Outperform E-Book

John Baschab

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 486

Veröffentlichungsjahr: 2010

Beschreibung

"University endowment managers have generally outperformed the market benchmarks. However, their knowledge has not been well documented in any book. This book fills that gap and should be of significant help to all those who want to learn from extensive interviews with a number of endowment managers."--PREM JAIN, McDonough Professor of Accounting and Finance, Georgetown University Learn how higher education's largest endowments consistently achieve higher investment returns than the overall market. The Chief Investment Officers who oversee the top academic endowment funds manage over $400 billion in total assets. Over the last ten years (1999-2009), large endowments returned an average of 6.1%, compared to the S&P 500 index average of -2.22%, an outperformance difference of over 8%. With the recent sharp economic downturn, and a decade of inflation-adjusted flat returns in the overall equities market, institutional and individual investors alike are looking to endowments for proven strategies for improving the performance of their portfolios. Outperform: Inside the Investment Strategy of Billion Dollar Endowments interviews top CIOs from leading endowments, to detail how they consistently outperform the market, what they predict for the coming years, and how small investors can employ their investment philosophies.

Leseprobe

Table of Contents

Title Page

Copyright Page

Preface

Acknowledgments

Part I - ACADEMIC ENDOWMENTS

Chapter 1 - Academic Endowments Overview

The World of Endowments

History of Endowments

Academic Endowments in the Context of the Investment World

Large Academic Endowments

Implications for Individual Investors

Summary

Notes

Chapter 2 - Historical Endowment Performance

Investment Returns

Asset Allocation

Summary

Notes

Chapter 3 - A Look Inside Endowments

Endowments Are Different

Endowments Define Asset Classes Broadly

Endowments Achieved a One-time Sophistication Improvement

Endowments Are Nimble

Endowments are Evaluating Approaches to Managing Tail Risk

Endowments also Manage Working Capital

Endowments Manage Liquidity Carefully

Endowments are Changing their Approach to Performance Measurement

Summary

Part II - PUBLIC UNIVERSITIES

Chapter 4 - Jonathan Hook Chief Investment Officer

The Ohio State University and the Endowment

Chapter 5 - Guy Patton President and Chief Executive Officer

University of Oklahoma and the University of Oklahoma Foundation

Chapter 6 - Bruce Zimmerman Chief Investment Officer

The University of Texas System and UTIMCO

Part III - PRIVATE UNIVERSITIES

Chapter 7 - James H.C. Walsh Chief Investment Officer

Cornell University and the Endowment

Note

Chapter 8 - Sally J. Staley Chief Investment Officer Anjum Hussain Director ...

Case Western Reserve University and the Case Western Reserve University Endowment

Chapter 9 - Mary Cahill Vice President of Investments and Chief Investment Officer

Emory University and the Emory University Endowment

Chapter 10 - Don Lindsey Chief Investment Officer

George Washington University

Chapter 11 - Scott W. Wise President

Rice University and the Rice Management Company

Chapter 12 - James ( Jim) Hille Chief Investment Officer

Texas Christian University and the Texas Christian University Endowment

Chapter 13 - Jeremy Crigler Chief Investment Officer

Tulane University and the Tulane Educational Fund

Part IV - ADVISORS AND MANAGERS

Chapter 14 - Sandy Urie President and Chief Executive Officer Celia Dallas ...

Cambridge Associates

Chapter 15 - Lyn Hutton Chief Investment Officer

Commonfund

Chapter 16 - Thruston Morton Chief Executive Officer and Chief Investment Officer

Global Endowment Management (GEM)

Chapter 17 - Mark W. Yusko Chief Executive Officer and Chief Investment Officer

Morgan Creek Capital Management

Chapter 18 - Rafe de la Gueronniere Principal

New Providence Asset Management

Disclosures

Chapter 19 - Bob Boldt Chief Executive Officer

Boldt Ventures

Conclusion

Glossary

About the Authors

Index

Copyright © 2010 by John Baschab and Jon Piot. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Baschab, John, 1968-

Outperform : inside the investment strategy of billion dollar endowments /

John Baschab and Jon Piot. p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-44213-5 (cloth); ISBN 978-0-470-64882-7 (ebk); ISBN 978-0-470-64883-4 (ebk); ISBN 978-0-470-64884-1 (ebk).

1. Endowments-United States-Finance. 2. Investments-United States. 3. Institutional investments-United States. I. Piot, Jon, 1966- II. Title.

HV91.B28 2010

332.67′ 253-dc22

2010006831

Preface

The idea for this book came to us in late 2007. After spending several years researching the money management business, we were intrigued by the continual stellar performance of university endowments as it pertained to their investment returns. While these endowments would report double-digit returns year in and year out, the individual investors we knew were hardly earning middle single digits. Take out fees and taxes and the individual investor was lucky to earn a couple of points.

We had just sold our second company and were searching for a home for the proceeds. We interviewed personal wealth advisors, but after a while, all the presentations started to sound the same. There was not much differentiating investment management between providers.

What we figured out is that the average retail and so-called high-net-worth or private wealth management professionals are often simply “asset gatherers” for investment banks. The management approach is frequently simplistic: after you sign on they help you determine a risk profile that fits you, and build an asset allocation model. Unfortunately, in this arrangement, oftentimes at best, you’ll begin to earn market returns less fees or at worst, you sign up with a dishonest manager and lose your life savings (a la Bernie Madoff ).

We could have taken another route, that of the highly active self-managed account of the individual investor. This is typically the individual who avidly watches the business news channels hoping to spot the next Google or Apple early on. This person has a standard 60 percent /40 percent equity bond portfolio. In the equity portfolio, they’ve selected 20 diverse stocks and try to keep up with those 20. Some of these investors do great while others fail miserably.

We found the endowment model intriguing. In June 2007, Harvard reported their endowment returned 23 percent that year. Yale returned 28 percent while minimizing risk. We wondered how are these endowments earning such exceptional returns? The more we read, the more interested we became, and we decided to figure out the puzzle once and for all. What is there to be learned from endowment investing? How can the individual learn from endowments and achieve superior returns?

We have written three previous books, and we felt the best way to understand the topic was to research it and document our findings, and in early 2008, we established the concept for the book.

