If you want to see how the “other half” manages its money, turn to the National Association of College and University Business Officers, which surveys college endowments across the country. These schools portfolios tend to be a bit larger than yours and mine: Harvard University’s 2018 endowment, the largest in the country, came out to more than $38 billion. In second place, the University of Texas is managing an endowment portfolio of just under $31 billion.
You can see on the chart below the actual dollars in the 40 largest university endowments. In all, the survey uncovered $616 billion managed by 104 American colleges and universities, and the top ten accounted for 1/3 of the total.
How do these institutions invest their assets? U.S. stocks made up just 13% of the largest endowments, foreign stocks made up 19%, and bonds added another 7% of the total. Three percent was allocated to cash, and a whopping 58% were devoted to “alternative strategies” — meaning private equity, hedge funds, derivatives, venture capital, investment real estate, timber farms and distressed debt. Looking over all public institutions, these alternative strategies made up 46% of the universities’ total investments.
Of course, the reason that universities invest in those alternative strategies is that they have enough scale (total dollars) and enough money to hire smart investment managers who know how to make real money there — right? Interestingly, the average return for all the endowments ranged from 5.6% to 6.1% a year over the last ten years. That’s considerably lower than the colleges and universities would have gotten if they’d simply put all their money in the S&P 500 index — which was up 10.2% a year over the same time period. Even a low cost 60/40 index fund returned 6.2% over the same time period. (See the comparison chart below.)
The lesson here may be that all the high-priced talent hired by some of the world’s largest investors may have outsmarted themselves when a simple investment approach would have worked out better. We like to keep things simple and invest with evidence-based, time-tested strategies. Call or email anytime – we’ll be happy to share our investment philosophy with you.
The three funds used here were Total U.S. Stock Market Index Fund, Total International Index Fund, and Total U.S. Bond Market Index Fund. The split between U.S. and foreign stocks was 3-to-2 since that was the average allocation for the endowments. Source: A Wealth of Common Sense
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 08/29/2019 and are subject to change at any time due to the changes in market or economic conditions.