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Are colleges the ideal investors?

Source: Dartmouth.edu

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
Phone: 603-224-1350
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By | 2017-07-17T12:23:16+00:00 October 22nd, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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