A new study from Georgetown University and NYU’s Stern School of Business looks at major endowments’ portfolios between 2009 and 2016, and the news is not good. Using publicly available IRS filings, the study found that the median annual returns were 5.53 percentage points below a classic 60/40 mix of equity/Treasury bond investments. Coming in at only 3.75%, the median return was even 1.14% below the 10-year Treasury bond return.
“’In other words,’” say economists Sandeep Dahiya and David Yermack, “”the typical endowment fund would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100 percent Treasury bonds and taken no equity risk whatsoever.’”1 There were some outliers who outperformed, such as Yale University, but the overall result for higher education institutions was distressing, showing a negative alpha of 1.01% per year – and, as researchers point out, this was during one of the longest bull markets in history.
Elite colleges may be faring slightly better, but have still been underperforming the classic 60/40 mix. An additional study from research and analytics provider Markov Processes International looked specifically at Ivy League endowments from 2008 to 2018, and found similar disappointing news. This study found that Ivy League schools also lagged a 60/40 equity/bond portfolio over this time period, and with greater volatility (though they did perform somewhat better over a 15-year period). Whereas the hypothetical 60/40 portfolio returned 8.1% during the time period, Harvard’s portfolio returned 4.5%, Cornell returned 4.8%, and Brown returned 5.9%. On the positive side, Ivy League endowments had a good fiscal year in 2018: “Every endowment, except Columbia University, had double-digit returns, and all outperformed the 60-40 portfolio. According to MPI’s returns-based analysis, private equity and venture capital investments were the primary drivers behind most endowments’ gains.” 2
Poor investment returns can affect endowments in a variety of unfortunate ways. In addition to making it more difficult to meet spending targets, donors may be less likely to contribute to underperforming endowments, negatively impacting fundraising and compounding the problem.
What can higher education institutions do to improve long-term endowment performance? Read Arnerich Massena’s white paper, Keeping College Affordable: How to fund public university obligations in a low-return environment (or listen to the podcast here) for some suggestions that may help. Though directed at public institutions, the investment tips apply to all higher education institutions. Or, contact us to learn how we can help build a long-term, thoughtful, disciplined strategy to help you meet your mission.