September 29, 2016; Bloomberg
Endowment investing drives major universities. Endowment income accounts for more than 30 percent of total operations at some institutions, supporting everything from financial aid to research. Management teams and boards establish governance and management structures to strive for positive returns. No investment approach constitutes an industry best practice. A clean audit opinion does not say anything about an institution’s success at risk mitigation. Positive performance calls for complex diversification strategies. When it works, students enjoy new amenities and alumni and other donors are proud. When it doesn’t work, misery abounds.
Cornell University’s endowment just posted the worst investment loss among the Ivy League schools. They are in good company. Cornell’s 3.3 percent loss is worse than its peers only by degrees. More than a dozen university endowments with assets of more than $1 billion, including the University of Pennsylvania, Duke University, and Dartmouth College, have reported investment declines. That includes the largest university endowment of them all: Harvard declared a two percent loss on its investments for the year ending June 30th.
Harvard’s student newspaper, the Harvard Crimson, offered an unforgiving assessment of the Harvard Management Company’s performance in this recent Editorial Board letter entitled, “The Urgency of the Present, Sub-par endowment returns are one of the greatest threats to Harvard today.”
As crass as it might be to say, money makes Harvard go round. We are a nonprofit institution of higher learning, but educating young people is expensive. Paying professors is expensive; maintaining dorms is expensive; funding research is expensive. As we stated this spring, 35 percent of the University budget is funded by the endowment. Far from a pot of gold in the sky, the endowment and its performance have tangible effects on University life and activities.
Cornell’s chief investment officer began in July, the fourth person to head Cornell’s endowment fund since 2010. He is moving the investment office from Ithaca to New York City. The thinking is that the relocation will attract better professional talent.
The Harvard Crimson letter offers this pointed comparison between endowment performance and the fundraising efforts of the school’s development office.
Indeed, endowment underperformance outweighs the potential benefits of fundraising. As we opined in 2015, major gifts are dwarfed by potential investment gains in a portfolio as massive as Harvard’s. A one percent rise in returns equates to about $350 million—approximately the size of the gift that renamed the School of Public Health. This year’s losses of $2 billion amount to five separate gifts the size of the one that renamed the School of Engineering and Applied Sciences.
Among the Ivy League schools, only Yale is celebrating. Its endowment registered a 3.4 percent increase this year. One reason may be stability; David Swensen, Yale’s chief investment officer, has served the university since 1985. Cornell, Harvard, and others have experienced years of turnover in that pivotal office. Each new leader brings with him or her new investment and risk management strategies. While it can be fun to watch a football match between Harvard and Yale, win or lose, it is always a sickening experience to be defeated on the playing field of endowment investing.
NPQ writes often about nonprofit and specifically university endowments and how they impact civil society. While Congress, the Movement for Black Lives, and many others are making demands on university endowments, most chief investment officers are simply struggling to keep their endowments of a size worth fighting over.—James Schaffer