PE No Savior For Lackluster Endowments

Harvard University, which has the world’s biggest endowment with $30.7 billion in assets, recorded a slight loss of -0.05 percent, against a 5.5 percent return for the S&P. Jane Mendillo, Harvard’s endowment chief, was among those that blamed global economic shocks for the endowment’s break even performance. She wrote to trustees, saying, “This is a time of unusual turbulence with significant macroeconomic issues facing regions around the world,” and adding, “Harvard carries relatively more exposure to both foreign and emerging markets than many of our peers.”

Private equity and venture capital together yielded a 2 percent return for Harvard, which was 2 percent below its internal benchmark. That’s a far cry from the 26.2 percent return that private equity and venture together delivered in 2011. But despite private equity’s weak showing in 2012, the university announced it was reversing course and boosting its policy allocation to private equity by four percentage points to 16 percent from 12 percent over the next few years.

According to a recent article in Harvard Magazine, the university’s plans to increase its private equity exposure are due to “indications that the investment managers see some emerging opportunities.”

That’s a big change for Harvard, which until last year was actively shrinking its private equity portfolio to a 12 percent allocation target. In her report to trustees in 2011, Mendillo explained why she continued to shrink Harvard’s portfolio, saying “private equity has become more and more crowded,” adding, “our expectations are that returns will be more muted going forward.”

Harvard’s marginal loss in 2012 follows an impressive gain of 21.4 percent in fiscal 2011. The endowment has garnered an average annual return of 9.5 percent over the past 10 years. And while the endowment is still far below its 2008 peak of $36.9 billion, it has rebounded substantially from its record 27 percent loss in fiscal 2009, which left the endowment with $26 billion, or nearly $11 billion off its peak.

Yale University’s $19.3 billion endowment did better than Harvard’s, returning 4.7 percent, but David Swenson’s unrivalled investing skills were not enough to beat the S&P. In fact, even with Yale’s investment gains, the endowment wound up slightly smaller, as distributions from the endowment exceeded investment returns plus new contributions.

Yale’s private equity portfolio was particularly impressive, returning 13.2 percent, more than 11 percent above Harvard’s. Yale has among the highest private equity allocations among endowments, currently at 35 percent, or $6.8 billion, of the university’s overall portfolio.

But Yale has more to worry about in the long term. Swensen, widely heralded as one of the nation’s best money managers, disclosed recently that he had cancer and was seeking treatment.

Swensen’s investing skills have resulted in a 10.6 percent average annual return over the last decade, a period that includes two recessions. Yale’s endowment is still below its peak of $22.9 billion, which was set in 2008.

The University of Pennsylvania joins Harvard and Yale as the only other Ivy League university so far to report its 2012 investment results. Penn’s $6.8 billion endowment returned 1.6 percent in fiscal 2012, with the Philadelphia university’s 10-year average annual return coming in at 7 percent, lagging both Harvard and Yale. At press time, the endowments of Ivy League rivals Cornell University, Dartmouth College, Brown University, Princeton University and Columbia University had not yet announced results.

The endowment that has so far notched the best results is the Massachusetts Institute of Technology, whose $10.3 billion endowment returned 8 percent in fiscal 2012. That gain compares to a 17.9 percent gain in 2011.

Stanford University’s huge $19.7 billion “merged pool,” which includes its $17 billion endowment and other assets, produced a 1 percent return in fiscal 2012.  That compares to a 22.4 percent return in fiscal 2011.

Finally, the University of Chicago joins MIT as the only other big university that so far has beat the S&P. Chicago returned 6.8 percent in 2012 to finish the year with $6.5 billion.