Do annual returns mean anything?
Photo: Jade. Source: Morgufile
College endowments have reported their annual returns for fiscal 2017, which ended on June 30th. In contrast to 2016, when schools struggled to break even, returns were quite strong. Grinnell College, in Iowa, had an 18.8% return – driven by a large allocation to public-market equities. Harvard, whose massive $37 billion endowment dwarfs most other schools, lagged the pack at 8.1%.
But do annual returns mean anything? Part of the reason we don’t find out until October how colleges performed through June is that most schools devote a large portion of their endowment funds to non-public investments: private equity, venture capital, real-estate, and other items. And a large proportion of their funds are invested around the world. What is the current market value of a 3-year-old web-based internet security firm based in Taipei? Who knows!
The schools typically don’t invest their funds directly, but hire managers who specialize in various strategies. The primary job of a university endowment office is to cultivate and nurture relationships with top managers. It’s not easy to get access to the top deals. Everyone is looking for the next Facebook or Uber: a startup that needs funds with the potential to change the world, and grow in value from a small startup to a multi-billion-dollar behemoth.
Among Ivy League schools, Yale and Columbia have been perennial leaders. Over the last ten years, Columbia had a 7.3% annual return, and Yale had a 6.6% return. For comparison, the US stock market returned 7.2%. But even more important is the level of risk. Stocks had a volatility of 16% while Yale and Columbia were more like 12.5%. Their endowments should more reasonably be compared with a mix of stocks and bonds, which is less risky.
How did Dartmouth do? They’re in the middle of the pack. Not among the elite, but not in the cellar, either. Their 14.6% returns last year were the best in the Ivy League, but one year doesn’t make or break an endowment office. A string of bad years will, however, which is why Harvard is now on its fifth Chief Investment Officer in the last 15 years. And a picture of returns over the last 15 years is telling. There’s a reason why endowment offices prefer the current private-market focus. Public markets are liquid and transparent, but schools don’t need immediate access to all their money all the time.
This is why Yale’s David Swenson is lauded for his approach. He’s been running Yale’s investment office for over 30 years. People who have worked for him are now managing the best performing investment portfolios around the country. Swenson understands that portfolio management – especially for his 316-year-old institution – is a long game.
That’s why I don’t get too worked up over the annual return horse race. Yes, it’s nice to be in front, but sustained long-term risk-adjusted performance should be the real objective. When you’re trying to attain that, short-term returns are sometimes just a distraction.
Douglas R. Tengdin, CFA