
The eight Ivy League endowments averaged 8.3% return in fiscal year 2023-24 (July 1, 2023, to June 30, 2024). Comparable schools like Stanford and MIT returned 8.4% and 8.9% respectively. In sharp contrast, the S&P 500 gained 23.5% for the same period, almost triple the Ivies.
To make matters worse, universities allocate tens of millions of dollars from their general revenues to their fund managers. Take Stanford, for example. Its financial assets are managed by the Stanford Management Company. For the current 2024/25 fiscal year, the Provost allocated $56.7 million to SMC. Over the years these allocations have amounted to hundreds of millions. Its head earns over $5 million a year. The staff numbers 59 persons, hired to meet the University’s Diversity, Equity, and Inclusion requirements. Its investments must also satisfy the University’s environmental concerns.
What about long-term comparisons for average annual returns?
Time SMC S&P 500
5 years 9.9% 11.3%
10 years 8.6% 15.2%
20 years 9.3% 10.5%
Why the difference? SMC invests in private equity, real estate, and bonds, with a much smaller share in publicly listed equities. It must also take DEI and Environmental concerns into account. Like generals fighting the previous war, fund managers invest on the old model.
Boards of Trustees have oversight on their endowment managers, usually delegated to Committees on Finance and Investment. Over a third of Stanford Trustees are in the money management business. One would think that changes ought to be made among endowment fund managers when their budgets of tens of millions of dollars result in returns that pale in performance against the S&P 500 . After all, every university claims that it has to be responsible stewards of their donors gifts.
Blunting any change is the reality that serving as a Trustee of one of the great universities in the world conveys enormous prestige in the philanthropic world. What most Trustees want is their name on a building, on one or more endowed professorships, and on research centers and institutes. At Stanford, for example, a third of all professorships are named (endowed) and most buildings on campus are named. Barring a financial shock like the 2008-09 Great Recession or a major scandal, Trustees generally leave the management of their universities to their Presidents, Provosts, Deans, and faculties. The Ivies, Stanford, and MIT are blessed with fabulously wealthy alumni who are likely to donate fresh money every year.
READER COMMENTS
Ahmed Fares
Jan 11 2025 at 8:07pm
The article ignores sequence risk when comparing returns from SMC as compared to the S&P 500 which is why SMC diversifies, giving up return in the process.
A Google search shows that Stanford makes withdrawals from its endowment fund, which exposes it to sequence risk.
How does Stanford’s $36.5 billion endowment work?
Ahmed Fares
Jan 11 2025 at 8:35pm
re: an illustration of sequence risk
Imagine that you have a $100k portfolio invested in the stock market for 20 years. Assume that the market produced ten years of 10% returns followed by ten years of 0% returns, or vice versa. Note that the ending portfolio value is the same in either case. This is due to the commutative property of multiplication. (1.1^10 * 1.0^10 = 1.0^10 * 1.1^10). Here, sequence of returns does not matter.
Assume on the other hand that you needed to withdraw $10k each year to live on.
Scenario 1 (good years first): For the first ten years, you make $10k each year and withdraw $10k, leaving you with an ending value at the end of the tenth year of $100k, after which the bad years come. Now your portfolio goes to $90k, then $80k, etc. Total time to exhaust the portfolio is twenty years.
Scenario 2 (bad years first): Your portfolio goes from $100k to $90k, then $80k, etc… you hit zero in ten years. Now the good years come, but you have no money left. Total time to exhaust the portfolio is ten years.
re:
Thomas L Hutcheson
Jan 12 2025 at 10:38am
Arbitrage ought to eliminate any downside from investing with “ethical” considerations.
BC
Jan 13 2025 at 10:31pm
How so? If avoiding “unethical” investments makes any positive “social impact” at all, it does so by raising the cost of capital of those investments (thereby reducing the number of “unethical” projects). But, if it raises the cost of capital, then investors in “unethical” investments will earn higher returns than those that avoid them. Conversely, if “unethical” investments earn no higher returns than their ethical counterparts, then those “unethical” projects will not be handicapped by a higher cost of capital, i.e., the “ethical” investment strategy will make no social impact.
Even in this latter case, however, the “ethical” investment strategy will still suffer from less diversification than a strategy that invests in everything. It would be like investing in a S&P 100 instead of the S&P 500. The difference might be small, but it will be negative, not positive. Further, the (non-)diversification effect is magnified by the fact that “unethical” investments tend to fall within the same industries, say fossil fuels, gun manufacturers, gambling, etc. So, “ethical” strategies don’t just drop stocks at random. They drop precisely those stocks in industries that the portfolio is already underweighted due to the other stocks that were dropped.
Thomas L Hutcheson
Jan 12 2025 at 10:42am
But what kind of “diversification” can Stanford do that’s better at avoiding sequence risk than index funds?
Ahmed Fares
Jan 12 2025 at 10:45pm
They’re looking for asset classes that are negatively correlated. Bonds typically have a negative correlation with equities but can become positive at times, hence the need for other assets like real estate.
Craig
Jan 12 2025 at 3:06pm
There is naturally also the issue of risk. Some of these plans often times have rules/restrictions as to how to invest.
