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University Endowments’ “Smart” Investment Strategies?

If you want to see how the “other half” manages its money, turn to the National Association of College and University Business Officers, which surveys college endowments across the country. These portfolios tend to be a bit larger than yours and mine: Harvard University’s 2018 endowment, the largest in the country, came out to more than $38 billion. In second place, the University of Texas is managing an endowment portfolio of just under $31 billion.

You can see on the chart the 40 largest university endowments. In all, the survey uncovered $616 billion managed by 104 American colleges and universities, and the top ten accounted for one-third of the total.

How do these institutions invest their assets? U.S. stocks made up just 13% of the largest endowments, foreign stocks made up 19%, and bonds added another 7% of the total. Three percent was allocated to cash, and a whopping 58% was devoted to “alternative strategies”—meaning private equity, hedge funds, derivatives, venture capital, investment real estate, timber farms, and distressed debt. Looking over all public institutions, these alternative strategies made up 46% of the universities’ total investments.

Of course, the reason that universities invest in those alternative strategies is that they have enough scale (total dollars) and enough money to hire smart investment managers who know how to make real money there—right? Interestingly, the average return for all the endowments ranged from 5.6% to 6.1% a year over the last ten years. That’s considerably lower than the colleges and universities would have gotten if they’d simply put all their money in the S&P 500 index—which was up 10.2% a year over the same time period.

The lesson here may be that all the high-priced talent hired by some of the world’s largest investors may have outsmarted themselves when a simple investment approach would have worked out better.

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