Barron's Streetwise: "Index Funds vs. Ivy League"

Date: March 1, 2025
Host: Jack Hough
Featured Guest: Meb Faber, CIO and founder, Cambria Investment Management

Episode Overview

This episode of Barron's Streetwise, hosted by Jack Hough, explores a central question for everyday investors: Can individuals achieve investment results comparable to those of elite institutional funds like Yale's famed endowment? Guest Meb Faber unpacks the mythos and reality of the "Ivy League" investment approach, offers historical analysis, and discusses whether average investors can replicate or even outperform institutional giants—often just by using low-cost index funds.

Key Discussion Points & Insights

1. The 60:40 Portfolio – Still Relevant?

• The classic 60% stocks, 40% bonds mix has long been a default strategy, but today's markets demand flexibility and personalization.

• Notable Quote:
  "I think it's important to just say, well, what is 60:40? Because it actually means different things to different people."
  – Jomana Selehin, Vanguard [09:33]

• Modern investors often use "60:40" as a shorthand for a diversified, broad-based portfolio, not a strict rule.

2. Big Food Industry as an Investment Case Study

• Food companies like Kraft Heinz, General Mills, and PepsiCo are underperforming the S&P 500 despite their reputation for stability.

• Recent CAGNY conference (Consumer Analyst Group of New York) showed industry leaders obsessed with "algorithms" for growth, but riding headwinds: inflation, consumer confidence drops, and changing diet trends (GLP1/obesity drugs).

• Not all staples are suffering: McCormick (spices) bucks the trend with a differentiated approach.

• Memorable Exchange:
  "There is one big food company that's doing just fine right now. McCormick... their CEO said, 'We do not compete for calories, we flavor them.'"
  – Jack Hough [04:34]

3. Ivy League Outperformance: Myth or Model?

A. Understanding the “Yale Model”

• Yale’s endowment, led by David Swensen, is famous for diversifying into private equity, venture capital, and alternatives.

• The big question: Is the Ivy League model replicable for regular investors, or was Yale just early to a now-commoditized opportunity?

• Notable Quote:
  "David Swensen...I would consider him to be the GOAT, right? As far as asset allocators, you put him on the Mount Rushmore."
  – Meb Faber [13:32]

B. Performance Breakdown: Endowments vs. Index Funds

• Since 1985, Yale's returns were exceptional (13%/year), outperforming average endowments (9%) and even a "replication portfolio" (9.5%).

• The S&P 500 pushed nearly 12% annualized, driven primarily by a more recent 15-year bull run.

• Since 2010, however, S&P 500 (15%) outperformed both Yale (11%) and the average endowment (8%).

• Notable Quote:
  "So, the average endowment over this period did just fine.... The S&P did almost 12. Yale did 13%."
  – Meb Faber [16:04]

C. The Golden Age of Private Equity

• Yale’s past advantage came from being early to private equity and VC, before competition and high fees eroded the edge.

• Today, access to similar exposures is widespread—often commoditized in ETFs and public markets.

• Notable Quote:
  "The alpha of Swensen and Yale...was that they made these decisions at the time...Now, every single MBA coming out of school wants to go work for VC or private equity, and these massive firms have just been growing and sloughing off enormous fees."
  – Meb Faber [23:35]

4. Replicating (or Beating) Ivy League Returns

A. Can You Build a Yale-Like Portfolio?

• Swensen, for individual investors, recommended a simple diversified mix:
  • 20% US stocks
  • 20% foreign stocks
  • 10% emerging markets
  • 20% REITs (Real Estate Investment Trusts)
  • 15% US bonds
  • 15% TIPS (inflation-protected bonds)

B. Why Indexing Often Wins

• For the last 15 years, simple S&P 500 index investing trounced more "sophisticated" models.

• Most institutional advantages (scale, access) often don't translate to outperformance.

• Notable Quote:
  "If you have the best resources in the world...you would assume that would result in outperformance, but historically it doesn’t."
  – Meb Faber [22:46]

C. Volatility Laundering and Leverage

• Illiquid assets (private equity) seem less volatile— not because they're less risky, but because they're priced less frequently ("volatility laundering").
• Levering up diversified portfolios can match historic endowment returns, but brings higher volatility.

D. The Alpha vs. Beta Debate

• Most “private equity alpha” is replicable via public market exposures: cheap stocks, small caps, value tilts.

• The real challenge is distinguishing between true alpha (outperformance) and beta (market returns).

• Notable Quote:
  "Our belief is we can replicate...you can replicate private equity and VC through the public markets..."
  – Meb Faber [25:00]

5. Looking Ahead: Practical Advice for Investors

• Key ideas from Faber:

  • Move away from US market cap-weighted indexes; seek value in foreign and emerging markets.
  • Lowering fees and taxes is the biggest, simplest edge for individuals.
  • Cambria (his firm) is experimenting with new ETFs that allow investors to defer taxes by "seeding" ETFs with appreciated stocks (351 transactions).
  • The "best way" to generate alpha: reduce costs and optimize tax efficiency.

• Notable Quote:
  "We all spend all of our time talking about investments...the reality is the biggest way most of us can generate alpha is through fees and taxes."
  – Meb Faber [26:32]

Notable Quotes & Memorable Moments

• "The smartest person on Wall Street...is just that person who plunked all of their money in a cheap S&P 500 index fund and held it for a long time." – Jack Hough [18:36]
• "Some people will read this and be like, you know what my takeaway is: 60-40 is just fine. Other people will go along with Swensen and say, you know what? I think I should diversify globally." – Meb Faber [22:11]
• "We just did one in December. But it's a cool idea if you're stuck in Nvidia and App Loving and Microsoft, whatever you you have and you say man, I want to sell these but the IRS is going to kill me. You could contribute those and get a diversified portfolio like this endowment style ETF in return, which we think is pretty cool." – Meb Faber [28:26]

Timestamps for Important Segments

• [00:00] – 60:40 Portfolio debate introduction (Jomana Selehin, Vanguard)
• [03:00] – Big Food industry analysis, CAGNY conference recap
• [11:34] – Introduction of Meb Faber, setup of "Can We All Invest Like Yale?"
• [13:32] – Meb Faber explains the endowment and Yale models
• [16:04] – Comparative historical returns: S&P 500, Yale, average endowments
• [17:32] – Impact of US stock outperformance since 2009 ("Covid meme stock mania")
• [18:51] – Index funds v. endowments since 2010: S&P outperformance
• [21:17] – Volatility laundering in private equity
• [23:35] – The "golden age" of private equity, is it over?
• [26:32] – Practical advice: value, international diversification, tax-advantaged investing
• [28:10] – Cambria's innovation: ETF seeding for tax deferral

Conclusion: The Streetwise Takeaway

• The Ivy League advantage may be as much about timing and uniqueness in earlier decades as about persistent skill.
• For most investors, low-fee, diversified index investing—possibly tilting to value and global markets—is still the best path.
• Focus on cutting fees and optimizing for taxes; complicated strategies may no longer deliver an "edge."
• And sometimes, yes, you can "invest like Yale," but doing so rarely requires an Ivy League degree.

For further resources, insights, and the full Vanguard perspective, visit Vanguard.com