A Lesson from the Ivy Leaguers

October 13, 2016

Hitting the press recently has been a stream of investment returns getting published by the big university endowments.  Why does this matter, you ask?  With hundreds of billions allocated especially to those funds of the Ivy League schools, a lot of attention is paid to how this “smart money” invests.  Returns give an insight to that.  And this smart money has been doing a lot of thinking, especially since the financial crisis of 2008, to find ways to enhance returns, limit risk, and get to the best possible place for their dollars.

But the results continue to be questionable.  In fact, in the most recent year average, endowments posted their worst returns since 2009, a period that included the financial crisis (endowments typically use June 30th as the end of their performance periods).  Much of the way these endowments have gone about “fixing” their portfolios from 2008 has been through a growing use of alternatives which has steadily been increasing.  A study from Vanguard about endowments shows large endowments have increased their exposure to alternatives from 28% in 2002 up to 60% more recently.

How have they done?  You can see for yourself.  Below is a chart showing many of the top Ivy League endowments and how their return stacked up.

Now the message here is not to pick on alternatives or debate their merits.  No, the point here is that this has been a tough investment climate all around.  Sure, large US stocks were up 4.0% (S&P 500) and bonds (Barclays Aggregate) were up 6.0%, but all other portions of the market struggled.  Small US stocks lost -6.7% (Russell 2000) and foreign stocks fell -10.2% (MSCI EAFE).  Put all this together and the basic balanced portfolio* referred to in the chart had a go nowhere year.  That doesn’t feel good, but it’s all relative.  While it is certainly important how you feel when these types of markets inevitably present themselves, it is far more important what you do about it.  The endowments keep trying to “fix” things: change managers, have more alternatives, lock up in long-term investments, bring more investment talent in-house, and the list goes on.  A lot of the “fixing” ends up looking like chasing performance, something we’ve seen time and again not work.

Instead, the approach needs to be that of discipline.  Sometimes the best investment decision is the one you don’t make at all.  It doesn’t mean you don’t think and evaluate what’s going on.  But if your philosophy is anchored upon a meaningful strategy, the only way to realize the fruits of the strategy is to weather the ups and downs that come with it.  And all along the way it certainly makes sense to keep your eye on how others, like the best and brightest of the endowment world, are doing relative to you.  By that measure, things look pretty darn good.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  The Barclays Capital U.S. Aggregate Index (Agg) represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.  The Russell 2000 Index® (R2000) measures the performance of the 2,000 smallest companies in the Russell 3000 Index.  The MSCI® EAFE (Europe, Australia, Far East) Net Index USD is the pre-eminent benchmark in the US to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America measured in U.S. dollars.

Data for the chart above gathered from university press releases and the Wall Street Journal.

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