve done with a fairly simple global market portfolio. The results are pretty shocking:
| Year | Harvard Endowment | Global Equity Portfolio* |
| 2009 | -27.3% | -26.7% |
| 2010 | 11.0% | 24.7% |
| 2011 | 21.4% | 33.6% |
| 2012 | -0.1% | -3.7% |
| 2013 | 11.3% | 21.4% |
| 2014 | 15.4% | 24.7% |
| 2015 | 5.8% | 1.7% |
| 2016 | -2.0% | -1.6% |
| 2017 | 8.1% | 21.6% |
| 2018 | 10.0% | 10.8% |
| 10 Year Return | 4.5% | 9.1% |
As you can see, a simple market portfolio has doubled the return of Harvard’s endowment over the last 10 years! One explanation could be that Harvard is more focused on managing volatility and therefore doesn’t risk it. But looking at the financial crisis in 2009 (their fiscal year is 6/30), that thesis didn’t hold up. Here is what we can learn from this:
- Simple almost always trumps complex– hedge funds, natural resource funds, private equity…they all sound very fancy and potentially what you should be doing if you have lots of money. Still, in many cases, those funds fail to outperform simple indexes.
- Fees matter– while Harvard does not publish their fees paid to managers, hedge funds, private equity, and other exotic investments almost always carry larger fees than index funds. Those fees act as a drag on performance.
- Being “smarter” may not produce better results– the market is a gigantic meeting place for brilliant people to set prices. The reason Harvard has underperformed is not that they aren’t smart (they’re brilliant people); it’s because the other people they are competing with are also brilliant. Since buying and selling investments is a zero-sum game (there will be a winner and loser with every trade), it is hard to outperform because it is difficult to get an advantage over other very intelligent investors. We have yet to find evidence that smart people can consistently beat the market.
- Focus on what you can control– keep costs low, control taxes, diversify, and bring discipline to your investment process. It’s not sexy, but focusing on these four things will put you ahead of the vast majority of investors…maybe even Harvard!
*Global Equity Portfolio is represented by the DFA Equity Balanced Index
