By: Benyamin Davidsons
Universities normally have endowment funds, through which they invest in securities, real estate, venture capital, or other investments to provide a permanent source of capital to support the institution’s mission and programs. These endowments are many times managed by professional private equity firms or hedge funds, who charge hefty fees for their services.
This year, University endowment managers are living up to their hype, having made impressive returns for the funds. As reported by the NY Times, on Thursday, the Massachusetts Institute of Technology reported that its endowment gained returns of 56 percent in its latest fiscal year, which closed in June. On the same day, Yale also published its returns, revealing its endowment rose by 40 percent over the same period, marking its third-best annual return since 1970. Duke posted a 56 percent return on its endowment. Dartmouth reported a return of close to 47 percent.
Harvard, whose endowment is the largest, worth roughly $53 billion, said on Thursday that its fiscal-year return was up just 34 percent, which is not as impressive as many of the rivaling funds which excelled this year. Harvard’s endowment manager said this “tremendous” return nevertheless reflected “the opportunity cost of taking lower risk” compared to many of the other schools.
The oversized returns for endowment funds are being attributed to increased investments in private equity, venture capital and hedge funds in recent years. This creates diversification in contrast to broader stock and bond market trends. These “alternative” investments can be less predictable than more conservative choices.
Of course, the returns don’t come free. Large universities have long been criticized for paying out more money annually to professional fund managers than they paid out in tuition assistance. As an alternative, some institutions rely on their own staff or trustees to invest the funds. This year, being a bumper year of sorts, the investment in professionally managing the funds paid off, but not always. In the 2019 fiscal year, university endowment returns averaged 5.3 percent, after fees, as per an annual study released by the National Association of College and University Business Officers.
To provide a perspective on this year’s returns, the S&P 500 rose roughly 40 percent in the 12 months ending in June. Yale’s endowment had close to 40 percent of its portfolio in private equity funds, and it ended up matching the return of the diversified index fund.