Return data from university endowments for the fiscal year ended June 30th “is not pretty,” writes columnist Barry Ritholtz in a recent Bloomberg article.
Ritholtz cites return estimates of 8.7% as “too optimistic” compared to actual gains including:
- Harvard: 6.5%
- Yale: 5.7%
- University of Pennsylvania: 6.5%
- Dartmouth: 7.5%
During the same period, Ritholtz reports, the S&P 500 saw total returns of 10.4%: “This underperformance is consistent with the record of the past decade, with none of the Ivy endowments beating a 60-40 portfolio in the 2008-2018 period, though a couple did come close.” Ritholtz explains that the endowment underperformance was due mostly to high exposure to hedge funds and natural resources as well as their high operating costs.
“Many endowments have cut back their exposure to hedge funds,” Ritholtz notes, “only to find a new object of affection: private equity. That seems to be an odd choice, given the similarly high cost structure, illiquidity and returns that may well lag behind the broader market.” He goes on to cite industry criticism related to private equity’s accounting methodology, operating inefficiencies and optimistic return expectations.
“If that sounds familiar,” Ritholtz concludes, “it is because it seems so similar to the dashed expectations of subprime mortgage investors.” He adds, “Endowments and pension funds were counting on higher—and imaginary—returns of hedge funds to make up for the low returns on offer elsewhere. Financial consultants played no small part in that last round of magical thinking about hedge funds and no doubt have a similar role this time.”
