In fiscal 2018, MIT’s endowment saw a 13.5 percent return, and Notre Dame’s made 12 percent. The strategies of those high-yield investors, however, likely won’t work for independent schools or even larger asset-rich universities in the long run, said John Regan of Permanens Capital, an endowment management firm, in a recent NBOA webinar. Those top earners took high risks, had little liquidity and paid large fees to get those returns.
Yale’s endowment, which led the way in venture capital and private equity, is now scaling back in those areas — a bellwether, according to Regan.
“Everyone is talking up allocations to private equity and venture capital because the stated returns of the indices have been very high…around 16 percent, 17 percent,” he said. But that’s no longer “a return you can buy,” he explained. Unlike public stock market indices such as the S&P 500, private equity indices such as the Cambridge retroactively remove funds when a private equity manager stops reporting them, Regan explained. This leads to “survivorship bias” and makes the returns look more generous than they in fact are. Yale’s endowment, which led the way in venture capital and private equity, is now scaling back in those areas — a bellwether, according to Regan.
“The small schools with no private equity, small high schools with $20 or $30 million are putting up a 5 percent return, the same as the larger schools,” he said. “So, it hasn't really hurt you to be out of private equity” over the past 10 years. Taking into account fees, most top funds don’t earn any more than a simple mixed index fund made up of 60 percent stocks and 40 percent bonds, Regan said.
Regan recommends schools consider these two questions when developing or revisiting their investment policy statement (IPS).
- Why are we investing? What is the purpose of the endowment?
- Who is really in charge of the endowment — who has a fiduciary responsibility and who can pull the trigger for us?
He cautioned that most schools have overdrawn on their endowments over the past 10 years since CPI growth has been so low. “No one has reached their goals on a 5- and 10-year rate of return of 7 or 8 percent.” Thus schools may need to reconsider their draw goals.
Regan further urged schools to consider an outsourced chief investment officer in lieu of managing investments themselves or outsourcing to asset managers. Independent schools don’t have the bandwidth to support an internal investment office, and banks and brokers aren’t fiduciaries, he explained. An outsourced investment officer should have more skin in the game and a closer relationship to the school. When sending out an RFP, don’t send out your school’s portfolio, Regan advised; see which firms ask for it – that will tell you if a firm will make specific investment choices appropriate to your school, not just rely on a generic “house recipe” of investments.
For more on fee trends, benchmarks, endowment managers and more, visit the archived webinar, slides and transcript.
