Endowment Returns Update: More to the Story

David F. Swensen, End of an Era

— Lux Et Veritas

David F. Swensen, Ph.D., Yale ’80 and chief investment officer Yale endowment, died May 5th, 2021.

Mr. Swensen was a 32-year-old kid in 1985 with no endowment experience and a couple of years on Wall Street when William Brainard ’62 Ph.D. and Yale provost hired him as the university’s first endowment investment manager.

When Swensen accepted the position at Yale, most endowments held US stocks and bonds. That’s it!

His iconoclastic views on markets and investment opportunities led to a fundamental shift in how and where institutional investors sought to make money.

The conceptual groundwork had been laid for Mr. Swensen’s investment heresy in 1967 by another Yale alum, McGeorge Bundy A.B. ‘40, then-president of the Ford Foundation.

In the Foundation’s ‘67 annual report, President Bundy noted that “…the true test of performance in the handling of money is the record of achievement, not the opinion of the respectable.”

Mr. Bundy commissioned influential studies attacking the old assumption that the “prudent man” rule of personal trust law applied to management of endowment and foundation funds.

Along with the dissemination of modern portfolio theory, these initiatives cleared the path for Swensen’s sophisticated and non-traditional portfolio management style at Yale and, in the years that followed, other Ivy schools.

Today, thanks to Mr. Swensen’s “Pioneering Portfolio Management“, endowment investment chiefs are the ultimate long-term, strategic investors.

They have an infinite investment horizon, a global playing field, and can invest in anything anywhere – within the broad policy limits set by their institution.

He will be missed and hard to replace.

Swensen’s investment portfolio and returns are baked in for at least five more years. But good management starts with good succession planning.

As I mentioned to Bloomberg News, culture and institutional memory play an important role in top quartile investing. And in the case of Yale, we should add “tradition.”

Our first headhunting calls would be to two of the top CIOs on our list; 47 years old MIT CIO Seth Alexander ‘95, and Stanford University’s CIO Rob Wallace ‘02, 55 years old.

Both have years remaining in their careers, stellar track records, and strong ties to the school and the Yale investment office (YIO).

If not Messrs. Alexander or Wallace, well there’s plenty of Yale alumni and YIO talent to pick from.

See the YaleNews’ touching “In Memoriam”, next article.

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Updates and Erratum

We have updated our charts to include ten more schools and highlight more women CIOs among the top performers.

Also, the University of Virginia earned ten and five-year returns of 10.1% and 6.6% (not 8.10% and 5.80% as we first reported) for June 30, 2020.

See: Endowment Returns 2020, Strange Days for updated charts and rankings.

— Charles Skorina

Our 2020 endowment performance report features ten-year returns for one hundred and ten institutions — the latest available.  We consider a ten-year span to be a rigorous and revealing measure of the strength of an institution’s oversight and long-term investment abilities.

However, as always, there are caveats.

Timing

Most endowments close their books for the fiscal year on June 30 then prepare for the auditors.  Soon thereafter, usually in mid to late fall, the schools release preliminary performance results.

These numbers are “official” but Non-Time Matched because private market performance reporting – real estate, private equity, etc. – lags public market results by three to six months, and sometimes longer.

Usually, this does not matter because public and private market investments tend to move pretty much in sync.

However, in spring 2020 with covid on the loose, the June 30th fiscal close missed a big uptick in private market valuations because those numbers were not ready and therefore not reported to the investment offices.  This hit big endowments hard, those with heavy allocations to alternatives.

Costs

Not all returns are equal.

Some schools report their numbers net of all costs including external management fees, internal office costs, and the endowment tax.

However, many endowments when computing their returns subtract external management fees but not office costs or the endowment tax.

Over a ten-year period that makes a difference.

Turnover

Turnover affects performance.  Only about a third of the one hundred CIOs on our list have held the top investment position for ten years or more and they tend to have the best performance

For example, in our chart below, ten of our top fifteen endowments by 10-year performance had investment heads with ten years or more in tenure.

The most notable CIO-centric event of 2020 in the endowment world was undoubtedly the retirement of Scott Malpass as chief investment officer at Notre Dame.

Mr. Malpass was just a dewy 25 years old and relatively inexperienced when Notre Dame recruited him as “assistant investment officer” in 1988.

He was already effectively in charge that year, but decorously waited for his predecessor to retire in 1989 to officially take the CIO title.

In 2020 he punched out as smoothly as he had punched in.

His successor, Michael Donovan, had been Mr. Malpass’ wingman for 20 years. They had been undergraduate classmates (and roommates) in ND’s class of 1984, making them both about 58 in 2020.

Although he is ferociously devoted to his school, Mr. Malpass chose not to hang on until standard retirement age. Instead he passed the baton early enough to leave plenty of career runway for his colleague and successor.

Badly executed successions can be ruinous in institutional investing. The examples have been too notorious to list. This is how the pros do it.