In mid-2008 we had interviewed several chief investment officers from endowments and foundations. We were convinced that key learnings from the endowment investment model existed for individuals, and we were on track to publish the book in late 2008 or early 2009. The fiscal year end for most endowments is June 30, and the results for the period ended June 30, 2008, for most of the top endowments were respectable: Harvard 8.6 percent, Yale 4.5 percent, Stanford 6.2 percent. During the same period, the S&P had a negative double digit return (not including dividends). However, things changed rapidly beginning in the second quarter of 2008. In March 2008, the Federal Reserve Bank of New York provided an emergency loan to Bear Stearns to avert the collapse of the bank. On Monday, March 17, 2008, the New York Times reported that JPMorgan had offered to purchase Bear for just $2 per share (“Could Bear Stearns Do Better,” New York Times, March 17, 2008). The company had traded for $30 per share on Friday and was off its 52-week high of $133. This shocking sequence of events was the prelude to one of the worst bear markets in U.S. history. On September 15, 2008, Lehman Brothers filed for bankruptcy, and by the time we reached our anticipated publication date, the United States and the world were in a full-scale economic disaster. We knew that our work would not be complete without the results of endowment performance during the 2008-2009 fiscal year.

The seriousness of the situation caused many college presidents to publish emergency letters to the community. On November 10, 2008, President Drew Faust sent a letter to the Harvard University faculty, students, staff and alumni detailing the significance of the recent events. The letter by President Faust detailed the implications of the global economic crisis for the University.

He wrote, “We all know of the extraordinary turbulence still roiling the world’s financial markets and the broader economy. The downturn is widely seen as the most serious in decades, and each day’s headlines remind us that heightened volatility and persisting uncertainty have become our new economic reality.”

President Faust explained how the university had weathered numerous other difficult times over centuries and that this event was similar but would take extraordinary efforts to adapt to change and manage resources.

Faust stated that revenue would be affected and the need to plan was important in order to preserve priorities such as teaching, research, and service. The effect would be felt in the income received from the endowment, from donors and foundations who are less able to give, and from federal grants from “stressed federal budgets.”

He wrote, “Consider, first, the endowment. As a result of strong returns and the generosity of our alumni and friends, endowment income has come to fund more than a third of the University’s annual operating budget. Our investments have often outperformed familiar market indexes, thanks to skillful management and broad diversification across asset classes. But given the breadth and the depth of the present downturn, even well-diversified portfolios are experiencing major losses. Moody’s, a leading financial research and ratings service, recently projected a 30 percent decline in the value of college and university endowments in the current fiscal year. While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint.”

He went on to assure the community that Harvard would press on with important programs such as financial aid, scholarships, research and other critical programs that allow the university to attract and educate the best and brightest people in the world during this difficult time. The economic crisis was far from over and multi-hundred point swings in the Dow Jones Industrial Average were shocking but nevertheless still occurring.

On June 30, 2009, endowments reported dismal numbers. For many it was the worst drawdown in modern times. Returns of negative 30 percent were seen.

However, a broader view of endowment performance showed that the model still produces superior returns over long periods. The endowment model still handily beats the S&P index for the 10-year period ending June 2009.

We believe there is tremendous value for individual investors to understand how endowments manage their money. This book is important for several reasons. First, we have directly interviewed a significant number of the top investment professionals in the endowment business. Second, concepts that you will read can be put to use in developing your own investment philosophy. Third, the trends identified by the CIOs we have interviewed will certainly be important for years to come.

We are excited to share these insights and to provide an updated, first-hand look at the architecture of an exceptional investment approach. As always, we invite and welcome your feedback. We can be reached at:

JOHN BASCHAB [email protected] JON PIOT [email protected]

Acknowledgments

This project began as a quest to improve our own understand-t ing of superior investment management and to understand the workings of a great investment model. It is the result of countless contributions by mentors, colleagues, friends, family, and teachers. We thank all of them for helping us along the way.

We would like to thank Pamela Van Giessen, Emilie Herman, Melissa Lopez, and the team at John Wiley & Sons for their invaluable assistance and advice as we completed this work. Thanks also to Rafe Sagalyn and his team at the Sagalyn Literary Agency.

We would also like to acknowledge the interviewees and contributors for their invaluable time and effort. This includes Bob Boldt, Mary Cahill, Jeremy Crigler, Celia Dallas, Rafe de la Gueronniere, James Hille, Jonathan Hook, Anjum Hussain, Lyn Hutton, Don Lindsey, Thruston Morton, Guy Patton, Sally Staley, Sandy Urie, James H. C. Walsh, Scott Wise, Mark W. Yusko, and Bruce Zimmerman.

Several people were instrumental in assisting us with contacts in the industry. Kim Davis, Tom Gale, Bob Rowling, Mike Smith, and Elizabeth Williams were especially helpful here.

Thanks to the team at NACUBO and the Commonfund for providing such valuable annual research to the endowment business, and for permission to utilize their research in this book.

Last, and most important, we thank our families, Mary, Emily, and Will Baschab; and Susan, Lauren, Allison, and Will Piot, and close friend John Martin. Without their patience, support, and sacrifices of time, this book would not be possible.

Part I

ACADEMIC ENDOWMENTS

Chapter 1

Academic Endowments Overview

“Investment in knowledge pays the best interest.”

—Benjamin Franklin

Each year over 800 of the United States’ best-known academic institutions take part in the National Association of College and University Business Officers (NACUBO)-Commonfund study of endowments. The much anticipated survey ranks the university investment pools on performance and assets for the prior fiscal year. The most powerful and influential universities are perennial entrants in the top 10 percent of the list, with the cutoff being nearly a billion dollars under management. The size and performance of a university’s investments has a tremendous impact on its ability to carry out a mission of teaching, research and service. It is no surprise that the NACUBO-Commonfund study commands the attention of a wide variety of constituencies, from professional money managers to university administrators.

Until 2009, the investment performance of academic endowments has been exceptional, and positive. In 2007, academic endowments returned on average 17.2 percent, compared to a considerably more modest 8.88 percent Dow and 5.49 percent S&P 500 index return that year. 2007 was no exception—in the last 15 years, large endowments have outperformed the broad market indexes eleven times. This extended long-term performance is a remarkable testament to the effectiveness of the endowment investment model and to the professionals managing the investment pools.

More recently, the credit crisis and market dislocation of 2008-2009 tested the very foundations of the endowment investment model. Did the model hold up? What are these investment managers doing today based on what they learned? These are important questions and are particularly relevant to individual investors. The S&P 500 index, which is a reasonable proxy for the returns a typical small investor might expect, returned negative 2.2 percent annualized over the 10-year period ending June 2009. During that same period, endowments returned 6.6 percent annualized. To avoid a repeat of this “lost decade,” individual investors can look to the endowment model to better understand how endowments so consistently outperform and to inform their own decisions.

