Universities and schools in the U.S. have started to report the returns on their endowments for the last fiscal year, and it’s not a good look.
The “U.S. Endowment Returns Tracker” from Pensions & Investments says that the average return for those who have reported so far is 10.4% for the year ending June 30, 2018. The S&P 500 SPX gained 24.6%, which is less than half of that (0.42% through June 30).
This isn’t a completely fair comparison, but it’s also not too bad either, since most endowments aren’t involved in stocks all the time. The average grant also fell far behind the 20.2% gain seen in a portfolio of 80% stocks and 20% bonds, which may have been a better comparison.
The table below shows the top five and bottom five performers for the year ending June 30, according to reports from schools and universities as of October 16:
The fact that the endowment returns for the most recent fiscal year have fallen within a small range is another interesting thing about them. As an example, the standard deviation of the returns that have been recorded so far is only 1.8 percentage points. It’s interesting to see that this shows that college and university investment committees have mostly the same asset allocations. It’s possible that endowment returns would be spread out more, with some managers being more ready to bet on a certain asset class than others.
Lawrence Tint, the former U.S. CEO of BGI, the company that made iShares and is now part of Blackrock, says that the fact that endowments don’t show this is proof of a herd drive. Tint ran an investment consulting company with William Sharpe, who won the Nobel Prize in economics in 1990, for many years. He has also been on a number of endowment investment boards in the past.
Tint said in an interview that endowment managers would rather lose in the usual way than take the chance of winning in an unusual way, which would mean that their funds would not do as well as other college and university assets.
This desire to follow the crowd can show up in a love affair with so-called “alternative investments,” such as real estate, hedge funds, and private equity. This obsession has its roots in the fact that Yale University’s fund was a huge success when David Swensen was in charge. He was one of the few fund managers who was willing to try new things and succeed, putting a lot of money into alternatives and making a lot of money.
When other fund managers saw how well Swensen was doing, they copied what he did. William Bernstein of EfficientFrontier.com says that took away any real edge. Bernstein wrote in an email, “Those who came after Swensen got the tuna noodle casserole.” Swensen was the first to get to the alternatives dinner table and ate a lot of lobster tails and prime rib.
Richard Ennis, who used to edit the Financial Analysts Journal and helped start EnnisKnupp, one of the first financial consulting firms, agrees with Bernstein’s assessment. In a study that came out in February 2024 in the Journal of Investing, Ennis said, “alpha [the difference between a portfolio’s return and its benchmark] seems to react to alts as if they were kryptonite—the more exposure, the harsher the effect on alpha.” He came to the conclusion that “institutional investors should think about whether continuing to invest in alternatives is worth the time, money, and reduced liquidity that come with them.”
Who will be the first to leave the group, though? The most recent endowment returns show that no one is yet ready to do it. However, these disappointing returns might inspire the next David Swensen to give it a try.
For the rest of us, the financial lesson is this: Don’t judge your success by how well you did compared to others. His famous book “The Intelligent Investor” says this: “The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” Graham is known as the “father of fundamental analysis.”
Because “where you want to go” is likely to be different from where other people want to go, your success is unique and can’t be compared to that of others. That’s what you should keep in mind as you make your financial plan, not how other people might be making theirs.
