Endowments at Smaller Universities Outperformed Larger Endowments in 2008

The fiscal year for most endowments has ended, and for the first time in a long while smaller college and university endowments outperformed endowment heavyweights such as Harvard and Yale, the Wall Street Journal reports.

Although nearly every college and university endowment suffered losses in the fiscal year just ended, those valued at a $1 billion or less generally held up better than larger endowments because they had more money in fixed income vehicles and less money in alternative investments such as hedge funds, private equity, and real estate, all of which failed to offer much diversification as the credit and stock markets were thrown into turmoil.

Adopted by many large endowments, the so-called Yale approach holds that because endowments invest for the long term and are not concerned about redemptions or short-term market fluctuations, they are the ideal candidates for alternative investments. In 2008, however, many of these alternative assets became hard to sell, forcing schools to either dump their best performing funds and securities or borrow money to meet their obligations. Ivy League schools, which rely on their endowments for 25 percent to 45 percent of their operating revenue, compared to 5 percent at the average college, suffered more from these so-called "asset-liability mismatches."

Indeed, the five largest single-school endowments — which in addition to Harvard and Yale include Stanford, Princeton, and MIT — are looking at declines of 25 percent to 30 percent for the fiscal year just ended. In contrast, the median decline for college and foundation endowments for the first eleven months of the fiscal year was 20 percent, according to Northern Trust. Endowments with less than $100 million in assets did even better, relatively speaking, down 16 percent for the period.

"A lesson from this crisis," said Daniel Jick, managing director and CEO of HighVista Strategies, which manages endowment money for small schools, "is that following what the larger guys have done is not necessarily a road map to success."

Craig Karmin. "Ivy League Endowments Finally 'Dumb'." Wall Street Journal 06/30/2009.