The World of Endowments

Academic endowments are a long-term, carefully managed pool of funds used to support the operating budget and long-term goals of the institution. The endowments in the 2009 NACUBO-Commonfund study represent over $306 billion in combined assets. The smallest endowments are under $25 million in assets while the largest have over $1 billion in endowment assets. Even after the losses of the 2009 fiscal year, over 50 academic endowments had over $1 billion under management. Endowment management complexity ranges from part-time investment committee oversight to sophisticated offices with dozens of investment professionals and activities rivaling the largest hedge funds. Large endowments will employ a Chief Investment Officer (CIO) to oversee the investment decisions and operations of the endowment.

Endowments have enjoyed a remarkably durable and consistent track record of performance over the past 20 years. Even with the global economic crisis of 2008-2009, the large endowment returns still surpassed almost any measuring stick or competitive benchmark. There is much to learn from studying endowment fund management for the individual investor, and in this book we have documented how endowment CIOs are thinking about investing in the coming years.

At over $26 billion, the Harvard endowment takes top ranking for endowment size. It was hard to foresee that the establishment of the fund in 1669 would grow over the next 340 years to a peak of $36.9 billion in 2008. Harvard represents one of the most powerful elements of endowment returns—a perpetual time horizon for investing. Sixty pounds, the initial amount in the Harvard endowments and a considerable sum of money at that time, compounded at 6 percent over a 340-year period would yield $36 billion today, not accounting for withdrawals or additional contributions. Endowments are the ultimate long-term investor, created to last in perpetuity, and to provide a steady income to the institutions. While only spending a portion of the earnings they generate, they compound their principal to keep up with inflation and preserve purchasing power.

For almost 300 years of U.S. endowment investing, since the inception of the Harvard endowment and until the early 1970s, endowment investment management followed a fairly staid approach—employing a standard investment mix of bonds and stocks. In the 1970s endowment investment philosophy began to change, primarily based on a new set of standards reflected in the Uniform Management of Institutional Funds Act (UMIFA). These changes provided dramatically increased flexibility in portfolio management, risk evaluation, spending policy and use of outside managers. The implementation of UMIFA provided the avenue for endowments to begin transformating into the sophisticated investment engines they are today. To support their institution, most endowments employ complex techniques to achieve a relatively simple set of objectives, which can be broken down into three pieces:

1. Maintain the corpus in perpetuity—preserve the principal over time. This is the primary objective.

2. Grow the corpus at or faster than the inflation rate—this is to maintain the “real” value of the corpus so that it can be invested the following year with the same purchasing power.

3. Distribute excess earnings (over the inflation rate) to the institution in support of its objectives; this is often in support of the operating budget or can be specific projects undertaken by the institution.

Although endowments are intended as perpetual entities, their mandate to provide annual income for the institution requires careful planning to ensure an appropriate level of liquidity on an annual basis.

History of Endowments

Endowments at U.S. institutions have early roots. In 1649, Harvard received its first gift from alumni by members of the Harvard Class of 1642 (John Bulkeley and George Downing, the college’s first teaching fellows) and the Class of 1646 (Samuel Winthrop and John Alcock). According to the Harvard Guide, this initial gift was real estate, “a once upon a time cowyard.” The gift was granted the name Fellows’ Orchard after alumni planted apple trees on it. “Widener Library now occupies part of the site,” according to the Guide.1

In 1669, 10 merchants from Portsmouth, New Hampshire, pledged £60 per year for seven years to Harvard. Harvard endowment lore also holds that the lumber merchants sometimes paid the school in lumber, which the treasurer sold to convert to cash.2

Harvard has managed its endowment well. It has maintained the value of its fund in real terms while providing a strong support for the university operating budget. In addition, the university is one of the top fund-raising schools in the world and receives new gifts which increase the size of the endowment so that income keeps up with the growth in university expenses that exceed inflation.3 In the fiscal year ended 2008, Harvard ranked second behind Stanford in raising funds from private donors with $690 million raised.4

Endowments are important to schools for many reasons. Primarily, they provide a stable mechanism for predictable long-term annual income to support the projects and goals of the institution, such as instruction, research, new facilities, technology and capital improvements. This predictability allows the institution to engage in planning over extended timelines. A well-managed endowment is a critical component of an effective and successful educational institution.

While endowments may appear to be an undifferentiated pool of money, this is not the case. A typical endowment consists of dozens or even hundreds of multiple funds that that may be managed as one or more pools of assets. The source of funds is usually private donors who gift restricted and unrestricted funds. Restrictions may influence spending and investment policy and hinder the investment officer’s ability to maximize returns across asset pools.5

Academic Endowments in the Context of the Investment World

Endowments are just one type of investment vehicle, and it is useful to place them in context of other institutional investments as well as the broader markets. Academic endowments are surprisingly small relative to other investment pools in terms of assets. The net asset value of sovereign wealth funds is almost eight times larger than the net asset value of all U.S. college endowments combined. (See Table 1.1.)

While endowments are comparatively small, their exceptional performance over the past two decades warrants outsized attention to their techniques and philosophies.

Large Academic Endowments

This book is focused on endowments and investment managers with over $1 billion in assets. The focus is intentional. Not only have endowments in aggregate performed well, but the largest endowments have traditionally outperformed their smaller peers. When evaluating the performance data, an interesting fact appears: The larger the endowment, generally speaking, the better the return. The two largest endowments, those of Harvard University and Yale University, have significantly outperformed the average endowment. Following is a sampling of the largest endowments in the United States and their assets under management.6

Table 1.1 Investment Entities by Total Assets Managed (Q3, 2007)

SOURCES: 2007 NACUBO Study (Endowments); International Financial Services London, Private Equity 2008, August 2008 (Private Equity); Investment Company Institute, 2009 Investment Company Factbook, Section 7, Worldwide Mutual Fund Totals (Mutual Funds); World Federation of Exchanges, Statistics, 2007 Equities Market Capitalization (Equities); The Economist, January 27, 2008 (Pension Funds); Alternative Investment Management Association’s Roadmap to Hedge Funds, November 2008, Alexander Ineichen (Hedge funds); Sovereign Wealth Funds, Bryan Balin, March 27, 2008 (Sovereign wealth funds)

Investment Entity TypeNet Asset Value (Billions)U.S. College Endowments$411Private Foundations$485Private Equity$686Hedge Funds$2,680Sovereign Wealth Funds$3,200Pension Funds$20,000Mutual Funds$26,000Total U.S. Equities Market$60,874

Top 12 Largest Endowments (Net Asset Value—Fiscal YE 2009)

1. Harvard University ($25.7B)

2. Yale University ($16.3B)

3. Stanford University ($12.6B)

4. Princeton University ($12.6B)

5. University of Texas System ($12.2B)

6. MIT ($8B)

7. University of Michigan ($6B)

8. Columbia University ($5.9B)

9. Northwestern University ($5.5B)

10. University of Pennsylvania ($5.2B)

11. University of Chicago ($5.1B)

12. The Texas A&M University System and Foundations ($5.1B)

The following is a brief overview of the top five endowments in the United States, ranked by net asset value.

