Calendar year 2018 was a difficult year for “endowment model” portfolios, which we define generally as globally diversified portfolios seeking long-term success by embracing both traditional and alternative strategies that include liquid and illiquid instruments. So was the fiscal year ended June 30, 2018, during which the performance of most endowments lagged a simple 60/40 mix. In fact, for the 10 years ending June 30, 2018, the relative and absolute strength of the US equity market has called the “endowment model” into question. Over that period, a 60/40 mix of the S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index outperformed most endowments, returning 8.1% per annum vs 6.7% per annum for the average Ivy League endowment, according to a study cited in Institutional Investor. The study shows that the US-centric 60/40 mix outperformed every Ivy school during that period. The recent decade’s return for the US-centric 60/40 mix exceeded the same portfolio’s return over the prior 10 years (that is, ending in mid-2008) by 3.5% per annum. We believe that US stocks will struggle to keep up with their pace over the last decade, and thus forward returns for the US-centric 60/40 mix are unlikely to keep up with the last 10 years. For us to be proven wrong, bond yields would also have to drop another 1% (to 1.75%) in the next 10 years, which we think is highly unlikely.
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