Investment Lessons from University Endowments
Recently a familiar theme cropped up in discussion following an article on Bloomberg – that of the potential lessons from investing like the big US university endowment plans. They excite interest due to the vast sums they manage and that they can access some of the best and brightest individuals in academia who are based literally on their door steps. The Yale Endowment Model has been widely publicised and described by the Yale Chief Investment Officer, David Swensen, in his book “Pioneering Portfolio Management”.
Bloomberg note that according to figures compiled by the National Association of College and University Business Officers (“NACUBO”), universities with the largest endowments generated an average return of 9.7% annually over the last 3 years through June 2017 – the longest period for which annual returns are available – slightly above the S&P 500 Index’s total return of 9.6%. Moreover, their adherents highlight the lower volatility of such programmes when compared with the stock market. However, that can be partly explained by the fact that many of the endowments investments are outside the equity markets and instead they often use hedge funds, venture capital, private equity and real estate as well as hard assets such as lumber etc. Such investments are often illiquid and beyond the reach of the average investor.
It is worth noting that not all endowments are equal in terms of performance. The largest US university endowment is Harvard which in recent years has struggled when compared with peers such as Yale. Whilst Dean Takahashi and David Swensen have been at the helm at Yale’s endowment for 30 years, Harvard have had multiple changes in leadership since 2005. This staff turnover in the endowment investment leadership team has been accompanied by changes in beliefs abouthow best to implement investment strategy such as whether to use internal or external investment management teams. Changes in investment strategy can cause disruption and exiting illiquid strategies when a chief investment officer has left unexpectedly can negatively impact investment performance.
Individuals can increase their chances of a successful investment outcome by selecting their optimal strategic asset allocation at the outset and then sticking with it long term with small tweaks, as Yale have done, rather than wholesale chopping and changing. Although individuals cannot access the same breadth of alternative strategies as an endowment such as private equity, venture capital and many hedge funds, they can still enlist the factors used by many of these managers such as value, momentum, size and quality. The Bloomberg article notes that the average investor could do this by investing in a 90/10 mix of the MSCI USA Diversified Multiple-Factor Index representing the aforementioned factors and the aggregate bond index. This blend is comparable to the asset allocation they cite for the average large endowment. According to Bloomberg it returned 8.5% annually over an 18-year period to June 2017 – nearly 0.7% better per year than the average large endowment return for the same period.
MASECO clients will recognise the four factors above as these are all represented within our own portfolios. In addition to the strategy suggested by Bloomberg we look to invest with wide geographical diversification to avoid any “home country bias” to either the US or the UK. We would also endorse David Swensen’s other main guidance to individual investors looking to sleep soundly. This is to invest using low cost funds and rebalance regularly. In his view if you heed this, “you’ll end up beating the overwhelming majority of participants in the financial markets.”
 Harvard has $36 billion and Yale $27 billion according to the National Association of College and University Business Officers (“NACUBO”) https://www.nacubo.org/-/media/Nacubo/Documents/EndowmentFiles/2017-Endowment-Market-Values.ashx?la=en&hash=E71088CDC05C76FCA30072DA109F91BBC10B0290
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