Fiscal 2016 endowment performance results at the country’s top schools reveal that university investment offices have not been immune to the past year’s slight global economic downturn.
But for endowment managers and observers alike, a 12-month period is not long enough to assess the effectiveness of investment strategies. Instead, experts prefer viewing endowment performance through a multiyear lens.
“There’s a horse-race mentality about the one-year numbers,” Yale Chief Investment Officer David Swensen told ProPublica in 2009. “Obviously, you’ve got to disclose them, but anointing winners and losers on the basis of 12 months’ worth of performance is silly in the context of portfolios that are being managed with incredibly long time horizons.”
Nationally, endowments with more than $500 million in assets earned an average percentage return in the low single digits in fiscal 2015, about 12 percent less on average than the year before. In fiscal 2016, however, only four schools with more than $500 million in assets — Yale, Princeton, the Massachusetts Institute of Technology and the University of Oregon — have reported positive returns at all, and Yale’s 3.4 percent return comfortably leads the pack.
But beyond financial tumult, change is occurring at the personnel level among university investment offices. The investments office for Texas’ public universities is currently looking for a new CEO, Harvard and Columbia University have both appointed new investment leaders within the last month and it has been one year since Stanford University dismissed more than half its investment team. While no personnel changes have been announced at Cornell University, the school announced its investments office will relocate from Ithaca to New York City in a statement sent one day before they released the lowest results among all the Ivies this year.
Investment experts interviewed by the News agreed that while annual results are not entirely unimportant metrics, the long-term view on endowment performance is a better measurement of an investment office’s relative success or failure.
“You really can’t gain much information from a 12-month period,” said William Jarvis ’77, executive director of the Commonfund Institute, an institutional-investment advisory firm. “Most people who are in this field think that the appropriate time to measure performance is a market cycle, which can be anywhere from five to 10 years.”
Jarvis also noted that given an endowment’s mandate to manage money on an intergenerational basis, measuring performance over a year or two does not provide meaningful assessment of an investment office’s effectiveness.
According to hedge fund manager and Yale School of Management finance professor Roger Ibbotson, investments in illiquid alternative assets make it difficult to asses the value of an endowment on an annual basis.
“When you have private equity and venture capital assets that are not priced every day, it is difficult to know exactly what the real performance is,” Ibbotson said. “I don’t really like ranking the endowments annually because there’s such a significant measurement error.”
As of June 2015, Yale had allocated more than 70 percent of its investment portfolio to alternative assets including hedge funds and real estate, which require long-term investment commitments. A 2015 survey conducted by the National Association of College and University Business Officers and money manager Commonfund found that the average allocation to alternative assets among 812 schools was 52 percent.
While alternative assets have proven incredibly lucrative for Yale — over the past 20 years, the University’s venture capital investments have earned about 90 percent on an annualized basis — gains from alternative assets are harder to evaluate every 12 months than assets traded on stock markets daily.
Ibbotson said that it is very hard to accurately measure the value of an asset in private equity, venture capital or real estate every year since such investments typically have a longer life cycle. For instance, it took multiple years for Yale’s $2.7 million investment in the professional networking company LinkedIn to result in $84.4 million in gains for the endowment.
“Even if the value of both liquid and illiquid assets could be accurately measured, there’s so much noise involved in how you do in any short period,” Ibbotson added.
Charles Skorina, a specialist in recruiting chief information officers, wrote in an Oct. 12 newsletter to institutional investors that more weight should be put on “duller” five- and 10-year annualized returns. Over the five-year period between fiscal 2010 and fiscal 2015, Yale’s endowment earned an annualized 14 percent return, beating the 9.8 percent national average reported by NACUBO and Commonfund. Similarly, over the 10 years between fiscal 2005 and fiscal 2015, Yale’s annualized 10 percent return beat the national 6.3 percent average.
“It’s just like in baseball — the winners of the World Series in any one year are not necessarily the best team around,” Ibbotson said. “But if you look at who’s won the most over 10, 20 years, you have a much better chance of figuring out which team really is better than the others.”