News » University Affairs | Oct. 20
The University’s endowment returned 11.7 percent in fiscal year 2013, falling in line with other recently announced returns across the Ivy League. The total value of the endowment grew to $18.2 billion.
This year’s return surpassed the 3.1 percent gain in fiscal year 2012, when the value of the endowment shrunk slightly since spending outpaced growth.
The Friday announcement follows a Thursday meeting of the directors of the Princeton University Investment Company, which manages the endowment.
The double-digit gains reported by the University and its peers reflect increasingly bullish activity in foreign and domestic markets.
The Standard & Poor’s 500 index, a portfolio considered a broad indicator of market conditions, rose 17.9 percent between June 30, 2012 and June 30, 2013. In the same period, Harvard’s endowment posted an 11.3 percent return — the lowest return level of the Ivy League schools that have reported so far — while Yale and Dartmouth reported returns of 12.1 and 12.5 percent, respectively. Among the Ivy League, the University of Pennsylvania registered the largest gain at 14.4 percent.
No university in the Ivy League mustered a return greater than that of a standard index fund. The reason for this, according to PRINCO President Andrew Golden, lies in the complexity of PRINCO’s investing model, which aims to deliver strong returns while also managing downside risk over a long horizon.
“The perspective is that we made that return the hard way. We executed well on a reasonably complicated, global, multi-asset class, investment approach,” Golden said. “This was a year in which, given that the U.S. stock market was up over 20 percent, you could have made that same return a lot more simply. We think that the hard way, the more sophisticated approach, positions us to do well in a variety of environments, including this one.”
Due to the enormity of the financial industry, many experts believe that the U.S. stock market is “efficient.” An efficient market is one in which all assets are appropriately priced, and the only way to improve one’s expected return is to increase the amount of risk held. A portfolio consisting solely of stocks, like an index fund, might have a higher expected return than a multi-asset portfolio, but it would also hold far greater risk.
The S&P 500 did outpace the University’s returns this year. However, were the University to have held only the S&P 500 in the 2009 fiscal year, it would have realized a negative 33 percent return, far greater than the negative 22.7 percent return actually experienced.
Nonetheless, the efficient market hypothesis paints a dreary investment landscape for money managers, who can apparently do little to increase expected returns while simultaneously managing risk. The so-called Endowment Model of investing, pioneered by the Yale Investments Office, provides an alternative to that outlook.
The Endowment Model encourages investment in so-called “alternative assets”— more exotic financial instruments like private equity, hedge funds and even real assets like precious metals, timber and other commodities. Since these markets have high barriers to entry and are often more complicated than the stock market, fewer investors participate, and these asset classes are less likely to be efficiently priced. As a result, mangers may be able to squeeze out greater expected return without taking on additional risk.
At Princeton, too, Golden said the core principle underlying the Endowment Model — that illiquid markets make good investments — is almost tautological because inefficient markets by definition provide greater opportunities, and illiquid markets tend to be inefficient.
“It’s also true that illiquid investments tend to be the type where there are greater opportunities to influence the actual fundamentals of the investment,” Golden added. “You can not just recognize value, buy cheap and sell dear, but you can make that thing you are buying worth more.”
As of June 30, 2012, 22.6 percent of the University’s assets were held in real assets and 36.4 percent in private equity. This year’s allocation has yet to be announced. But for Golden, one of the best testaments to the endowment’s success has been the 10-year annualized return, which increased to 10.2 percent following last year’s 11.7 percent return.
“Ten years in itself is too short, but I’ll be happy when people focus on that number,” Golden said. “The most important element is to look at the appropriate time horizon. One year is really too short. I said that last year when our return was much less, and I’ll say it this year when our return is quite satisfying.”
Since investment strategies are designed to sustain the activities of the University far into the future, year-to-year performance often assumes greater importance than it perhaps deserves, according to Golden. Moreover, while PRINCO does use the performance of other endowments as a measure of the University’s success, Golden said there isn’t any sense of competition.
“It’s not something where if you beat Harvard and Yale you get a bonfire. That would be a silly way to evaluate performance, in terms of outperforming peer schools,” Golden said. “You get some perspective on how you’re doing by those comparisons.”