Ivy League Endowment Strategy Loses Luster in Disappointing Year

(Bloomberg) -- The Ivy League is looking less elite these days, at least when it comes to investing returns.

Endowments at the richest schools have been shaving bets on U.S. stocks during the decade-long bull run while favoring international equities and alternative assets. That strategy dragged down results in fiscal 2019.

Yale University’s $30.3 billion fund returned 5.7%, about half of the S&P 500’s gain. Princeton University came in at 6.2%, less than half of last year’s performance.

Led by the Ivy League and other elite institutions, colleges have been shifting away from the easier returns of U.S. stocks and bonds for more than a decade. They have been lured by the superior returns promised by foreign equities and more esoteric assets like private equity, hedge funds and real estate. This year, Yale had only 3% of its fund targeted directly to U.S. equities and about three-quarters devoted to a range of alternative and less liquid assets.

“The Ivies think they’ve got it all figured out,” said Thomas Gilbert, an associate professor at the University of Washington who studies optimal portfolio allocation. “There was this ever-growing belief that high returns are not in stocks and bonds anymore, so everyone piled on elsewhere.”

Brown University was the one Ivy school that had a standout year. Its $4.2 billion fund topped the group with a 12.4% return.

Yale’s Endowment Allocations

Asset Class200020102020
Domestic Equity14.2%7%2.75%
Foreign Equity99.913.8
Absolute Return19.52123
Private Equity*2530.338
Real Assets**14.927.515.5

Source: Yale. 2020 are targets; *includes
venture capital; **includes real estate,
natural resources

Ivy Imitators

Yale crushed its peers in the decade before the 2008 credit crisis, fueled by venture capital and hedge fund gains. The school produced an annual average return of 16.3% compared with 6.5% for the average endowment, according to the National Association of College and University Business Officers, or NACUBO. The S&P 500 gained an average of about 2.8% in the period.

Yale’s handsome returns inspired a bevy of imitators. By 2018, big endowments on average had 58% of their portfolios in alternative assets -- almost doubling since 2002 -- and 13% in U.S. stocks, according to NACUBO.

“You don’t want to lose, so you do things the rest of the industry does and try to tweak it on the margin,” said Greg Williamson, the former chief investment officer of the American Red Cross and now head of strategy at money manager Pluribus Labs.

Buyout and venture capital funds have been among the better-performers for endowments in the last decade. Hedge funds have been disappointing, producing an average annual return of about 5.1% since 2009. This year, international equities provided the pain for endowments that had piled in.

Misplayed Market

“The international markets were less kind to us,” Andrew Golden, president of Princeton’s investment company, said in an interview.

Some schools like Carthage College in Wisconsin didn’t join the alternatives parade. These small endowments either don’t have access to prominent money managers or don’t want to pay the high fees. Carthage’s $123 million endowment mostly used index funds to create a diversified portfolio and produced returns superior to almost all of the Ivies over the last decade.

“They totally misplayed the market,” Bill Abt, Carthage’s endowment chief until last year, said of the larger endowments. “They’re underperforming and their expenses are extra high with alternative investments.”

After Yale owned what seemed like an insurmountable lead over other schools, that performance gap has narrowed. Over the past 10 years, the New Haven, Connecticut-based university has posted 11.1% annualized gains compared with 9% gross of fees for the typical endowment, according to Wilshire Trust Universe Comparison Service.

Yale’s CIO David Swensen didn’t return a request for comment.

Yale isn’t ready to rip up its playbook. The university pared its target for domestic equities to 2.75% for 2020. It’s also upping its bets on leveraged buyouts and venture capital while trimming hedge funds.

Princeton’s Golden, who used to work at Yale for Swensen, says this year’s slide in performance doesn’t hold much meaning about future success. The elite school plans to keep what it considers its long-term winning strategy.

“We don’t buy into the idea that the U.S. stock market is the best benchmark or even the best context for what we do,” Golden said. “That will prove to be wise when the stock market stops going from low valuations to extremely high valuations.”

©2019 Bloomberg L.P.

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