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How College Endowments Invest for the Future

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Do university endowments invest for the long term, a strategy they should follow given that they invest for future generations?

A new study published in the Financial Analysts Journal examined the behavior of a dozen rich U.S. endowments since 1945, and drew comparisons with earlier periods to find out.

(Related: Study Finds Good News for 11 College Endowments That Embraced Sustainable Investing)

The research showed that during the run-up to a crisis, the 12 endowments typically decreased their active risky allocations, defined as equities and alternative assets. After the onset of a crisis, they increased these allocations as prices for risky assets fell.

“Thus, the evidence suggests that endowments do, indeed, behave as long-term investors by tending to invest countercyclically,” the study concluded.

The study’s sample comprised the eight Ivy League schools — Brown, Columbia, Cornell, Dartmouth, Harvard, Princeton, University of Pennsylvania and Yale — as well as four universities that ranked in the top 20 in doctorate production in the early 1920s — Johns Hopkins, Massachusetts Institute of Technology, Stanford and the University of Chicago.

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Researchers assembled an annual time series of asset allocations and investment returns for each school, and analyzed how their investment strategies evolved over the long term, emphasizing major shifts in their allocations to risky assets.

They documented two major shifts in endowment allocations to risky assets, both spearheaded by the Ivies. The first was from bonds to stocks in the 1930s and 1940s, the second from stocks to alternative assets beginning in the 1980s.

The researchers then looked at whether the endowments in the sample really did behave as long-term investors by examining their investment behavior around the time of major financial crises: 1906–1907, 1929, 1937, 1973–1974, 2000 and 2008. Their question: Did endowments buy assets when prices were low and sell them when prices were high?

For each downturn, they calculated the active portfolio allocation to risky assets.

The study concluded that endowments typically exhibited a countercyclical investment pattern — in particular, increasing their allocations to equities after the onset of a crisis — compared with evidence indicating that retail and other investors without the advantage of a long horizon exhibit strongly procyclical behavior.

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