Envy is a certain outcome of any serious competitive endeavour. As the endowment funds of elite US universities, such as Yale, Harvard and Princeton, continue to post investment returns well ahead of the mainstream, many institutions have tried to emulate their winning strategies by allocating aggressively to alternatives. But will strategies hatched in the past deliver the outperformance that new followers desire? And what other examples should the mainstream follow from the universities’ success? SIMON MUMME reports on the innovation, and imitation, that has been spurred by the endowments phenomenon.
Socrates deemed it an “ulcer of the soul”, after Heraclitus, speaking more than a century earlier, said that “our envy always lasts longer than the happiness of those we envy”. Writers and prophets of many nations and creeds, from Shakespeare to Mohammed, warn us of the harm that visits people who are irredeemably jealous of their peers’ success. At its worst, “our envy of others devours us most of all,” wrote the late Alexander Solzhenitsyn.
In the intensely competitive world of institutional investment, envy might not only affect individuals, but also the big licks of capital at stake. The endowment funds of elite US universities – such as Yale, Harvard, Stanford and Princeton – have shot to prominence in the past decade as they pioneered new models of asset allocation that produced stellar returns, effectively scoring a “triple crown” of market-leading returns, committed diversification and ample “sex appeal”, according to Gareth Abley, the head of asset consulting at MLC Implemented Consulting.
Their success is underscored by an emphatic consistency: between 1996 and 2005, more than 5 per cent of US endowments beat the top percentile return for an American corporate pension fund with more than US$100 million in assets.
This superiority of the leading schools was particularly visible in 2000 and 2001, when the excess returns achieved by endowments of Ivy League universities, along with Duke, MIT, Caltech and Stanford, outperformed those of other schools by up to 10 per cent. In 2000, for instance, the average excess return from endowments reporting at least 10 years of performance data between 1992 and 2005 was roughly 8 per cent, while the elites generated returns north of 26 per cent.
Such achievements have been driven by maverick calls on strategic asset allocation (SAA) that showed a willingness to invest heavily in alternatives and other illiquid assets, combined with the governance to pull it off. For example, at the end of financial 2006, Yale aimed to hold 69 per cent of its portfolio in private equity, hedge funds, and real estate. As the returns rolled in, headlined by Yale’s annual 17.2 per cent return in the decade to 2007, the institutional mainstream, stuck in dotcom wreckage, rightly took notice. ‘Endowments envy’ crept up on US pension funds and layed on the minds of investment committee members.