At Ivy League Endowments, Performance Dragged Down by Managers’ Picks

What is going on with Ivy League universities?

Despite a strong year for private equity and venture capital, Ivy League endowments—which have outsized allocations in those asset classes—failed to make the grade on their returns.

Schools in the Ivy League averaged just 6.7% in fiscal year 2019, lagging behind the showing of a benchmark US portfolio of stocks and bonds, according to a report released Tuesday from Markov Processes International, an investment research firm. The benchmark portfolio, with a 60-40 stock-bond split, averaged 9.9% over the same period.

The trailing performance of prestigious schools came during a strong year for many asset classes. In the investing world at large, there were stellar results in private equity, which jumped 14%, and venture capital, which climbed 21%. Broadly speaking, other asset classes also posted better returns, such as bonds (8%), and public equities (10.4%).

Researchers in the report had a simple explanation for straggling performance from the schools: individual managers’ uninspiring security selection.

According to the report, the generally poor returns of the Ivies is “the result of individual choices by these endowments from among the investment opportunity set and, in turn, by the investment decisions of their underlying managers, particularly in private market assets.”

That would explain the head-scratching performance across schools, the report said. For example, schools like Yale and Princeton, which had higher allocations in outperforming private equity and venture capital assets, still underperformed most of their peers, coming in fifth and sixth place, respectively.

On the other hand, Brown, which had the highest asset allocation in one of the worst-performing asset classes, hedge funds, was the only one to beat the performance of a domestic portfolio. The Rhode Island school also beat its target rate by more than double last year with a 12.4% showing, which raised the endowment to a record $4.2 billion.

Part of this is explained by the wildly varying performance among private assets. Another explanation is the difference in selection returns across university portfolios. The report found that all Ivy League universities did poorly when it comes to individual selections—with the exception of Brown.

“We believe that the selection return estimate is the best indicator of how an endowment is doing in comparison to its most closely matched investment opportunity set,” the report read.

Other asset classes that may have helped drive gains may be other asset classes, such as emerging market bond or small-cap stocks, the report said. Endowments also have other costs, such as fees and write-offs, that subtract from performance.