Michael Markov
Jan 12 2025 at 4:32pm
SMC is one of 10 Ivy+ endowments tracked by MPI Transparency lab – a free resource of data and research on largest pensions and endowments.
There’s a lot of research on endowments
The approach is based on the ideas of Stanford’s Prof. William Sharpe.
Endowments are usually compared to a 70-30 global portfolio.
Ivy+ SMC’s return (10Y+) is in line with the risk they are taking.
MIT has 50% higher risk, hence higher longer-term return.
Short-term return is misleading given higher allocation to privates priced at book value.
SMC’s risk is actually on a lower side, below the Ivy average – positive.
Given their size, Ivy+ performance is index-like, being a linear function of risk taken
If all fees were disclosed and compared with efficiency of investments – this would be very embarrassing for Ivy+. Such transparency is not coming soon, no worries.
Yale’s endowment is the only one that has higher adjusted returns than the rest of the crowd.
Nevada’s PERS at $60B has similar if not higher efficiency and is managed by one person.
Michael
David Seltzer
Jan 14 2025 at 2:16pm
Michael. Your response is spot on. I was a managing partner of a hedge fund. I also managed risk. The linear relation ship between risk and reward was well developed in Bill Sharpe’s CAPM. Our equity, debt and derivative positions were pretty much determined by CAPM. As an aside, our average alpha was near zero. The lesson. It’s nearly impossible to out perform the S&P 500.A portfolio manager can only look for risk adjusted returns from a capital market line (CML) for portfolios that optimally combine risk and return.
Alan Goldhammer
Jan 13 2025 at 8:24am
The late David Swensen who managed the Yale University endowment was perhaps the greatest endowment manager of our time. His portfolio of investments outperformed most if not all other endowment managers. It’s a very difficult job to do and criticism of underperformance is always on the horizon (witness all the turmoil that went on regarding the Harvard University endowment). Mr. Fares raises important points.
David Seltzer
Jan 14 2025 at 2:21pm
Alan. Did Swenson outperform other endowment managers or were his returns higher because he assumed more market risk than they did? If the latter, it’s not clear he outperformed other managers.
JFA
Jan 13 2025 at 10:02am
I’m going to echo the other comments in this section. If the goal of the endowment was maximize its value over the next, say, 30 years with no consideration of using those funds in the mean time, then maybe parking the money into an S and P 500 index would do the trick. But I don’t think that’s what the goal is. Portfolio volatility and sequence risk need to managed if one is to consume some of the investment funds in the present. That’s why people don’t invest 100% in stocks during retirement. Considering the 5- and 20-year returns are only ~1.5 percentage points below a stock index, it seems like they’re doing pretty well. One thing to note from a report on the Stanford portfolio: “A typical “70/30” passive portfolio returned 7.3% and 6.2% over the last five and 10 years.”
Ghost
Jan 13 2025 at 11:04am
The points made in the comments here about risk and diversification are legitimate in principle, but the evidence seems to be that even with that backdrop the large endowments are not doing a great job.
The attached from Richard Ennis is brief, pugnacious and thought-provoking.
https://richardmennis.com/blog/the-endowment-syndrome-why-elite-funds-are-falling-behind
BC
Jan 13 2025 at 10:15pm
I’ll echo others here, but say it a little differently, in pointing out that the S&P 500 is not a good benchmark even for passive indexing. The question of passive vs. active is orthogonal to asset allocation. A 70-30 portfolio can still be passive if the 70% allocation to equities tracks an equity index (like the S&P 500) and the 30% allocation to bonds tracks a *bond* index. There is no theory or empirical data to support the notion that the optimal investment, even in a world with zero alpha, is the S&P 500. The S&P 500 is not the “market portfolio”, the optimal portfolio under the zero-alpha assumptions of the CAPM. The S&P 500 is an index of large cap, US stocks only. It does not include small cap stocks, non-US stocks, bonds, real estate — all part of the “market portfolio”. In fact, private equity is part of the market portfolio, the aggregation of everyone’s portfolios. So, strictly speaking, a purely passive allocation to the “market portfolio” would include an allocation to private equity (and bitcoin and every crazy meme coin, btw).
Btw, if Stanford’s endowment is 36.5B, then an SMC budget of 56.7M represents an expense ratio of 0.16% (excluding fees paid to external managers). Not crazy high by any means. One could argue that with such large scale, they should really manage most of their assets internally instead of paying much higher fees to external managers. However, Harvard Management Co did that about 20 years ago and, despite very good performance, encountered much political/ideological opposition.
David Seltzer
Jan 15 2025 at 11:14am
BC: The S&P 500 is not the market portfolio…but it was for our purposes when trading diversified market portfolios. The VIX was used to determine risk-return trades. As you point out…”not the market portfolio”…our quants used the SPX it to determine correlation of other assets when building hedges. Just a few. S&P 500/ QQQ rho =.86. Russell 2000, .86. Real estate, .92. Bitcoin, .92. Our well paid quants and physics PHD’s were charged with finding Arrow- Debreu state price securities for replicating portfolios. Nearly 100% of the time, the law of one price prevailed. The search for the best trade that compensated us for a given level of risk (optimal) was our primary objective subject to constraints.
Comments are closed.