Among university endowments, an Ivy League pedigree may be the key to success. That’s one insight of a soon-to-be-published analysis of university endowment performance by Josh Lerner, a professor at Harvard Business School. “Secrets of the Academy: The Drivers of University Endowment Success” reports that although Yale, Harvard and other elite endowments have persistently posted strong performance thanks to greater exposure to such alternatives as private equity and hedge funds, such strategies have proved less effective outside the Ivy League and other top schools.
“However appealing it may be, the conclusion that more exposure to alternative assets will always lead to better performance may be a false one,” writes Lerner, a private equity expert who collaborated on the paper with Antoinette Schoar, an associate professor of entrepreneurial finance at the MIT Sloan School of Management, and Jialan Wang, a Ph.D. candidate in financial economics at the Sloan School. Other factors critical to success, he writes, include an investment team’s experience with alternatives as well as access to the best private equity and hedge fund managers.
The analysis may help to explain the persistently outsize success of many of the largest and most visible endowments. Between 1992 and 2005, endowments of Ivy League universities, along with those of Duke, MIT, Caltech and Stanford, persistently outperformed other universities by an overall average of more than 3 percentage points annually. In 1992 the top 10 percent of endowments had assets 160 times greater than the bottom 10 percent; by 2005 the top 10 percent’s assets were 400 times greater.
The rich, it seems, get richer in academia as well as in life. The findings suggest that once an endowment reaches a critical size, it can afford the professional and sophisticated investment staff and investment committee that can help maintain high levels of returns.
University endowments are increasingly playing the Ivy League game. Between 1993 and 2005 they boosted their exposure to alternatives from 9 percent on average to 18 percent, according to the National Association of College and University Business Officers. Corporate and public pensions as well as a growing number of sovereign funds -- from Kuwait to China -- are also investing more in hedge funds, private equity, real estate and other nontraditional assets.
The elite university endowments with the most successful investments in alternatives have three defining characteristics: active investment committees, typically drawn from alumni; experienced staffs that have worked together for many years; and an academic orientation that promotes a process of self-evaluation. Without these, following the Ivy League’s lead may be risky, indeed.
