Here’s an insightful discussion with Josh Lerner, professor of investment banking at Harvard Business School. Lerner discusses pension funds’ search for alternative ways to invest in private equity, cutting out the middleman, and more.
Cover photo by c_ambler via Flickr CC License
For the second year in a row, U.S. public pension investment returns outpaced endowment funds.
Endowment funds on the whole returned 15.8 percent, while public pension portfolios returned 16.86 percent.
From Chief Investment Officer:
US university endowments returned an average 15.8% in the fiscal year ending June 30—more than 100 basis point less than the typical public pension fund, two studies have shown.
Public pensions rode their large equities allocations (averaging 61%) to 16.86% gains, Wilshire Associates reported in August. Funds larger than $1 billion did even better, returning 17.44% for the fiscal year.
Endowment portfolios, in contrast, held an average 30% of the best-in-class performing asset, according to preliminary data from the annual NACUBO-Commonfund study. For the 129 institutions evaluated, domestic equities generated 22.6% returns while international stocks gained 19.6%.
“Smaller endowments, which typically have the largest allocations to traditional asset classes, benefited from the strong performance of liquid domestic and international equities beginning in 2009,” said Commonfund Institute Executive Director John Griswold.
“But,” he added, “the greater diversification practiced by the largest endowments and their emphasis on a variety of sources of return, both public and private, tends to result in higher long-term investment performance.”
[…]
A number of the nation’s most high profile, elite universities have, in recent weeks, revealed FY2014 performances far in excess of the average large endowment’s 16.8% gain.
Yale University earned 20.2%, Princeton 19.6%, MIT 19.2%, and Columbia returned 17.5% on its $9.2 billion portfolio.
But the largest, most-watched endowment of all once again failed to enter the winner’s circle. Harvard University disclosed its sub-par 15.4% returns for FY2014 just hours before announcing the replacement for outgoing CEO Jane Mendillo. Managing Director and Head of Public Markets Stephen Blyth is set take over the $36.4 billion fund on January 1, 2015.
To see a breakdown of endowment funds’ returns by asset class, click here.
A group of Harvard alumni are voicing concern and anger over the compensation packages of investment managers who run the school’s endowment fund. From Chief Investment Officer:
Harvard Management Company (HMC), which runs the $32.7 billion fund, paid $132.8 million in salaries, bonuses, and benefits in the 12 months to June 30, 2013. This was more than double the $63.5 million it paid in 2010, according to Bloomberg.
HMC staff salaries and benefits were “increasing at a much faster rate than the endowment, which still has a long way to go before it reaches its pre-crisis peak”, they said in the letter.
A spokesperson for the Ivy League university told Bloomberg: “HMC’s unique hybrid model has saved the university more than $1.5 billion in management costs compared to what an equivalent external management strategy would have cost over the past decade.”
The nine alumni, who aired their concerns in a letter to Harvard’s president, said it’s not just the compensation packages that rub the, the wrong way. It’s also the performance. From Chief Investment Officer:
They criticized the pay hikes, which had come despite the endowment underperforming many of its peers. It has still to reach its pre-financial crisis peak of $36.9 billion in assets after losing 27% in the 12 months to June 30, 2009—although its 11.3% return for the fiscal year ending June 30, 2013 marked an outperformance of its benchmark.
According to AI-CIO, Princeton University also shoveled out the dough to its investment managers. They received $8.3 million in bonuses last year, which was a 39 percent increase over 2012.
Photo by Chaval Brasil
