The Yale Investment Office, which manages the Yale Endowment, devoted a couple of pages of its 32 pages annual report to explaining why it disagrees with Warren Buffett’s advocacy of index investing. The report points out that the endowment has had very strong returns for many decades and delivered returns better than index investors. It’s done this while steadily reducing its allocation to publicly-traded U.S. stocks and putting about half the portfolio in illiquid assets.
While Buffett appropriately recognizes the challenges investors face in manager selection—perhaps most notably that the vast majority of managers who attempt to outperform fail after taking into account fees and expenses—his conclusion goes too far. The superior results of Yale and a number of peers strongly suggest that active management can be a powerful tool for institutions that commit the resources to achieve superior, risk-adjusted investment results.Like Bu≠ett’s identification of the Superinvestors, astute observers of the investment world could have identified more than two decades ago a number of thoughtfully managed endowments that adopted common principles: portfolio diversification; equity orientation; and active manage ment of ine∞ciently priced assets. Critical to the investment programs’ success is that these principles were implemented by high-quality investment professionals overseen by impressive committees of fiduciaries.