Are colleges the ideal investors?
Private colleges have a long-term time horizon. Or at least, they’re supposed to. The first school endowments were agricultural estates that paid rent. A College Bursar’s job was to manage these estates by approving new leases, renewing old ones, selling timber, and appointing stewards. Sixty years ago land comprised more than half of the typical endowment.
Real estate was attractive because it seemed so stable and provided steady income. Or so it seemed. The industrial revolution that reduced the need for farm-labor also made food a lot cheaper. Agricultural rents collapsed. Colleges shifted their endowments into stocks and bonds, which have provided solid—if apparently more volatile—returns.
In recent years many schools have shifted back to a less liquid approach that focusses on non-public holdings. Over the past 20 years Yale University has had some success with this approach, generating returns of 13.9% while a 60/40 mix of stocks and bonds yielded only 8.5% over the same period. Their success has encouraged many investors to copy the “Yale Model,” where public securities make up only 20% of their portfolio.
But it’s not for everyone. Private investments are notoriously illiquid, and can demand cash infusions at inopportune times. During the Financial Crisis, both Harvard and Dartmouth had cash demands that caused them to underperform for years afterwards. Because private managers self-report asset values, their performance can seem less volatile while their economic value actually fluctuates dramatically. As anyone who has ever tried to sell a house knows, just because you can put a price on something doesn’t mean you can sell it there.
There are good reasons to favor an active approach to investing. But there’s such a thing as being too active.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!