Tiny Wisconsin College Using Index Funds Trounces Endowment Rivals

(Bloomberg) -- A tiny Wisconsin college that invests in index funds is shaping up to be the one to beat among school endowments.

Carthage College’s $120 million endowment posted an investment return of about 11 percent in the 12 months through June 30, according to its recently retired chief investment officer, Bill Abt. That compares with a median 7.4 percent for endowments of all sizes, according to data published Tuesday by Wilshire Trust Universe Comparison Service, which tracks institutional investors.

The Wilshire figures provide an early indication of how schools’ investments did in the past fiscal year. Carthage is one of the first to individually report because it doesn’t invest in alternatives such as private equity, whose returns can take longer to calculate. Most college funds end their fiscal year in June and report results in the fall.

Performance by endowments is expected to be more modest than for the prior period because of outsized gains in U.S. equities previously. Typically, funds that have a higher concentration of alternative investments such as private equity have seen better results than those concentrated in stocks.

The Wilshire Trust Universe Comparison Service reports quarterly performance for about 1,300 plans with $3.6 trillion in assets. The returns are gross of fees while colleges usually report their numbers net of fees. Carthage’s return was 11.3 percent gross of fees and 11.2 percent net of fees -- or virtually the same because of the low cost of its all-index portfolio.

2017 vs. 2018

Karl Scheer, CIO of the University of Cincinnati’s endowment, said he expects a return of about 9 percent on the $1 billion his office manages.

“The last half of calendar year 2017 was awesome, and the first half of 2018 was basically flat on almost everything we owned,” he said.

Endowments with assets of $500 million or more performed better than the group as a whole with a 10 percent median return, according to Wilshire data. Larger funds usually outperform their smaller counterparts because they have more diverse portfolios, said Robert Waid, managing director at Wilshire Associates, in an interview.

Carthage’s small fund deviates from that generality. The school has invested mostly in index funds for the past 15 years, and its 10-year annual returns beat 90 percent of all endowments in fiscal 2017. Its 10-year return as of June 2018 is 8.3 percent. Wilshire’s numbers show 6.8 percent for all endowments and 6.2 percent for the larger funds in the same period, gross of fees.

In the most recent period, Carthage was buoyed by a 20 percent return in Vanguard’s international growth fund, 16.5 percent in its small-cap index and 15 percent in the total stock market index, said Abt, who was the school’s CIO for 18 years before retiring June 30.

His parting advice to the school’s finance committee, which will help oversee the endowment in the future, was to be aware of increasing market volatility in the next six to 18 months, he said in an interview.

“2017 was an extremely unusual year,’’ Abt said. “The standard deviation during the calendar year of 2017 was the lowest in over 40 years.”

To contact the reporter on this story: Janet Lorin in New York at jlorin@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Mary Romano, Josh Friedman

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