Endowment datapoint of the day

By Felix Salmon
June 30, 2009
underperforming when it goes down.

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Big university endowments like to think that their returns constitute alpha — a simple outperformance of the market. But it looks increasingly as though in fact there’s a large component of beta — outperforming when the market goes up and underperforming when it goes down.

The five largest single-school endowments, which in addition to Harvard and Yale, are Stanford University, Princeton University and the Massachusetts Institute of Technology, have said they are planning for declines of 25% to 30% for the fiscal year.

By contrast, the median decline for an endowment or foundation for the first 11 months of the fiscal year was 20%, according to Northern Trust Corp. Foundations and endowments with less than $100 million in assets did even better, down 16% for the period.

If the big endowments came out explicitly and said “we have more money, and therefore the wherewithal to take more risk, while smaller endowments must perforce care more about capital preservation”, that would be one thing. But they generally don’t — in good years, they present their high returns, improbably enough, as carrying relatively small amounts of risk.

The critics of Yale’s David Swensen, in particular, are now finally being heard:

John Michaelson, who heads Cooper’s investment committee, said other schools could benefit from taking a lower-risk investing approach. He is especially critical of what has been known as the “Yale model.”…

Mr. Michaelson of New York private-equity firm Imperium Partners says Yale’s approach, widely emulated in recent years, places too little emphasis on colleges’ annual cash needs and is “deeply flawed.”

Michaelson can talk, here: the $600 million Cooper endowment looks as though it won’t have fallen at all in the year to June 30, and might even have risen a little. And he even locked in property-bubble gains, by renegotiating the lease on the land under the Chrysler building in 2006, and selling a six-story academic building in 2007 for $97 million.

What’s more, the endowment isn’t simply managing to preserve capital: the endowment has risen in value sixfold since late 2001, when it was valued at just $100 million. And one look at its spectacular new Thom Mayne building proves that it’s hardly been hoarding cash over that time. Would that Brandeis had been able to manage its endowment so well.

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3 comments so far

I think the appropriate analysis is whether the large endowments’ returns over the last few years is greater than the amount lost in the downturn. To take one downturn and extrapolate it to cover the entire strategy is short-sighted. I’d be curious to see an analysis of those universities’ absolute dollar return outperformance over last 10 years. My hunch tells me they’ve made way more money over time than they lost in the breakdown.

I thought, at first, that you’d decided to review the tv series “Hung”. I’m happy to find out that I was wrong.

Remember that endowment managers were paid based on valuations of what turned out to be even more illiquid assets than believed. The incentives were aligned to take a lot of risk and to devalue risks to the continuing current operation and capital improvement funding needs.

When the latest Yale kid called asking for money, I told him I was giving it to a local food bank. He tried to engage me about Yale’s needs and I suggested he ask David Swenson for the cash. The food bank needs the money. Yale only needs the money because they got in too deep.

Posted by jonathan | Report as abusive
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