Harvard University: Harvard Management Company

Harvard University was established in 1636 and is the oldest higher education institution in the United States. There are approximately 7,100 undergraduate and 12,870 graduate students at Harvard. The President and Fellows of Harvard College, a governing board, oversees financial affairs. Harvard was one of the first universities to separate its endowment into a separate investment group. Harvard Management Company (HMC), a wholly owned subsidiary, was founded in 1974 to manage the university’s investment assets. The endowment consists of over 11,000 separate funds established over many years. Over the past 10 years, endowment income has grown to support roughly one-third of Harvard’s annual operating budget. As a result, HMC views its work as integrally linked to the work of Harvard’s faculty, students, and staff. The Harvard endowment had a net asset value of $25.7 billion as of fiscal June 30, 2009.7

From 1974 to mid-2009 (academic endowment typically ends their fiscal year in June), under HMC, the endowment has grown from $2 billion to $25.7 billion. The endowment’s aggregate payout rate is approximately 4.8 percent with a target rate of 5-5.5 percent. The payout rate when multiplied by the aggregate size of the endowment equals approximately a third of Harvard’s operating income. HMC employs approximately 150 staff. Figure 1.1 shows the reporting structure relative to the university. HMC has most recently been managed by Jane Mendillo. Prior to Ms. Mendillo, Mohamed El-Erian, now CEO and co-CIO of PIMCO, presided over the endowment. Jack Myer, who with David Swensen is widely credited with creating the modern endowment investment model, was president and CEO of HMC in the 1990s.

Figure 1.1 Reporting Structure of Harvard Management Company

SOURCE: Harvard Management Company

Figure 1.2 shows the overall growth of the Harvard endowment for the past 20 years.

Table 1.2 shows the impressive annual returns the Harvard endowment has achieved in various time periods.

Although the returns weren’t reported in the 2009 annual report, at the end of fiscal 2008 Harvard’s endowment returns were 13.2 percent since inception and 14.6 percent annualized over 30 years. Table 1.3 shows the evolution of the Harvard endowment asset allocation and policy portfolio. You will find a dramatic reduction in equities and an increase in real assets and absolute return.

Figure 1.2 Harvard Endowment Growth

SOURCE: Harvard Management Company

Table 1.2 Harvard Average Returns for the Periods Ended June 30, 2009

SOURCE: Harvard Annual Report, June 30, 2009 ∗Total return is net of all fees and expenses

PeriodTotal Return1 year−27.3%5 years6.2%10 years8.9%20 years11.7%

Yale University: Yale Corporation Investment Office

Yale is the third oldest university in the United States, established in 1701. There are over 11,500 undergraduate and graduate students at Yale.8 The Yale Corporation Investment Office (YCIO) manages the endowment and other university financial assets. The Investment Office was created in 1975, and the Investment Committee is responsible for oversight of the endowment. The YCIO is led by the chief investment officer, David Swensen, who is perhaps one of the most well-known investment professionals in the United States. He created the modern endowment investment model, also known as the Yale model, and published two bestselling books on the topic: Pioneering Portfolio Management in 2000, and Unconventional Success: A Fundamental Approach to Personal Investment in 2005. Prior to joining Yale in 1985, Swensen spent six years on Wall Street at Lehman Brothers and Salomon Brothers. In addition to managing the endowment, he is also a professor at Yale College and Yale School of Management.

Table 1.3 Harvard Asset Allocation

SOURCE: Harvard Annual Report, June 30, 2009

Over the past 10 years, endowment income has grown to support roughly 36 percent of Yale’s $2.3 billion annual operating revenue.9 The Yale endowment had a net asset value of $16.3 billion as of June 30, 2009.10

Over the past 10 years, the endowment grew from $5.8 billion to $16.3 billion with annual net investment returns of 11.8 percent. The endowment outpaced its benchmark and outpaced institutional fund indexes. The Yale endowment’s 20-year record of 13.4 percent per annum produced a 2007 endowment value more than seven times that of 1989. See Figure 1.3 for the growth in the Yale endowment.

Yale attributes its success to:

• Disciplined, diversified asset allocation policies

• Superior active management results

• Strong capital market returns

Spending from endowment grew during the last decade from $191 million to approximately $850 million, an annual growth rate of approximately 16 percent. The endowment consists of thousands of funds with a variety of purposes and restrictions. Funds are commingled in an investment pool and tracked with unit accounting much like a large mutual fund.

The Yale Investment Company employs 19 full-time professionals. Several notable ex-Yale professionals have gone on to manage other large academic endowments, notably MIT (Seth Alexander), Harvard (Jane Mendillo) and Princeton (Andrew K. Golden). As at Harvard, Yale’s investment philosophy has directed a large percentage of the endowment toward investment in assets expected to produce equity-like returns. Both institutions were leaders in the industry move toward alternative and real assets and non-U.S. public equities relative to historic levels.11

Figure 1.3 Yale Endowment

SOURCE: Yale University

Table 1.4 shows the returns for the past five years for the Yale endowment.

Table 1.5 shows the evolution of the Yale endowment asset allocation and policy portfolio. You will find a reduction in equities and an increase in real assets and absolute return.

Table 1.4 Yale Endowment Returns

SOURCE: Yale University

Table 1.5 Yale Endowment Asset Allocation

SOURCE: Yale University

Stanford University Endowment

Stanford was founded in 1891 by Leland Stanford. There are approximately 15,300 graduate and undergraduate students at Stanford. Stanford Management Company (SMC) was established in 1991 to manage Stanford’s financial assets. SMC is a division of the university with oversight by the board of directors appointed by the university board of trustees. SMC manages $15 billion of endowment and trust assets.12 The endowment consists of over 6,000 funds.

