(MoneyWatch) A little while back, we saw that even some of the most well-respected university endowments in the nation had a. Now, there's another black mark against investors trying to invest like the professionals.
Mark Yusko was the former chief of the endowment for the University of North Carolina at Chapel Hill. He left to start his own fund, the Endowment Fund, which is a hedge fund that invests in the same manner as top endowments. The fund, started nine years ago, holds about $3.3 billion.
In recent years, the fund's performance trailed the S&P 500 Index. In 2011, the Endowment Fund lost 4.1 percent, versus a gain of 2.5 percent for the S&P 500. For the 12 months ending late August, the fund was down 2.5 percent, compared with an 18 percent gain in the S&P 500. Over the past five years, the Endowment Fund returned 5.7 percent per year, lagging the 7.7 percent gain by the S&P 500.
While investors suffered, Yusko continued to generate fees of up to about 3.5 percent a year for his fund. Additionally, the underlying funds can receive as much as 25 percent of any profits they make. Piling fees on top of fees, the fund's investors who came in through Merrill Lynch financial advisers may have paid as much as a 2.5 percent up-front fee. It's not hard to see the link between the large commissions and the fact that the fund's assets soared 42 percent in 2008, despite steep losses.
The bottom line is that the endowment model was never what it was cracked up to be. In fact, a study on Yale University's endowment fund published in the Summer 2010 edition of the "Journal of Wealth Management" found that any disciplined investor with a high risk tolerance could replicate Yale's results using publicly available index funds and some degree of leverage. They added that they saw value in Yale's broad diversification across asset classes with relatively low correlation.
The implication is striking: If Yale, with all of its resources, cannot identify the future alpha generators, what are the odds that any individual money manager, investment advisor or other endowment can do so? This is why I believe that active management is the triumph of hype, hope and marketing over wisdom and experience.