Ivy League Endowments Are Stuck in a Rut - Barron's

Barron's cover story this week discusses the headaches of Ivy League endowment funds.

Not long ago, university endowments at Harvard, Yale and Princeton were the envy of the investment world, largely because of the inflated returns they generated. Over the past 10 years, the Yale endowment gained 16.3% annually, Harvard rose 13.8%, and Princeton was up 14.9%. During the same span, the S&P 500 earned just 2.9%/year. But it's no great secret that much of those stellar gains were a result of heavy investments in nontraditional assets such as commodities, hedge funds and private equity.

Now these funds find themselves heavily weighted in the same alternative investments, which have declined precipitously over the past year. But they are largely unable to liquidate their positions, due to the lack of a robust marketplace. The trio estimates their yearly losses through the end of June at about 30%, but it's probable they lost closer to 50% on their alternative investment portfolios at current depressed prices. This is exactly why they're not liquidating these assets, and why it's likely they will trail the broader market in the coming year as they struggle to bridge the gap between their book valuations and market prices.

Not surprisingly, they've been forced to borrow heavily to meet disbursement needs, even as they liquidate some of their more liquid assets (which is further skewing the relative weight of alternative assets in their portfolios). Even before the past year's crunch, alternative investments accounted for about 75% of Yale's and Princeton's endowment funds, and about 55% of Harvard's.

In a recent interview, Yale's famed endowment fund head David Swensen acknowledged that "diversification isn't going to help you in the midst of a financial crisis, or at least the type of diversification that you see in institutional portfolios like Yale's." He added, "I'm not sure that the crisis has caused us to conclude that we would do things differently, but it certainly highlighted the importance of liquidity."

At this point it's unlikely that any of the biggest endowments will run into serious trouble, because their assets still dwarf their debt. But, Barron's says, they're "already leaner than they were just a year ago, and their prospects for recouping investment losses anytime soon look remote. The brutal market of the past year could mark the end of the alternative-investment boom they abetted, as managers of trend-setting university endowments, as well as their followers in the nonprofit world, move back toward the traditional stocks and bonds that once were staples of their investment portfolios."

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Separately, granted that endowment funds' strategies aren't looking so smart right now, but managers' track record, as noted above, puts most fund managers to shame. Yet these folks earn a mere fraction of what their Wall Street counterparts are taking in for lesser performance. Which flies in the face of all the hand wringing over Wall Street losing its best talent if it tones down its inflated bonuses.

Comments

[fatcat:]

A horrible market like we had would make most managers look bad,but illiquid markets in exotic assets makes the problem much worse...for instance,they were probably locked out of much the gains for the last few months,for lack of liquidity.

I suspect a lot of state and local retirement funds are in the same predicament...I know CA. has a lot of RE investments that way upside down...

Anyway,good reporting Eli...

Jun 28 06:47 PM

[Teutonic Kn...:]

Eli -

Good article.

These are good schools; however, nothing to boost about, at these troublesome times one of them still held out to honoring awarding a fellowship to my son toward pursuing his master's.

Now, pardon a non-finance type as myself for a dumb question, what is ''Alternative Investment?

TK

Jun 28 09:50 PM

[whidbey:]

As a former Ivy League academic (finance) I review this article with some reservation. The alternatives were the exclusive property of those with the "gift of the anointed" not open to the less lights. But the results were not too good and the exotic were not so rewarding, and the statement "we would not do it differently even we had known" is just hubris. They did their alternatives because they could and they were too bright to do what the average prudent investor did.

Look ! they knew damned well that their investments were disproportionate, risky above the alpha of the market and workable only with "luck". This is another case of the smart outsmarting themselves. A little attention to who they and whom they are not is over due. May we learn from our mistakes and so too the three ninnies of the Ivy league.

Jun 28 10:07 PM

[Graham and ...:]

"Cash and carry" is the order of the day, with so many chances of default.

Jun 29 08:25 AM

[ExBiggie:]

An 'appraisal' of value is nothing like the real market.
Thus, we won't truly know until there is a true 'cash on cash' calculation of return how well or poorly these endowments have performed. That will occur when these funds alternative assets are ultimately liquidated. Only then will we know what their 'real returns' really were. I suspect that they are much lower than they have been reporting. It is very difficult to compare an illiquid private asset to 'mark to market' of liquid markets. In the credit panic no one even wanted to bid on supposedly high quality liquid mortgages that had been packaged up in securitized instruments. What do you suspect one of a kind illiquid investments producing little cash flow are worth in this environment....not much.
Consider this scene from the movie Trading Places
Pawnbroker: I'll give you 50 bucks for it.
Louis Winthorpe III: Fifty bucks? No, no, no. This is a Rouchefoucauld. The thinnest water-resistant watch in the world. Singularly unique, sculptured in design, hand-crafted in Switzerland, and water resistant to three atmospheres. This is *the* sports watch of the '80s. Six thousand, nine hundred and fifty five dollars retail!
Pawnbroker: You got a receipt?
Louis Winthorpe III: Look, it tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome, and Gstaad.
Pawnbroker: In Philadelphia, right now it's worth 50 bucks.
Louis Winthorpe III: Just give me the money.
If the enlightened endowment managers at these prestigious institutions didn't know that you need liquidity when times are their worst such as in a credit panic, they don't know as much about investing as they thought.

Sep 24 08:57 AM