Over past 10 years, the endowment has achieved an 8.9 percent annualized rate of return, growing from $4.3 billion to $15 billion. SMC manages the assets to optimize long-term returns, provide stable annual payouts, and preserve purchasing power. The endowment provided 29 percent of Stanford’s 2009 operating revenue. Table 1.6 shows the long-term policy targets set by Stanford.

Stanford has achieved over 15 percent annual returns for the previous 10 years as shown in Table 1.7.

Table 1.6 Stanford Long-Term Policy Targets

SOURCE: Report from the Stanford Management Company, 2009, http://www.stanfordmanage.org/Annual_Report.pdf

TargetAbsolute Return18%Public Equity37%Fixed Income10%Private Equity12%Real Estate16%Natural Resources7%

Table 1.7 Stanford Average Returns for the Period Ended June 30, 2009

SOURCE: Report from the Stanford Management Company, 2009, http://www.stanfordmanage.org/Annual_Report.pdf

Total Return1 year−25.9%3 years−1.0%5 years6.8%10 years8.9%

University of Texas System Endowment: University of Texas Investment Management Company

The University of Texas System comprises 15 education institutions and approximately 195,000 students. The largest school in the system, the University of Texas at Austin, is a public education institution located in Austin, Texas. The university was established in 1883. There are approximately 50,000 undergraduate and graduate students at the main campus.

The University of Texas Investment Management Company (UTIMCO) was established in 1996. The University of Texas was the first public educational institution to create an external investment management corporation. UTIMCO reports to the UT System board of regents and is governed by a nine-member board. It is led by Bruce Zimmerman, CEO and chief investment officer. UTIMCO employs about 48 professionals.

The combined net asset value of UTIMCO funds equaled $15.2 billion as of August 31, 2009.13 UTIMCO expects the long-term rate of inflation to equal 3.0 percent. Fund distributions range from 3.5 percent to 5.5 percent using a smoothing formula (e.g., three-year average net asset value). We estimate that the endowment provides approximately 6 percent of the UT System operating revenue, which was $8.5 billion in fiscal 2009.14 The UTIMCO asset allocation targets, which are consistent with other university ranges, are shown in Table 1.8.

UTIMCO has achieved a 4.97 percent annual return for the past 10 years as shown in Table 1.9.

Table 1.8 UTIMCO Allocation Targets

SOURCE: UTIMCO Annual Report 2009

Peer GroupUTIMCO TargetEquity25.0%24.4%Hedge Funds25.1%29.2%Private Investments34.5%22.8%Real Estate / Other0.1%4.5%Fixed Income13.3%14.5%Natural Resources Natural Resources2.0% 2.0%4.6% 4.6%

Princeton University: Princeton University Investment Company

Princeton University is a private research university located in Princeton, New Jersey and was established in 1746. There are approximately 7,300 graduate and undergraduate students at Princeton.

The Princeton endowment is managed by Princeton University Investment Company (PRINCO). PRINCO is structured as a university office but maintains its own board of directors and operates under final authority of the university’s board of trustees. In 1745, according to “A Princeton Companion,” 10 men pledged £185 to help create a liberal arts college for New Jersey. The money was to be invested, not spent, and the interest used for salaries and other expenses. The Princeton endowment stood at $12.6 billion as of June 30, 2009. Because the endowment is so large relative to the Princeton operating budget, the endowment typically funds almost half of the university’s $1.3 billion budget.15

The Princeton endowment has the largest ratio of endowment assets-to-student-enrollment in the United States.

Andrew K. Golden is president of Princeton University Investment. Before joining Princeton in 1995, Golden worked with David Swensen as an intern and then as portfolio manager at Yale’s Investment Office from 1988 to 1993. Golden earned his bachelor’s degree from Duke University and his master’s degree from Yale School of Management in 1989.

Table 1.9 UTIMCO General Endowment Fund Investment Returns

SOURCE: UTIMCO Annual Report 2009

PeriodTotal Return1 year−12.98%3 years1%5 years5.08%10 years4.97%

Table 1.10 Princeton Policy Portfolio, June 30, 2009

SOURCE: Princeton Annual Report 2009

PolicyActualCash0%3.2%Domestic Equity7.5%5.5%International Equity Developed6.5%4.9%International Equity Emerging9.0%5.8%Independent Return25.0%22.0%Fixed Income6.0%2.1%Private Equity23.0%33.4%Real Assets23.0%23.1%

Princeton’s asset allocation model, shown in Table 1.10, is similar to those of both Harvard and Yale. The Princeton endowment achieved a 14.9 percent return over the 10-year period ended June 30, 2008, as shown in Table 1.11.

Implications for Individual Investors

Although endowments manage considerable assets, their techniques, organization, strategy, and philosophy are relatively unknown outside the industry. Year in and year out new investment strategies surface and disappear with varied success. Meanwhile endowment managers have continued to score consistent gains year after year until the crisis of 2008 and 2009. The fiscal year ended June 30, 2009 marked only the 4th year in 20 in which endowments posted a negative return. In the worst investing year since the Great Depression, billion dollar endowments posted a 6.1 percent annualized gain over the 10 years from June 30, 1999 to June 30, 2009, compared to the S&P 500 index, which posted a loss of 2.22 percent, or the typical 60 percent equity/40 percent bond portfolio, which posted a gain of 1.4 percent.

Table 1.11 Princeton Average Returns for Periods Ended June 30, 2009

SOURCE: Princeton University, PRINCO, Report on Investments, 2008-2009. Policy Portfolio returns represent a weighted average of individual benchmark returns by asset class. The median college and university endowment returns represent data compiled by Cambridge Associates for 129 college and university endowments and provided in the Princeton Report of the Treasurer. ∗65/35 is a passive blend of 65% S&P 500 and 35% Barclays Government/Credit Index

Initially we set out to determine what, if anything, individual investors could learn from endowment investing. Our hypothesis was that at least some of the techniques that endowments utilize to realize exceptional returns were instructive to the individual investor. The extent to which individuals can replicate specific techniques of endowments is a matter of some controversy in the endowment world. We believe the reader will benefit from understanding how some of the best minds in the investment management field think about their job and the future. We also think that the endowment approach can inform how an individual makes strategic investment decisions, particularly in defining broad asset classes that will compose their portfolio. There are several pieces to the endowment investing model that, if not easily replicable, are interesting and noteworthy and can improve the investment prowess of the average investor. These components of investing traverse many topics including:

• Investment goals

• Diversification Asset allocation

• Rebalancing Asset class selection

• Securities selection Manager selection

• Tax implications

• Alpha

• Beta

• Risks (fees, currency risk, inflation risk, tail risk)

• Organization

• Tools

• Trends and themes

• ETFs

The interviews presented in the book will help the reader improve their understanding of how endowments succeed and enable the reader to evaluate how this knowledge can benefit their investment strategy. We explore questions such as:

• How did the events of Fall 2008 change things?

