Ivy Endowments Performance and Pay 2014:

Tenure, turnover, and the long game…plus our vote for best CIO over the last ten years.

[Spoiler: Our pick? Seth Alexander, CIO at MIT]

Every fall we chronicle endowment performance and pay at the eight traditional Ivy League schools, and at a few other top private schools around the country.

This year our Alt-Ivys are: Stanford, Chicago, Notre Dame, MIT and Duke.  We think their academic prestige, endowment size and sophisticated management make them investment peers of the Old Ivys.

In previous editions we emphasized five-year annualized returns as a key measurement. Our argument was: as recruiters we are interested in the performance of current management; and the average tenure among institutional chief investment officers is only about five years.

See: https://www.charlesskorina.com/346/

But, looking harder at this specific group of elite schools, we see that average tenure of CIOs was closer to ten years than five, about 8.5 years. 

No fewer than four of the CIOs in this group have been on duty for the entire ten years 2005 to 2014: Dr. Swensen at Yale, Mr. Narvekar at Columbia, Mr. Malpass at Notre Dame, and Mr. Golden at Princeton.  And four more were in office for at least eight out of the ten years: Mr. Alexander at MIT, Mr. Powers at Stanford, Ms. Frost at Brown, and Ms. Gilbertson at Penn.

Only two of the schools have had relatively high turnover in our ten year period: Dartmouth with three CIOs, and Cornell with four.

And, speaking of longevity, we should mention that Mr. Malpass, with more than 25 years on the job, is going to be honored next month in New York where he will receive Chief Investment Officer Magazine’s Lifetime Achievement Award.  He became Notre Dame’s CIO at the tender age of 26, and, as our charts reveal, he is one of the best in his profession.  See:  http://www.ai-cio.com/channel/NEWSMAKERS/Scott_Malpass,_CIO_of_

Notre_Dame,_to_Receive_Lifetime_Achievement_Award.html

The best of times, the worst of times

This has been a challenging ten years for all chief investment officers.

From 2005 to 2007, the S&P 500 rose 40 percent.  In the sharp contraction of 2008-2009 it dropped a bone crushing 56 percent.  Then, from 2009 to 2014, it rose a dazzling 287 percent (and is still climbing).  It was a period which contained more than enough shocks to stress-test any investment strategy.

Overall, the S&P 500 returned an annualized 7.4 percent in the decade, and the average big endowment earned 8.5 percent.

To track the performance of these long-serving CIOs through this tumultuous decade, we think 10-year numbers tell the clearest story.

Here’s a summary of CIO tenure in the 2004 – 2014 period:

 Chief Investment Officer Ranked by Tenure 

Does tenure affect performance?  This small, elite sample can’t answer the question, but it’s something to think about. 

The 10-year absolute returns: what are they really worth?

When trying to quantify a return-on-investment goal, the thinking on investment boards goes something like this:

First, we need about 5 percent to fund our annual contribution to the school’s budget.

Second, we must have at least 2 percent to offset inflation.

Third, we’d really like 1 or 2 percent more to grow the corpus.

So, the goal is typically a minimum 8 percent nominal return over the long run.  And, they would like to achieve this without unreasonable risk, however they define it. 

All the Ivys earned more than their minimum hurdle

Every school in our group cleared that hypothetical 8 percent hurdle over ten years.  Also, every one beat the S&P, and most beat the average big (over $1 billion) endowment (as calculated by NACUBO-Commonfund). 

Even Penn, with the lowest 10-year return, eked out a respectable 8.1 percent.  Further, Penn could argue that (as we’ll see further along) they met their objective with the lowest volatility in the group, as measured by standard deviation.

Yale and Columbia tie for first place with 11 percent 10-year returns (we used 5-year and/or 3-year returns as tie-breakers in the rankings).

Ivy & Alt Ivy Endowments Ranked by 10-yr Performance

NA: NACUBO/Commonfund study of endowments over $1bn

MIT is just a whisker below Columbia and Yale; and Duke is tied with Notre Dame for third place. 

If we compare 5- and 10-year rankings, we see the same five schools in the top half of each list: Yale, Columbia, MIT, Notre Dame, and Duke; and the same five in the bottom half of each list: Dartmouth, Brown, Harvard, Cornell, and Penn.  The other three — Chicago, Princeton, and Stanford — yo-yoed around the middle.

Ivy & Alt Ivy Endowments ranked by 5-yr performance

NA: NACUBO/Commonfund study of endowments over $1bn

The bragging rights for best 1-year return in this group go to Yale.  Their 20.2 percent edged out Duke’s 20.1 in 2014.

Ivy & Alt Ivy Endowments ranked by 1-yr performance

NA: NACUBO/Commonfund study of endowments over $1bn

However, the best return we’re aware of is at a public university: University of Minnesota’s $1.3 billion endowment earned 20.4 percent.  We’ll be looking at the public schools in a separate report after the holidays.

