They were the best of returns, they were the worst of returns.
Last Saturday Dartmouth and Harvard fought it out on the gridiron. To the regret of all right-thinking people everywhere, the wrong team won. But for the past ten years a different competition has been playing out. And at stake is the equivalent of a small country’s GDP.
David Swenson has been managing Yale’s endowment for almost two decades. Taking advantage of the endowment’s size, long term time-horizon, and the school’s other assets, he shifted the school’s investments from mostly publicly traded securities to a mix of private equity, hedge funds, and real estate, with small portion remaining in liquid investments. Harvard’s Jack Meyer did much the same thing, although he kept some of the asset management in-house, while Swenson hired a team of outside managers.
Ten years ago, Meyer ran afoul of some Ivy League sensibilities when his $7 million salary was disclosed. He stepped down, and Jane Mendillo agreed to run Harvard’s $30 billion endowment for about half his pay. About the same time, David Russ arrived at Dartmouth and began moving its portfolio away from its public, domestic-oriented focus—although Dartmouth’s endowment is a lot smaller.
Over the past ten years, Swenson’s team of managers have performed admirably, earning a compound annual return of 11%–a full 4% higher than a 60/40 blend of stocks and bonds. Dartmouth and Harvard have struggled, earning around 9%–still more than the index, but less than they might wish.
Source: University Endowment Offices
Since the endowments are so large, the stakes are huge. The combined excess return from the three schools is over $10 billion.
But it’s not just the destination that matters. Getting there is half the fun—or not. Harvard and Dartmouth both stumbled along the way, running into liquidity problems. Part of the problem with private equity and hedge funds is they can call on their investors for additional capital at inconvenient times. Harvard had to sell some funds at the worst possible time. Dartmouth had other issues. During the Financial Crisis, Harvard’s endowment fell dramatically, and both Dartmouth and Harvard have lagged. In their 5-year returns, Dartmouth and Harvard are 0.5% and 1.9% below the index, respectively. Yale has matched the index.
Returns have consequences. In 2009 David Russ left the Dartmouth Investment Office; Harvard’s Mendillo hung on until this past Fall. Pamela Peedin took the reins at Dartmouth in 2011, and her three-year returns are looking significantly better than her predecessor’s.
Harvard and Yale have a combined endowment of $60 billion. They dwarf Dartmouth’s $4 billion. The Yale Endowment Model isn’t for everyone. It requires a lot of capital to be committed for a long time to some highly illiquid strategies. Yale has been able to select and retain talented managers, and has avoided some of the fads (BRICs, Tech, Smart Beta). Beating the index is a good idea, but avoiding beating yourself up in the process is even better.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!