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."
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.