Recent results released by colleges and universities have revealed a striking trend: the traditional 60/40 stock-bond portfolio is outperforming even the most sophisticated endowment portfolios at elite educational institutions. In fact, the difference in performance is quite substantial.
A Clear Advantage
For the fiscal year ending June 30, a plain-vanilla 60/40 portfolio boasted an impressive 12.2% return. Meanwhile, Ivy League university endowments struggled to generate returns in the low single digits, if any at all. Refer to the chart below for a visual representation.
Looking beyond short-term results, the situation doesn't improve significantly. Analysis indicates that over the past 5-, 10-, and 15-year periods, the median college and university endowment has consistently fallen behind the 60/40 portfolio by margins ranging from 2 to 4 annualized percentage points. The National Association of College and University Business Officers provides these figures.
Exploring the Disparity
How is it possible that these esteemed institutions, filled with the "best and brightest," are underperforming the broader market? One of the primary factors is undoubtedly their shift away from traditional public stocks and bonds towards alternative investments. Undoubtedly, they were influenced by the incredible success of Yale's endowment in the 1980s and 1990s, guided by David Swensen, the renowned late investment guru.
Based on these findings, it may be advisable to consider selling the S&P 500 and opting for the remarkable performance potential offered by the 60/40 portfolio instead. It's evident that colleges and universities could benefit from reevaluating their investment strategies and considering the lessons learned from this unexpected turn of events.
Harvard Endowment and the Rise of Alternative Assets
Harvard’s endowment has taken a unique approach when it comes to investment allocation. With only 11% invested in public equity and 6% in bonds, they deviate significantly from the standard investment strategies followed by other college and university endowments. This unconventional approach is managed by the CEO of Harvard Management Company, N.P. Narvekar. The university's endowment has performed exceptionally well in recent years, largely due to the high allocation to alternative assets.
To further illustrate his point, Bernstein delves into the numbers. Around 25 years ago, approximately $300 billion was invested in hedge funds. These funds collectively pursued around $30 billion of available "alpha," indicating excess returns. Although these figures are rough estimates, they provide an accurate representation of the situation. Bernstein reveals that this 10% excess return covered the commonly practiced 2% management fee and 20% profit fee charged by hedge funds. However, with the exponential growth of investments in alternative assets, currently totaling around $3 trillion, the pursuit of alpha has intensified while the excess alpha has dwindled to a mere 1%. This is not even enough to cover the fees charged by hedge funds.
Despite the lackluster performance of many endowment funds, there is a silver lining for individual investors. The restricted access that individuals have to hedge funds and private-equity funds means they have not missed out on the diminishing returns experienced by large institutions. In fact, they may even be faring better by avoiding these heavily saturated markets.
In conclusion, Harvard's unusual investment strategy has proved successful, with their endowment achieving remarkable returns. However, the rise in alternative assets has brought challenges for the investment community as a whole. Nevertheless, those who did not have the same level of exposure to hedge funds and private-equity funds can find consolation in the fact that they may be better off without it.
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