The Ivory Tower geniuses atop the country's most respected endowments have recently received a firestorm of criticism for failing to produce outsized returns during the current bull market. But investors must accept that all investment strategies experience periods of underperformance and it's hardly a reason for endowments to hang their heads.
Investors tend to have short memories and forget that these same endowments outperformed the stock market over the past decade with much less volatility.
The Endowment Index, calculated by NASDAQ OMX, which tracks more than 800 endowment portfolios with more than $400 billion in assets under management, returned 17% in the year ending June 30, 2014 with only 34% of that $400 billion invested in traditional equities. In comparison, the S&P 500 gained nearly 25%, according to Nasdaq OMX.
The Endowment Index rose nearly 8% annually the past three years and nearly 12% a year on average over the past five. It lagged the S&P 500, which gained nearly 17% and 19% annually over the same time periods.
But looking over the past 10 years, the Endowment Index outpaced the stock market, rising 9% annually while the S&P added almost 8% annually. The Index comprises 20 liquid, exchange traded funds with exposure to hedge fund strategies, private equity, real estate, commodities, managed futures, bonds, foreign equities and U.S. stocks.
The Yale Investing Model
The main reason endowments underperformed during the current bull market is because they are more diversified and invest only a portion of their portfolios in equities like the S&P 500.
The Yale Endowment's investment policy, for example, calls for diversifying across seven asset classes that all act independent of each other in different economic environments: absolute return strategy, domestic equity, fixed income, foreign equity, natural resources, private equity and real estate.
"The University combines the asset classes in such a way as to provide the highest expected return for a given level of risk", the Yale Endowment wrote in its 2013 report.
