I just finished reading How Harvard and Yale Beat the Market,  and I found it fascinating.

I’m always keen to read perspectives that don’t jive with the evidence based party line:  that finding someone to beat the stock market averages is a futile task, and the odds of investment success are far better when constructing portfolios of indexes.

The money manager and author of this book, Matthew Tuttle, disagrees strongly with that premise.  As the President of Tuttle Wealth Management, he also breaks from the financially academic studies with some surprising statements:

For starters, he suggests that fees charged to investment clients can be irrelevant:

“In investment management, just like almost every other industry, the best people charge more” (Tuttle 73).

Of all the investment books I’ve read (more than 300) I’ve never seen anyone suggest that you get what you pay for, in the investment management business.   Someone more cynical than I am might suggest that Tuttle’s wealth management company charges high fees, and that he defends high fees in a self-serving manner.  But there’s no mention of Tuttle’s specific fees (none that I could see) on his financial service website, so I don’t have a basis for judging them.

In contrast, Yale University’s endowment fund manager, David Swensen, suggests that low investment fees are paramount:

“The old adage that ‘you get what you pay for’ fails to apply to the mutual fund [active management] world.  According to a study conducted by Standard & Poor’s, funds that charge lower fees consistently produce higher performance (Swensen, 2005, pg. 226).

Russell Kinnell, of the mutual fund data provider, Morningstar, agrees:  “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds. Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.”   

Tuttle’s book is well-researched, and he clearly reveres the endowment funds of Yale and Harvard—while showing how the average investor can learn from these colleges, while shunning low cost index funds for the superiority of active management.

But I’d be very interested to see Matthew Tuttle and David Swensen together.  There’s no doubt that Tuttle admires Yale’s endowment fund immensely, but at the same time, he and David Swensen (the man who runs Yale’s endowment) have huge philosophical discrepancies that would make for some interesting “fly on the wall” listening.

While Swensen strongly believes that investors should seek low fees, Tuttle suggests that historical outperformance is more important than low cost structures.  He doesn’t suggest that low costs should be ignored entirely, but his preferred emphasis on historical returns, rather than fees, counters academic research.

Tuttle’s book was published in 2009, and he mentioned that after looking at the five year historical return of the Fidelity Contraband fund (which gained 12.9 percent per year over a 5 year period) he would choose it over the U.S. index (which made 6.63 percent per year over the same time period).  The index would be cheaper, but Tuttle implies that he’d rather invest in a fund with a better return.

That might appear logical, if you hadn’t seen data implying that historical returns are poor indicators of future performance.

If you had read Tuttle’s book when it was first released, in 2009, you might have been tempted to buy the Fidelity Contraband fund, over the S&P 500 index.  But would that have been a mistake?

Since the release of Tuttle’s book, to the day that I’m writing this post (April 30, 2011), the Fidelity Contraband fund has gained a total of 52.8 percent.

In contrast, Vanguard’s total stock market index, over the same duration, has gained 65 percent.

Still, there’s a more interesting conflict:

 David Swensen believes that most investors should create portfolios of index funds.

Tuttle suggests that intelligent active management is superior.

Based on sourcing endowment fund returns of various sizes, Tuttle shows the superiority of active management over indexed strategies.  And his book promotes a mantra that, like endowment funds, you can beat the indexes too.

Endowment fund assets

10 year annual % returns

Endowment Funds over $1 billion


Endowment Funds $501 million to $1 billion


Endowment Funds $101 million to $500 million


Endowment Funds $51 million to $100 million


Endowment Funds $26 million to $50 million


Endowment Funds less than or equal to $25 million


S&P 500 Index


Source:  NACUBO Average Investment Pool Compounded Nominal Rates of Return for FY 2007.

The data does look impressive, and clearly, it points to the superiority of the endowment fund returns over the S&P 500 index.

We will ignore the fact that it isn’t an apples to apples comparison, considering that a single index does not constitute a rebalanced, diversified portfolio.

But let’s look at something else:

Yale’s endowment fund leader suggests that you would have to be “naive” to consider such data accurate.  He claims that when active managers are touting their abilities to manage an endowment, they will present data such as this, to impress the representative of the institution whose assets will be managed.  The sales rhetoric might go something like this:

“Why create a portfolio of index funds when historical data shows that by paying active managers, such as us, we can likely beat an indexed strategy.  Just look at the data”

But the man in charge of the greatest college endowment fund of them all (Yale’s David Swensen) disagrees:

Here’s my analogy of what he summarizes in his 2008 book, Pioneering Portfolio Management, An Unconventional Approach to Institutional Investment, and then I’ll give you David Swensen, in his own words:

Imagine being the coach of five cross country runners.  You enter a district championship, and three of your runners take the top three spots.  But two of your runners drop out, after falling too far behind.

Did your average runner finish 2nd, considering that your team took 1st place, 2nd place, and 3rd place?  That would be a pretty misleading claim.

And Swensen has the same argument for endowment fund data:

“Compilations of return data generally include only results of managers active at the time of study.  Discontinued products and discredited managers disappear, coloring the return data with an optimistic tint.  Were the generally poor results of non-survivors included in the database, the challenge of beating the market [indexes] would appear even more daunting”  (Swensen, 2008, pg. 77).

Swensen argues that 75 percent of institutional investors lose to diversified portfolios of indexes, after taking into account survivorship bias (Swensen, 2008, pg. 81).

The big question then, is this:

If the top dog in the endowment fund world promotes that most colleges would be better off with an indexed strategy, then how much water does Matthew Tuttle’s thesis hold, when suggesting that the average person can invest like a big endowment fund, and easily beat the returns of a passive strategy?

Would Matthew Tuttle be chastised by one of his heroes, for doling out poor advice?  Or is Tuttle on to something?

What do you think?


David Swensen, Pioneering Portfolio Management, An Unconventional Approach To Institutional Investment, 2008
David Swensen, Unconventional Success, A Fundamental Approach to Personal Investment, 2005
Matthew Tuttle, How Harvard and Yale Beat the Market, What Individual Investors Can Learn from University Endowments to Help Them Prosper In An Uncertain Market, 2009.
Historical Fund returns:  Morningstar.com