Mr. Malpass had 32 years in harness when he stepped down last year and was the longest-serving endowment CIO we know of, with the prominent exception of Yale’s David Swensen, 35 years and counting.

Longevity is great (at least for the incumbent) but it’s performance that counts. And, although the Yale endowment is far more prominent, Notre Dame’s performance has been remarkably good, and only very slightly behind the top northeastern schools. Casual observers may have missed that.

Mr. Swensen has earned his fame. But we suspect that the attention paid to Yale and the relative inattention to Notre Dame has much to do with the regional chauvinism of the financial press.

For the media, a Catholic college in Indiana will never have quite the cachet of the Ivy League.

Take a look at our 5-year performance numbers below. Allowing for ties, the 5-year return ranking is:

No. 1: Brown (9.8)

No. 2: MIT (9.0)

No. 3: Rockefeller/ Bowdoin (tie) (8.5)

No. 4: Yale/ Dartmouth/ UTIMCO (tie) (7.8)

No.  5: Notre Dame/ Princeton/ Williams (tie) (7.7)

By this reckoning, the recent performance of the Notre Dame Model is just a whisker behind the Yale Model. In fact, Notre Dame beat Yale in 3 of the last 4 years.

This is so interesting that we thought we should reach back to our longer-term Yale versus Notre Dame dataset.

Twenty years is a nice, round number, and we can’t think of any other such pairing that could put the same two long-serving CIOs head to head. But we pushed back 21 years to capture the Dotcom Meltdown beginning in the second half of that fiscal year.

Notre Dame versus Yale endowment performance

FY 2000-2020

Growing a discretionary asset management or investment advisor business is tough.

We have yet to see an independent Outsourced Chief Investment Officer firm reach $100 Billion AUM through organic growth.

Most of them will never even reach $20 Billion.

Of the thirteen firms managing $50 billion or more on our annual OCIO list, only one – Alan Biller and Associates – launched as a pure-play OCIO and consulting start-up.  And they’re just over the $50 Billion line.

Total OCIO assets have been growing briskly, at more than 15 percent annually (In the 12 months July 2019 to June 2020).Most except Biller began as financial mega-firms long before OCIOs were even invented. Several have roots stretching far back into the nineteenth century. JPM goes all the way back to the 1800s!

Independent OCIOs and RIAs have not been able to grow their way into this select company, and probably never will.

Why is this?

But it’s scattered among dozens of relatively small firms.

The solution seems obvious: Do it the old-fashioned way. Grow by acquisition and aggregation. Buy, sell, and merge firms. That’s how the mega-financials have done it.

It’s a well-understood historical process. Railways, utilities, steelmakers, banks, brewers, hotels, airlines all grew like this.

The boffins at Harvard Business School call it the Industry Consolidation Lifecycle. (See: https://hbr.org/2002/12/the-consolidation-curve)  It’s easy to see after the fact, but much harder when we’re all floundering through it in real time.

And yet, for most OCIOs under $50 Billion, there seems to be a deep aversion to mergin’.

Almost exactly ten years ago we reported with great interest Amy Falls’ move from Chief Investment Officer at Phillips Academy (aka Phillips Andover) to the CIO job at Rockefeller University.

Five years ago we interviewed Ms. Falls in Manhattan and marked her as someone to watch when a top-tier endowment position opened up. (See “Coffee with Amy” below.)

Now, it has just been announced that she’ll be moving on to Northwestern University.  She’ll lead their $12.2 billion endowment, succeeding William McLean as CIO.

Clearly she impressed Northwestern’s search committee by leading the Rockefeller endowment to consistently excellent performance.

But not everyone may have noticed just how excellent it was.

By our reckoning she is in the top 10 among all US endowments over those ten years – ranking ninth out of ten to be exact.

Paula Volent at Bowdoin ranks first for 2011-2020, with 11.6 percent.

All the other endowment big guns (MIT, Yale, Dartmouth, Princeton, Williams, Notre Dame, Brown, Carnegie Mellon) and their renowned CIOs are strung out between 11.4 and 9.5 percent for ten years.  Ms. Falls squeezed past Debbie Kuenstner at Wellesley with 9.6 percent.

But she was even more impressive in the second half of her decade at Rockefeller.

As she increasingly put her own stamp on their allocations, she surged even closer to the top of the pack.

Over the last five years, 2016-2020, her return tied with Paula Volent at Bowdoin for third-ranking among all US (and Canadian!) endowments with 8.5 percent.  They were surpassed only by Brown and MIT, with 9.8 and 9.0 percent, respectively.

As she has moved up to head bigger funds her comp has grown proportionately.

She made about $800K at Andover.  At Rockefeller her pay rose to about $1.5 million by 2020.  And now, at Northwestern, we estimate that her comp will be well north of $2 million.

Amy’s Excellent Network