Replicate The Yale Endowment With These ETFs

With fiscal year returns of 28%, it looks like Yale has the title of top endowment manager locked up.

The Yale endowment recently reported their investment returns, and the spectacular 28% tops the impressive Harvard returns of 23%. They handily beat the S&P500 (20%) and foreign stocks (27%), and swells their AUM to $22.5 billion. It looks like PIMCO hired the wrong guy!

I updated the table and chart from the earlier EndowWOWment post. Even with the amazing returns of the past 4 years, a simple timing model (leveraged 50%) does a good job of approximating the endowment returns (about .75 correlation). A 2X levered allocation would beat both of the endowments with near 20% annual returns, and a worst year of -7%. (I used commercial paper to estimate the margin rates. Discount brokers such as Interactive Brokers have margin rates in line with CP.)

Click to enlarge:

An investor could replicate the timing model with these sample ETFs:

US STOCKS: SPY, VTI, MDY, IWM
FOREIGN STOCKS: EFA, EEM
US BONDS: IEF, AGG, TIP, HYG
REITS: IYR, RWX
COMMODITIES: GSP, DBC

I get lots of emails asking about updating moving averages for timing models. Here is a table I use for internal use. If there is enough interest (leave a comment), I can post this PDF monthly. (Green cells are top 10 performance for that time period. I extrapolated some performance for some ETFs without 12 months of history.)

Comments

[10-Qs:]

"Sweden" is spelled without any contiguous "e"s.

2007 Sep 28 01:47 PM

[jbaird45:]

Would appreciate more info. about ETF'S that benefit the individual investor.

Thanks

2007 Sep 28 02:47 PM

[dreich@bear...:]

check out proshares.com, wisdomtree.com, ishares.com

be careful as you drill down into sector ETF's as the correlations are not 100%

2007 Oct 01 08:07 AM

[Howard:]

Most interesting. What % for each ETF? I'd be interested in following this monthly.

2007 Sep 29 11:22 AM

[CharlesC:]

I found this very interesting. Harvard in the past couple of years has lost it Managers because they changed their compensation. Again this year the Manager left for the same reason. It seems you only get what you pay for.

2007 Sep 29 12:39 PM

[redzin:]

I would be very interested to see your timing model PDF monthly.

2007 Sep 29 10:55 PM

[Genecis:]

Guaranteed: If posted monthly, I would carefully review your subject PDF. Thanks for including it today.

2007 Sep 30 01:27 PM

[xyztommy:]

i think it,s a great idea. do you use it in your own portfolio? what,s your current return?

2007 Sep 30 05:03 PM

[Kenny:]

So, are you saying that we can follow a list of ETFs (from the list you provided) and that the returns would be as above (20% CAGR) if we follow a leveraged 100% timing? I am interpreting leveraged as borrowing 100% to double up the positions. And, i am interpreting timing as Buy if above 10month SMA and sell if below 10month SMA. Is that true?

Assuming that to be true, you are saying that these results, then "simulate" the returns of Yale and Harward Endowment fund?

Thanks for clarifying.

Kenny

2007 Sep 30 11:16 PM

[RAVEN:]

GREAT COLUMN...UPDATES MONTHLY...YES!

2007 Sep 30 11:52 PM

[RAVEN:]

ALSO, IF YOU READ THE BOOK WRITTEN BY MR. SWANSON (ONE OF THE DIRECTORS OF THE FUND AT YALE) THEY REBALANCE OFTEN...READ WHENEVER THEIR TARGET RATIOS ARE OFF. THAT COULD BE DAILY. TRADING COST FOR SMALLER INVESTORS ARE IMPORTANT TO CONSIDER...

2007 Sep 30 11:54 PM

[WorldBeta:]

Thanks for all the comments. SA only posts some of my articles here, but there has been enough interest that I will post a monthly update on my blog World Beta (there is one today). For more info on the specifics of the timing model, please reference my paper "A Quantitative Approach to Tactical Asset Allocation."

I listed more asset classes here because different people use various combinations in their portfolios. In my paper I only used 5. Subsequent research has shown that more asset classes can improved risk adjusted returns - again, buried in the archives on my blog.

2007 Oct 01 10:49 AM

[Analyzer:]

Thank you for your post. I read your paper "A Quantitative Approach to Tactical Asset Allocation" with interest. Can you post the actual numbers when you analyzed trend following system on the indices of different countries? Currently, it just shows whether it was beat the buy and hold, but more granularity would be great. Thanks,

2007 Oct 09 11:55 PM

[Chris N:]

Excellent--looking forward to following up...

2008 Jul 09 02:47 AM

[Scott N:]

Have been a reader / observer of your methods for roughly a year and have become a real believer. I would think many would appreciate a template excel workbook to track signals, etc. Any chance this could be made available to those of us that arent great excel programmers? Or, if you have recommendations of websites that might be of real help, would appreciate being pointed in the write direction. Regardless, appreciate the work.

Jan 01 04:50 PM

[User 344928:]

I would second that - a spreadsheet -- also, could you direct us to a website that tracks the 10 month SMA vs. the 200 / 50 days which seem to be more common? Thanks!

Aug 01 07:04 AM