• What are endowment managers doing differently today because of the financial crisis of 2008-2009?

• What investment trends are anticipated for the coming years?

• What are the unique investment philosophies of leading institutional investors?

• In what ways can investment management be best organized?

• What investment model do institutions find most effective?

• How much leverage do they employ?

• How do institutional investors select hedge funds or private equity fund investments and managers?

• What strategies are they using to reduce risk?

• Is there a way to mitigate tail risk?

• How comfortable are investors with the current state of the public markets?

• What can individual investors learn from endowment investing models?

We have interviewed some of the top investment professionals in the endowment management field, including current and former chief investment officers. They will share their thoughts on the above questions and more in the chapters of this book.

Summary

The techniques of endowment investing have developed over several centuries. Most of the large endowments have developed sophisticated investment operations, accelerating dramatically in the past 35 years, and have experienced spectacular growth in assets over that period. There is much to learn from how these endowments manage their money and consistently beat U.S. equity benchmark performance. The principles they employ are of benefit to the average investor who wishes to better understand money management and evaluate their own portfolio. Our direct interviews with top professionals in the business provide insight into a high-performing corner of the investment universe.

Notes

1The Harvard Guide, 2007 President and Fellows of Harvard College.

2The Harvard Guide, 2007 President and Fellows of Harvard College.

3The Harvard Guide, 2007 President and Fellows of Harvard College.

4 “Stanford Named Top Fundraiser,” Stanford Report, February 25, 2009.

5 NACUBO 2007 Endowment Study.

6 NACUBO-Commonfund 2009 Study of Endowments, Public Tables Endowment Market Values.

7 Harvard Annual Report, June 30, 2008.

8Yale Facts (http://www.yale.edu/about/facts.html). Retrieved January 16, 2010.

9 Yale Finance Office Annual Report 2008, http://www.yale.edu/finance/controller/resources/docs/finrep07-08.pdf.

10http://opa.yale.edu/news/article.aspx?id=6924.

11 Yale Endowment Annual Report, 2008, http://www.yale.edu/investments/Yale_Endowment_08.pdf.

12http://www.stanford.edu/about/facts/finances.html.

13http://www.utimco.org/funds/allfunds/2009annual/index.asp.

14 University of Texas System Annual Financial Statements, November 2009, page 16, http://www.utsystem.edu/cont/Reports_Publications/CONAFR/Consolidated_AFR09.pdf.

15http://www.princeton.edu/pr/pub/ph/08/h and Karen W. Arenson, “Big Spender,” New York Times, April 20, 2008.

Chapter 2

Historical Endowment Performance

“If past history was all there was to the game, the richest people would be librarians.”

—Warren Buffett, “Despite Setbacks, Drexel Still Calls Shots,” Washington Post, April 17, 1988

“Over the past 200 years, the stock market’s steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.

The stock market is trading right where it was nine years ago.Stocks, long touted as the best investment for the long term, have beenone of the worst investments over the nine-year period, trounced even bylowly Treasury bonds.”

—E.S. Browning, “The Lost Decade,” Wall Street Journal, March 26, 2008

Academic endowments received substantial publicity during the past decade. Through early 2008, this attention focused on the consistently superior investment returns endowments achieved. In the summer of 2008, just after the conclusion of most universities’ fiscal year, it was common to see business press headlines praising an endowment for double-digit returns, a return with a large lead over market indexes. Meanwhile, the average individual investor had to be satisfied with perhaps half the return achieved by the largest endowments. On August 7, 2008, the Wall Street Journal published an article titled “Harvard Aces a Brutal Year,” observing that Harvard ended the recent fiscal year up 7 to 9 percent. Meanwhile the S&P 500 was down about 13 percent during the same period.

The flattering press clippings came to an abrupt end soon after August 2008. By September 2008, the global financial crisis was fully underway. As of December that year, the press had turned negative and endowment articles were distinctly unflattering. A sampling of Wall Street Journal endowment headlines post September 2008 indicates how the tide had turned in business media:

12/17/2008: “Yale to Trim Budget as Its Endowment Falls 25%” 1/09/2009: “Princeton Cuts Budget as Endowment Slides” 1/27/2009: “College Endowments Plunge” 2/07/2009: “Harvard’s Endowment, Beset by Losses, to Pare Its Staff ” 2/12/2009: “Harvard Endowment Cut Stock Holdings” 6/06/2009: “The Age of Diminishing Endowments” 6/30/2009: “Ivy League Endowments Finally Dumb” 8/24/2009: “Harvard Endowment Regroups” 9/10/2009: “Yale Endowment Down 30%” 9/12/2009: “Columbia Endowment Falls 21%” 9/16/2009: “MIT Endowment Off by 21%” 9/23/2009: “Yale Endowment Posts a 25% Loss” 9/30/2009: “Princeton Endowment Fell 23%” 10/10/2009: “Endowment Drops 23% at Dartmouth”

The question was being asked in the institutional money management business: Are endowments the superior investors they had been perceived to be for the previous two decades? Or had the crash of 2008-2009 exposed material flaws in the endowment investing model? Was a new management model in order for endowments?

Investment Returns

During 2008 and 2009 U.S. equity markets, the primary province of individual investors, suffered historical declines. From July 1 to November 30, 2008, the S&P 500 fell 29.3 percent. During the twelve months ended June 2009, the S&P 500 index declined 26.2 percent.1 College and university endowments did not escape this downdraft, not only in the markets, but across real estate, private investments, hedge funds, and other asset classes. The U.S. GDP decline for 2009 was the most severe since 1946. The worst recession in recent memory began to ease midway through 2009 as the effects from an unprecedented liquidity and stimulus program by the U.S. Federal Reserve and Treasury Department began to take hold. The market reached its bottom on March 6, 2009 roughly a 53 percent drop in the Dow Jones Industrial Average from its top in 2007. From the March low, the markets rallied and performed well through the end of fiscal year on June 30. (On a side note, since June 30, 2009 and through the completion of this manuscript in April 2010, the Dow Jones Industrial Average increased another 28 percent. The figures and returns in this book do not include this subsequent rally in the markets and corresponding asset values. The inclusion of the subsequent rally would further enhance the endowment returns reported in this book.)

