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Portfolio > Asset Managers

Why Yale Keeps Beating Harvard in the Endowment Game

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Harvard may have defeated Yale in a recent field hockey match, but when it comes to how these Ivy League schools manage money, there seems to be no contest: Yale has outperformed Harvard for six years in a row.

Yale said Friday that in the year ended June 30, its endowment had a 3.4% gain. Meanwhile, Harvard’s endowment sank 2%.

In the prior five years ending June 30, 2015, Harvard’s annualized investment return was nearly four percentage points below Yale’s roughly 14% return, according to Tim Keating of Keating Wealth Management.

Over a 10-year time horizon, Yale, Princeton and Columbia produced yearly gains of about 10% while Harvard “sits near the back of the pack with a return of 7.6%—about 25% lower than the Ivy League leaders,” explained Keating, a Harvard grad.

What explains this divergence?

Back in the 1990s and early 2000s, Keating said, both Harvard and Yale did well under the leadership of Jack Meyer and David Swensen, respectively, who moved their portfolios into “more exotic fare, such as private equity and hedge funds.”

However, Harvard worked with a hybrid model, with some funds being managed by external managers and other money led by internal managers. Swensen had moved all of Yale’s money to external managers.

With Harvard’s internal managers performing well, their earnings shot up to $10 million and even $30 million a year, which led to protests from faculty and some alumni. Meyer departed in 2005.

(Related: Top 20 Richest Colleges of 2015: The Biggest Endowments)

Harvard Management Co. has had three interim heads and three permanent heads over the past decade. In July, Stephen Blyth left for medical reasons, and the school’s endowment now has an interim leader.

In contrast, Swensen has been running the show at Yale for 31 years.

(The value of Yale’s endowment dropped less than 1% to $25.4 billion as of June 30, the university said, due to the fact that its targeted spending rate of 5.25% outpaced the endowment’s yearly return.)

Vanguard Challenge

While Swensen had led Yale’s strong performance, he also has “inspired a trend, spawning imitators,” Keating pointed out.

This means institutions and investors have moved to reduce their holdings of stocks and bonds and purchase illiquid assets like private equity, private real assets and hedge funds, which now account for about 60% of the largest endowment portfolios, according to research from Vanguard.

But, as Keating pointed out, Vanguard found that most endowments would, in fact, “have been better off had they invested in low-cost, diversified, transparent public mutual funds.”

In 1985, 65% of Yale’s endowment was allocated to U.S. equities. For the current fiscal year, its target domestic equity allocation is just 4%.

(Other investment targets are as follows: absolute return, 22.5%; venture capital, 16%; foreign equity, 15%; leveraged buyouts, real estate, 12.5%; bonds and cash, 7.5%; and natural resources, 7.5%.)

Advisor, Investor Takeaway

There are some points to glean from Yale’s outperformance, Keating said, “and the first is what not to do, which is very important.

“In his second book aimed at individual investors, Swenson clearly says his approach should not be a model for replication. At Yale, he has institutional and structural resources that advisors and investors don’t have,” the wealth manager explained in an interview.

Instead, Swenson agrees with Vanguard: Investors should rely on “a simple portfolio and mainly passive management/asset allocation,” Keating explained.

As for his alma matter, “Harvard should eliminate its internal managers—if for no other reason than to avoid the politics associated with directly employing highly compensated investment professionals—and radically simplify the endowment’s investment approach,” he stated.

The school “could do worse than a 60% stock/40% bond mix,” Keating added. 

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