Revenge of the Endowment Model

It's reporting season for college and university  endowments, and there are some eye-popping returns being published. Harvard University’s endowment was worth $53.2 billion at the end of June after returning some 34% in a year. MIT’s endowment surpassed $27 billion after jumping 56%, Penn’s hit $20.5 billion after gaining 41%, Duke’s soared 56%, to almost $13 billion, and Cornell's surged 42%, to $10 billion. The S&P 500 returned about 41% including dividends during that period.

The phenomenon of universities beating the market is mostly new. For years, endowment fund managers put more and more money into alternative investments like venture capital and private equity. Those couldn't keep pace with the decade-long bull market in stocks after the financial crisis.

But over the past year, alternative investments trounced the market, lifting many endowments' returns ahead of the market.

Brown University's endowment, for example, saw a 58.9% gain from its public equities portfolio, while private equity generated an 86.8% return. The overall fund, which includes other more conservative investments, surged 51.5%, to $6.9 billion.

Here's Barron's Mary Romano on the strategy behind the universities' endowments:

The stellar results amount to a big win for the so-called endowment model championed by Yale University that includes big allocations to illiquid asset classes like venture capital and private equity and relatively little in stocks.

Endowments weren’t helped, though, by big weightings in alternatives in the past 10 years, when stocks had a great run. School funds posted an average annualized 7.5% in the 10 years through June 30, according to a 2020 study by the National Association of College and University Business Officers and TIAA. The S&P 500 had an annualized return of 14.8% in the period.

'It’s the revival of the endowment model,' says Larry Kochard, the former chief investment officer at the University of Virginia Investment Management Co. who now oversees investments at Makena Capital, which has $20 billion in assets. 'The endowment model has taken a lot of push back in the past decade but this reinforces that you are going to get see bigger returns if you are long term-oriented.'

The endowment model was pioneered by David Swensen, the chief investment officer of Yale University's endowment from 1985 until his passing in May. Read his Barron's obituary here.

And read much more from Mary on U.S. universities' endowment performance and trends in the past year here.