The results from the 2008 NACUBO-Commonfund Endowment Study Follow-Up (shown in Table 2.1) indicate that the billion-dollar endowment investments fell about 20.5 percent during that five-month period. They outperformed the S&P but underperformed relative to expectations regarding diversification and asset allocation.

As the market got worse in fiscal year 2009, so did the endowment returns. At the conclusion of the 2009 fiscal year, billion dollar endowments would see their 10 year net returns averages decline from 9.5 percent to 6.1 percent as shown in Table 2.2.

Table 2.1 Average Endowment Investment Returns FY 2008

SOURCE: 2008 NACUBO-Commonfund Endowment Study Follow-Up

Table 2.2 Average Endowment Investment Returns FY 2009

SOURCE: 2009 NACUBO-Commonfund Endowment Study

For fiscal year 2009, endowments suffered substantial losses. While endowments typically had highly diverse asset allocations, the breadth and severity of the crisis spared no asset with the exception of U.S. treasuries and cash. Typically large endowments do not hold significant cash positions due to low returns and the erosion effect from inflation.

To make matters worse, many large endowments were heavily invested in illiquid assets, which made it difficult to produce the cash necessary to meet their obligation to the university operating budget. In some cases this necessitated selling near-liquid assets, such as U.S. public equities, at a low point. Figure 2.1 details Yale’s asset allocation changes from 1985 to 2005.

The chart in Figure 2.1 demonstrates how Yale moved from highly liquid U.S. equities to higher allocations in real assets and absolute return to achieve less volatile and higher returns. In the market crash of 2008, most all asset classes declined in unison and illiquid, non-bond-oriented portfolios did not perform well.

While the liquidity issues at some endowments were problematic, in general we do not believe the FY2009 endowment performance indicts the model. Endowments have perpetual time horizons and typically do not make investments with near-term performance in mind. While it is interesting to look at a five-month period of returns, it doesn’t really make sense for endowments. The 5-year, 10-year, or longer time frame is a much better evaluation period.

For example, note the Stanford endowment track record shown in Figure 2.2. Accounting for the period through June 30, 2009, Stanford achieved a 10-year return rate of 8.9 percent while the 60/40 portfolio benchmark achieved only a 1.3 percent annual return over the same period.

Figure 2.1 Yale Asset Allocation Targets 1985-2005

SOURCE: Yale Endowment Annual Report 2005

As illustrated in Figure 2.3, the Harvard and Yale endowments over the past 16 years have consistently overachieved the benchmarks. When you total up the overachievement and subtract the decline in 2009, the endowments are still far ahead.

Table 2.3 shows the returns for the Harvard endowment for the fiscal year ended 2009. Even accounting for the 1-year dismal performance, the 5-year, 10-year, and 20-year annualized returns for the endowment investments dramatically outpaced a 60/40 portfolio typical of the individual investor. Although there seemed to be a rush-to-judgment on the endowment model based on the short-cycle performance in 2009, a longer term look vindicates the model. The private and alternative investments that declined and the risk they entail produced the outsized returns of the past.

Figure 2.2 Historical Investment Returns for Stanford

SOURCE: Stanford Annual Report 2009

Figure 2.3 Harvard and Yale Investment Returns

SOURCE: Harvard University

Table 2.3 Harvard Historical Investment Return—Annualized

SOURCE: Harvard Management Company Annual Report 2009

Evaluating the 10 years of data from NACUBO-Commonfund (Figure 2.4) highlights a similar point. Large endowments have outperformed the S&P 500 in 9 out of 14 years. And they have achieved this with less volatility.

Over the long term larger endowments have typically outperformed their smaller counterparts, and the most recent study from NACUBO-Commonfund highlights this fact. Table 2.2 illustrates how the large endowments have performed 2.7 percent per year better than small endowments over the prior 10-year period. However, smaller institutions outperformed larger ones in FY2009, likely due to their more conservative asset allocation mix.

Figure 2.4 Excess Returns by School Type

SOURCE: NACUBO

Asset Allocation

It has been widely published that asset allocation is responsible for 90 percent of investment returns. Endowment managers spend considerable time developing an asset allocation policy. Finding uncorrelated asset classes helps build portfolio diversification and subsequently reduces the variability of the returns. Managers get a double benefit when they can simultaneously reduce the variability and maintain or increase the return. Highly diversified endowments delivered superior returns in the 1990s and mid-2000s. But, this diversified portfolio couldn’t reasonably save the endowments from a deep recession and a broad based market decline. The CIOs we spoke to discuss in individual chapters how they are responding to 2008-2009 in updating asset allocation policies.

Table 2.4 illustrates the difference in asset allocation between the billion dollar endowments and their smaller counterparts. Of note, institutions under $25 million had allocated 25 percent to fixed income while the $1 billion endowments allocated only 10 percent. This would explain why the smaller endowments outperformed the larger endowments in FY2009. Over the long term that fixed-income-oriented asset allocation underperformed the allocation model of the $1 billion endowments.

Lyn Hutton, Commonfund’s Chief Investment Officer, presented a new way of looking at asset classes that goes beyond the traditional categories. Figure 2.5 illustrates the asset allocation dynamics between asset classes.

Alternative strategies include such vehicles as private equity (LBOs, mezzanine, M&A funds and international private equity), marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, event-driven, and derivatives), venture capital, private equity real estate, energy and natural resources, and distressed debt.

Table 2.4 Asset Allocations for Fiscal Years 2008 and 2009

SOURCE: NACUBO-Commonfund Study of Endowments 2009

Figure 2.5 Evolving Asset Classes and Portfolio Dynamics

SOURCE: NACUBO-Commonfund Study of Endowments

Summary

The endowment model, while needing some minor adjustments, held up through the events of 2008-2009, and, evaluated over longer time frames, produces superior results.

