Key Takeaways
- • The top 20 university endowments grew by more than 9% annually in real terms between 1992 and 2005, according to Investopedia's educational overview of endowment investing.
- • Endowments typically withdraw only 4% to 5% of their assets annually for current use, while investing the bulk of principal to generate future income.
- • Endowments with assets of US$1 billion or more shifted in the decades before 2008 toward alternatives such as hedge funds, private equity, venture capital, and real assets, which offer higher returns but longer holding periods and higher minimums.
- • Between 1985 and 2008, Harvard returned 15.23% and Yale 16.62%, both outperforming the S&P 500's 12% over the same period.
- • The article notes that endowments fell about 23% in 2008 and have since re-jiggered their strategies, though investors may not be able to replicate their results.
Summary
An Investopedia educational article by Manoj Singh outlines the investment practices of leading university endowments, using Ivy League institutions such as Harvard, Yale, and Princeton as reference points. The article states that the top 20 university endowments grew by more than 9% annually on a real basis between 1992 and 2005. It also notes that many endowments posted negative returns following the 2008 financial crisis and subsequently revised their investment strategies.
Endowments are traditionally funded by donations and generally preserve most of their principal. According to the article, universities on average withdraw only 4% to 5% of endowment funds for current use. The National Association of College and University Business Officers (NACUBO) is cited for the observation that endowment withdrawals averaged 15% to 20% of college revenues in 2008. Endowments aim both to generate real returns sufficient to cover withdrawals and to preserve the real value of principal, using the Higher Education Price Index (HEPI) as an inflation benchmark, which the article says generally runs about 1% above the consumer price index for urban consumers.
From 1985 to 2008, Harvard's endowment generated 15.23% annual returns and Yale's 16.62%, both ahead of the S&P 500's 12% gain over the period. The article emphasizes that no single formula explains these results and that schools describe their asset allocation models in annual reports, although they rarely disclose individual holdings. Endowments with at least US$1 billion in assets typically held a small share of traditional stocks and bonds and a larger share of alternatives, including hedge funds, private equity, venture capital, and real assets such as oil and natural resources. The article notes these assets can outperform but require longer holding periods and higher minimums, favoring larger endowments able to commit capital for extended periods.
Governance is built around written investment policies set by investment committees, often composed of alumni, and day-to-day management is handled by chief investment officers and in-house staff. The article concludes that while endowments publicly disclose asset allocation breakdowns, individual investors may not be able to duplicate their historical success.
Endowments are traditionally funded by donations and generally preserve most of their principal. According to the article, universities on average withdraw only 4% to 5% of endowment funds for current use. The National Association of College and University Business Officers (NACUBO) is cited for the observation that endowment withdrawals averaged 15% to 20% of college revenues in 2008. Endowments aim both to generate real returns sufficient to cover withdrawals and to preserve the real value of principal, using the Higher Education Price Index (HEPI) as an inflation benchmark, which the article says generally runs about 1% above the consumer price index for urban consumers.
From 1985 to 2008, Harvard's endowment generated 15.23% annual returns and Yale's 16.62%, both ahead of the S&P 500's 12% gain over the period. The article emphasizes that no single formula explains these results and that schools describe their asset allocation models in annual reports, although they rarely disclose individual holdings. Endowments with at least US$1 billion in assets typically held a small share of traditional stocks and bonds and a larger share of alternatives, including hedge funds, private equity, venture capital, and real assets such as oil and natural resources. The article notes these assets can outperform but require longer holding periods and higher minimums, favoring larger endowments able to commit capital for extended periods.
Governance is built around written investment policies set by investment committees, often composed of alumni, and day-to-day management is handled by chief investment officers and in-house staff. The article concludes that while endowments publicly disclose asset allocation breakdowns, individual investors may not be able to duplicate their historical success.
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