Arguably, every one of these teams met their minimum target.  Isn’t that good enough?

Maybe.  But a potential donor — and the whole university community — can see that Yale would have turned a million dollars into something like 2.8 million over ten years, whereas Penn would have grown it to “only” around 2.2 million.

Apart from the logic of compound interest, individuals and schools are intensely competitive.  Many alumni and even some board members want to beat rival schools by any available metric.  We know that CIOs hear from them, because they tell us so.

The 10-year risk-adjusted returns

A good theoretical case can be made that risk-adjusted return is the most important criterion of investment management.

This makes sense up to a point, as long as the investor achieves his minimum hurdle-rate.  A conservative fixed-income strategy, for instance, could rack up high Sharpe Ratio but still have an unacceptably-low absolute return.

Ranking our list of thirteen schools by Sharpe Ratio, the most widely-used measure of risk-adjusted return (units of return per unit of risk) gives us the following.

10-year Endowment risk-adjusted returns

NA: NACUBO/Commonfund study of endowments over $1bn

Over the 10 years 2005-2014, MIT has the highest Sharpe Ratio, with Columbia a close second.  Both were about 0.9.

Harvard and Cornell had the lowest risk-adjusted returns, with Sharpe Ratios of about 0.6.  And, the average large endowment fell in between, with an SR around 0.7.

All these managers achieved a higher return, lower risk, and higher Sharpe Ratio than U.S. large-cap stocks.

Our pick for CIO of the Decade

Looking at all the charts and numbers, we believe Seth Alexander’s MIT Investment Management Company has delivered the strongest endowment performance among his peers over the last volatile ten years for the lowest “risk”.  Columbia, Yale, Notre Dame and Duke are the honorable runners-up.

Team MIT nudged out Columbia for the highest Sharpe Ratio.  They also had the second-lowest 10-year volatility.  And, they were virtually tied with Yale and Columbia for highest absolute 10-year return.  Further, they never ranked lower than fifth among thirteen on a 1, 3, 5, or 10-year absolute-return basis, indicating consistent results.

MIT under Mr. Alexander may have slightly outperformed Yale by some measurements, but we doubt that Dr. Swensen took much offense.

Mr. Alexander is a Yale man himself, and worked in the investment office there under the tutelage of David Swensen for six years, just one of many who have learned their trade under the master.  When he moved to MITIMC in 2006 he took over a $4 billion fund which has more than tripled on his watch and partly though his efforts.

Dr. Swensen described him then as “a superb investment professional,” and our numbers prove he was right.  And, like his mentor, Mr. Alexander passes on some his wisdom to the next generation as a part-time instructor at MIT’s business school.

A look at CIO and Staff Compensation at the Ivys.

These comp numbers are the latest available, based on calendar years 2011 or 2012, as indicated.

“CIO” pay is for the senior exec in each investment office, whether he/she is technically “chief investment officer,” or president of the investment management company.  And the listed individual is the one in charge during the pay-period shown, even if the office has subsequently turned over. E.g., we show Ms. Gilbertson at Penn and her pay in calendar 2012, although Peter Ammon was CIO in FY2014.

Bonuses vary from year to year, and contracts are re-negotiated for new hires; but it’s likely that the current incumbent has total comp similar to the amount shown.

The CIOs

As we’ve seen in previous editions of this report, the president of Harvard Management Company is the best-compensated by a wide margin.  CIO comp tends to correlate more strongly to total assets than to investment performance.  Harvard, with $36 billion AUM, paid Ms. Mendillo the most in 2012; Brown, with $3.2 billion AUM, paid Ms. Frost the least.

MIT, with an AUM of $12.4 bn, again seems to be getting their money’s worth from Mr. Alexander.  As we said above, he is arguably running the best shop in this group of thirteen based on available data.  An honorable mention goes to Mr. Triplett at DUMAC on the same performance-for-pay basis.

The Senior Staffers

We also have some data on the pay of senior staffers at these endowments.  They typically have the rank of managing director and are direct reports to the CIO or president.

Again, these individuals held their jobs in the stated periods, but may have subsequently moved on.

Also, comp disclosure is dictated by arcane IRS rules as interpreted by the respective schools or management companies, so this list, while accurate as far as it goes, should not be regarded as comprehensive.

Comp data for Senior Staffers

That HMC’s staff is well-paid will surprise no one.  Note that Mr. Blyth, who was a managing director in 2012, made more than his boss, the president of HMC.  Since then, he has been promoted to the president’s job.

Also, note that Mr. Holland is technically the chief investment officer at Columbia, although we usually treat his boss, Mr. Narvekar, president of CIMC, as CIO for our purposes.