We believe that endowments will continue to adhere to their historical asset allocation and rebalancing strategies, with perhaps a renewed emphasis on liquidity management and pursuit of some opportunistic or theme-driven investing. Those principles helped large billion-dollar endowments grow in excess of 11.5 percent over the past 20 years. David Swensen grew Yale’s endowment from $1 billion in 1985 to $16.3 billion on June 30, 2009. In a recent article, Swensen said periodic losses are inevitable in a portfolio tilted toward stocks and built to grow over many years.2

“When you have a market in which any type of equity exposure is being punished, it’s going to hurt long-term investors,” he said.3 “There isn’t an investment strategy that can produce the kind of long-term results we’ve generated at Yale that isn’t going to post the occasional negative return,” and, “we’re not even done with the current fiscal year. Judging a long-term investment strategy based on the results of a five-to six-month period is foolish beyond words.”4

Notes

1https://pgnet22.stanford.edu/get/file/g2sdoc/InvestmentPerformance.pdf.

2 Oliver Staley, “Yale’s Swensen Sees Extraordinary Opportunity to Snap Up Debt,” Bloomberg News, January 2, 2009, http://www.bloomberg.com/apps/news?sid=ab08HlxLZ5FY&pid=20601087.

3 Ibid.

4 Ibid.

Chapter 3

A Look Inside Endowments

“Everyone is a genius at least once a year. The real geniuses simply have their bright ideas closer together.”

—Georg Christoph Lichtenberg

Through our research and interviews with investment professionals we learned a number of useful and interesting things about this relatively undocumented corner of the investing world. A number of these findings were counter to expectations or conventional wisdom. Some are of general interest to those dealing with endowments, typically private investment general partners. Others have implications for how endowments will make decisions in the future. Finally, individual investors can take away several key points to use in developing their own approach and for context throughout the remainder of the book. We have highlighted eight relevant learnings in this chapter.

Endowments Are Different

From outside the industry, the approach for managing large pools of institutional money seems homogeneous. After all, they have a number of things in common: large sums of money, typically organized as a nonprofit, supporting a large and often well-known institution. Given that there is probably a convergence of thinking on what makes for prudent money management, it stands to reason that the technique for doing that would be the same across these apparently very similar groups.

As it happens, endowments are much different in nature from other institutional funds. The two most frequent funds that are mentioned at the same time as endowments are foundations and pension funds. Sovereign wealth funds are another oft-mentioned institutional asset pool.

Foundations differ from endowments on a few key points. First, they are typically static in terms of additional funds coming in. A foundation will be established with an initial sum from a donor or donors, and then will typically not have any additional contributions. Academic endowments, by contrast, most often have additional funds on an ongoing basis from alumni and other sources. This makes managing liquidity and operating budgets easier for endowments. Foundations also have, by virtue of the tax code governing nonprofits, an annual distribution requirement of 5% of the previous 12-month average fair-market value of the investment assets. This means that foundations have narrow latitude in a given year on how much money to distribute. An endowment can work with the institution in a bad or good year and adjust the distributions accordingly.

Likewise, pension funds have different constraints. Pension funds are often larger than endowments. The assets in the largest pension fund are nearly 10 times the size of the largest endowment. Pension funds, however, are more conservative than endowments in their investing. This is the result of two factors. First, pension funds have target liabilities that they can calculate based on the demographics of the retired or retiring population they support. There is no flexibility in their distributions, and therefore they must keep higher liquidity and lower-risk, lower-return assets on average than an endowment. Second, the governing boards of pensions are often more conservative and focused on asset preservation rather than growth. These factors mean that pension funds, while larger, may not generate the same returns that endowments can.

We also found that not only are academic endowments clearly different from pension funds and foundations, they are also quite different from each other. There are obvious differences, such as size and whether the institution is public or private. Other differences include things such as the percentage of the operating budget that the institution asks the endowment to provide. The culture of the institution, the composition of the investment committee, whether the endowment manages university working capital, the amount of new funds coming in from the donor base, the CIO’s philosophy on outsourcing or use of consultants, the vintage of the investments in the endowment pool, even the geography of the endowment may influence liquidity needs—for example, Tulane and its commitment to ensuring appropriate cash available during hurricane season. In all, we found that endowments are quite different from each other and this means that there is no consolidated “endowment model” for investing to be identified and documented. There are, however, basic principles that CIOs adhere to and fundamentals that they know will lead to good investing decisions. These are the things we focused on in our interviews.

Endowments Define Asset Classes Broadly

Endowments think about asset classes in the broadest possible way. As outlined in Chapter 2, endowments invest in a wide variety of asset types with a significant portion of their funds going to private or alternative investments.

This differs significantly from the approach typical of the individual investor, which considers an allocation to fixed income and a variety of large-cap, mid-cap and small-cap U.S. equity growth and value stocks to be a diversified portfolio. The CIOs we interviewed were nearly unanimous in their thinking that most individual investors have too much of a “home bias” and therefore an overallocation to U.S. public equity markets.

A look at the type of investments that endowments will typically have indicates how broadly they define this area. A fund will of course include allocations to fixed income and U.S. public equities but will also include other carefully researched and selected public equity investments in emerging and frontier markets. The alternative/private portion of the portfolio typically includes allocations to private equity, venture capital, real estate, real assets (land, precious metals, timber), and hedge funds of all types.

Endowment CIOs believe that a considerable amount of the return (and year-to-year consistency) is derived from asset allocation and diversification. This is conventional wisdom for individual investors as well. However, there is a wide gap between the asset classes typically used by endowments versus individuals, which we believe accounts for a significant portion of the performance difference between the two.

Endowments Achieved a One-time Sophistication Improvement

As we discussed the unique outperformance of the endowment model, CIOs were quick to point out that endowment portfolios prior to the 1970s looked like, and performed like, the typical individual investor portfolio. They believed that a number of factors contributed to the rise of endowment performance in the past 35 years, primarily due to increased sophistication of the method and the definition of asset classes as outlined above.

The implementation of UMIFA and UPMIFA standards which gave endowments considerably improved investment flexibility produced a ramping up of sophistication in the endowment approach. This, combined with investment committees populated by members with strong investment backgrounds (often hedge fund managers themselves) accelerated the move to the endowment model used today.

Endowment CIOs are cautious in forecasting the ability for endowments to produce some of the exceptional performance improvements seen in the first few decades after UMIFA. As one CIO put it, “you can move to a sophisticated model only once.”

We believe this is not a discouragement to the individual investor who wants to learn from endowments. Whether or not the outperformance of endowments in past decades is due to a one-time adoption of sophistication, the model has proven to produce durable consistent returns.

Endowments Are Nimble