The Harvard and Yale endowments are the two largest university funds with combined assets of over $71 billion. Barron’s October 14, 2019 issue had an article about the underperformance of these two funds last year, with an accompanying chart also showing the 10-Year annualized under performance of these and ten other elite universities as well as the mean of the 149 institutions in the category.
None of the twelve did better than the S&P 500 index and only three did better than a 70/30 Stock/Bond allocation. To be fair, managers of these funds cannot invest solely in large-cap equities which the S&P 500 index represents, and they also need some anchoring that bonds provide that would reduce the overall performance, thus the article’s 70/30 mix. The reality is that not all stock selections would be in large-cap but would also include mid and small-cap, a mix of value and growth and other variations of U.S. equities. Ditto with bonds and the length of the maturities which would be a significant element of the portfolio.
The article explains that Harvard and Yale were light on U.S. stocks with greater exposure in alternatives such as a hedge, private equity, venture capital, and leveraged buyout funds, real estate and natural resources and foreign stocks. It seems their goal is to outperform the market and they are now relegated to comparing their performance to other university endowments, which also did poorly with regard to the major indexes. It would seem to me that managing portfolios with the goal of duplicating the market averages for equities with a portion in individual bond and debt investments would be a better way to invest the funds the managers are entrusted with.
It is easy to second guess or try to analyze poor investment management performance, but a lesson from this for readers of my blogs is to consider the major index funds and skip stock picking and alternatives.
The brief article doesn’t seem to waste a word and provides a thorough thesis of how such funds should be invested. Here is a link to the entire article by Nicholas Jasinski.
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