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On his blog, Greg Mankiw describes the chart above as "the saddest chart I've seen today." The chart was featured in a recent WSJ article "Harvard Seeks Fund Chief for the Long Haul," about how Harvard University's $33 billion endowment fund (the world's largest) is seeking to replace its current very handsomely paid $5 million-per-year chief executive Jane Mendillo.

Here's what's even sadder - the 1.7% average return on Harvard's endowment fund over the last five years, which was way below the average annual total return of 7.0% over that period for the S&P 500 (assuming full dividend reinvestment, updated using the Political Calculations calculator). What's really, really sad is that if Harvard had simply invested in the S&P 500 from 2009 to 2013 its endowment would have grown to more than $42 billion, instead of $33 billion. In other words, Harvard is paying a team of professional fund managers as much as $5 million per year to lose the university more than $9 billion over the last five years compared to a passive, indexed investment in the S&P 500. Likewise, all of the professional fund managers in the sample above under-performed the total 7% return on the S&P 500 over the 2009-2013 period. And I'm not sure, but I think the growth in university endowment funds includes new contributions, which can significantly and artificially increase the fund's return and performance over time, when comparing those funds to the S&P 500 or other benchmarks.

For the most recent university budget year (2013), the S&P 500 increased by 20.2% (updated assuming dividend reinvestment) and almost none of the university endowments managed to "beat the market" during that period - the average return for university endowment funds was 11.7%. Harvard's endowment under-performed the S&P 500 by more than 14% over that period, earning a return of only 6.2% compared to the 20.2% increase in the S&P 500. Over the most recent 3-year period, Harvard's endowment increased by 10.5% per year, which was below the 16.65% total return on the S&P 500 over that period.

Given their almost infinite time horizon, university endowments should be pursuing a long-term "buy and hold" strategy, and one of the best ways to do that is by investing in low-cost indexed funds. It's really sad that universities like Harvard pay so many millions of dollars to professional fund managers to actively manage billions of dollars, who then manage to lose billions of dollars for the universities compared to passive index investments, at least over the most recent 5-year period. Why don't more universities simply invest for the long-term in low-cost indexed funds, and save millions of dollars in salaries and earn millions of additional dollars for their universities?