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M*: Why Target-Date Funds Don’t Resemble University Endowment Funds
Great article. Many of the investments in the endowment are quite complex and very difficult for smaller investors to own (assuming they would want them). Minimums tend to be high and there's lots of legal restrictions imposed by IRS or SEC which impede liquidity and add tax liabilities for small investors.
If (for the above reasons) these investments are not in a financial assets manager's basket of offerings to begin with, it's difficult for the manager to add them to a target date fund.
Article suggests that a target fund dated 30 years in the future is comperable to a college endowment in investment horizon. I'm not sure that's true. However, assuming it is ... what percentage of small investors in that age group (say 20-35 years of age) actually elect to invest through target date funds? Is there a sizable market there to make such a diversified offering profitable for the financial services provider? ---
More thoughts after sleeping on this one: A big difference (which I think the M* article largely ignores) is that humans age - and that this life-long transition must be taken into account over one's ever changing investment horizon. That's where target date glide-slopes come into play. Most rational advisors wouldn't allocate an individual's money as aggressively at age 60 as the would at age 30-40. However, with a university endowment there would seem to be no need for such a glide-slope. Assuming the university continues to grow and prosper, it's endowment investment horizon should remain constant - allowing an aggressive broadly diversified approach for many decades - even centuries. Do I have it right? Or am I missing something in highlighting this difference?
Comments
Even among the target-date funds, some are better than the others just like 529 college saving plan.
If (for the above reasons) these investments are not in a financial assets manager's basket of offerings to begin with, it's difficult for the manager to add them to a target date fund.
Article suggests that a target fund dated 30 years in the future is comperable to a college endowment in investment horizon. I'm not sure that's true. However, assuming it is ... what percentage of small investors in that age group (say 20-35 years of age) actually elect to invest through target date funds? Is there a sizable market there to make such a diversified offering profitable for the financial services provider?
---
More thoughts after sleeping on this one: A big difference (which I think the M* article largely ignores) is that humans age - and that this life-long transition must be taken into account over one's ever changing investment horizon. That's where target date glide-slopes come into play. Most rational advisors wouldn't allocate an individual's money as aggressively at age 60 as the would at age 30-40. However, with a university endowment there would seem to be no need for such a glide-slope. Assuming the university continues to grow and prosper, it's endowment investment horizon should remain constant - allowing an aggressive broadly diversified approach for many decades - even centuries. Do I have it right? Or am I missing something in highlighting this difference?