Getty ImagesIn a report published Tuesday, research firm Markov Processes International, or MPI, said asset allocation remained the most important factor in endowment performance, as returns at Ivy League endowments dropped off over the past year.
Yale’s endowment, formally known as the Yale Investments Office and which is ran by chief investment officer David Swensen, returned 3.4% over the year ended June 30. While that is well below its 10-year average return of about 8%, it handily beat other endowments. Princeton University is the only other Ivy League endowment that posted a positive return, earning 0.8% over the year ended June 30.
Yale’s endowment had a large allocation to private investments, with only 11% allocated to public investments, according to MPI, which used its own method to calculate the university’s exposure to various asset classes.
Within those private investments, it had greater exposure to private equity and real estate than to hedge funds and venture capital. In the public markets, it overweighted U.S. equity and bonds relative to commodities and emerging market equities.
University endowments sit in a unique position—their horizons aren’t just long-term, they are perpetual; they are exempt from taxes; they enjoy a steady stream of contributions from donors; and they are big enough to afford investments in some asset classes that aren’t available to average investors.
But even with all of those advantages, an endowment can stumble at times, like Harvard did. The problem isn’t that it isn’t run by smart people, it is the career risk that pushes managers to making unsound decisions, according to Ben Carlson, director of institutional asset management at Ritholtz Wealth Management.
For Yale’s part, the endowment also received positive returns from investing with outside managers, often referred to as alpha from manager selection. Alpha is the risk-adjusted excess return of a portfolio relative to its benchmark.
Harvard suffered from heavy exposure to troubled assets like commodities, emerging markets and poorly performing hedge funds, the MPI study shows. Harvard Management Company, as the endowment is known, doesn’t rely on outside managers. Unlike Yale, the endowment is known for managing 40% of its capital in house.
Harvard’s endowment lost $1.9 billion in fiscal 2016, a decline of 2% bringing the value of the fund to $35.7 billion.
Neither the Yale nor the Harvard endowment responded to requests for comment.
Harvard wasn’t alone in showing a loss. Many other Ivy endowments saw negative returns in fiscal 2016.
Outside the Ivy League, college and university endowments tracked by Cambridge Associates posted net returns of negative 2.7% for the year ended June 30. The S&P 500 SPX, +0.04% gained 3.25% during the same period, according to FactSet.
Carlson and others attribute Harvard’s poor performance to constant leadership change.
The Harvard Management board last month named N.P. Narvekar as its fourth chief executive in the past 10 years, following the end of the 18-month tenure of Stephen Blyth in July.
“Every time there is a new chief, he or she tries to change the strategy, but it is difficult to turn around a portfolio as big as Harvard’s, it takes years,” Carlson said.
For average investors, the big takeaway is to have a plan and stick with it, that asset allocation and the right managers can still play a big factor in performance.
“Yale’s strategy is very difficult to emulate, you would have to pick the right allocation, the right assets and the right managers at the right time,” Carlson said.