The endowments of the prestigious Ivy League universities saw an average return of 8.3% in the fiscal year 2023-24, falling short compared to Stanford’s 8.4% and MIT’s 8.9%. However, the S&P 500 outperformed them all with a significant 23.5% gain during the same period.
What exacerbates the situation is the substantial amount of money universities allocate from their general revenues to fund managers. Stanford, for instance, entrusted its financial assets to the Stanford Management Company (SMC), with a whopping $56.7 million allocated for the 2024/25 fiscal year alone. Over the years, these allocations have amounted to hundreds of millions, with the head of SMC earning over $5 million annually. The 59-member staff is specifically hired to meet the University’s Diversity, Equity, and Inclusion requirements, while also aligning investments with environmental concerns.
Looking at long-term comparisons for average annual returns, SMC’s performance pales in comparison to the S&P 500. Over 5, 10, and 20-year periods, SMC’s returns of 9.9%, 8.6%, and 9.3% respectively fall short of the S&P 500’s 11.3%, 15.2%, and 10.5%.
The disparity in returns can be attributed to SMC’s heavy investments in private equity, real estate, and bonds, with a smaller focus on publicly listed equities. Additionally, considerations for Diversity, Equity, and Inclusion, as well as environmental factors, impact investment decisions. It seems that fund managers are operating on outdated models, akin to generals fighting the previous war.
Boards of Trustees, typically delegating oversight to Committees on Finance and Investment, play a crucial role in monitoring endowment managers. However, with over a third of Stanford Trustees coming from the money management business, changes in fund management practices may be slow to materialize. Despite underperformance, Trustees prioritize prestige and philanthropic recognition, often seeking to have their names attached to buildings, professorships, and research centers.
In conclusion, while the Ivy League universities, Stanford, and MIT benefit from generous donations from wealthy alumni, there is a pressing need for endowment fund managers to reassess their strategies to deliver more competitive returns. Trustees must strike a balance between upholding prestige and ensuring responsible stewardship of donor gifts. Ultimately, adapting to evolving market dynamics and investment trends is essential to safeguarding the financial health of these esteemed institutions.
