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Business

Higher education has lower returns for college endowments

By
Terry Keenan
Published June 29, 2014, 5:24 a.m. ET

Nearly two months after most US college students took their finals, the nation’s college and university endowments are closing the books on their fiscal year.

For the most part, the men and women who manage higher education’s nest eggs get a C at best. When it comes to investing, summer school is in order.

Although the final results won’t be in for several months, college endowments — especially those of the nation’s elite universities — have been sorely underperforming the stock market averages over the five-year period ending last June.

While the S&P 500 has posted a meaty 18 percent annualized return in the five years from June 2009 to 2013, almost every Ivy League school, from Harvard to Yale to Penn, barely achieved a third of those results. Columbia University, the best of the bunch, racked up returns of just 6.8 percent, while Stanford clocked in at just over 3 percent.

The shoddy returns helped speed the departure of Jane Mendillo, the head of Harvard Management Co., earlier this month. She will step down at the end of the year.

As it bid Mendillo adieu, the university made a point to underscore her contributions to “sustainable investing.” As investment gains lag across the university landscape, money for scholarships and building projects have tightened as well.

How did the performance gap between the smart and the supposedly smartest of the smart become so wide?

Well, because the latter tried to outsmart the empirical data that show it’s nearly impossible to beat an index fund in the long run.

These über-managers have gone full bore into the most illiquid of investments — from private equity to real estate to hedge funds. While the Mensa crowd running these endowments didn’t mind paying outsized fees for these alternative investments, the returns have been dismal and it’s not easy to get out and correct course.

It’s little wonder that with only 16 percent of their holdings devoted to the best asset category of the past six years — US stocks — the overall portfolios have been treading water trying to go against the Federal Reserve’s asset bubble.