“Smart” Investment Strategies

Among other things, the National Association of College and University Business Officers surveys college endowments.  A recent survey listed $616 billion in assets among 104 colleges.  The chart shows the 40 largest.

Harvard is the largest with over $38 billion in assets, while the University of Richmond (at 40th) has $2.5 billion in assets.  Endowment assets are heavily skewed toward the top 10 institutions.  Of the 104 colleges surveyed, the top 10 institutions represented 1/3 of assets.

The survey also inquired about how the 40 largest endowments are invested.  U.S. stocks represent 13%, foreign stocks represent 19%, bonds were 7%, and cash was 3%.  The remaining 58% was invested in “alternative” investment strategies.

Alternative investments encompass a lot of different investment strategies such as private equity, hedge funds, derivatives, venture capital, direct real estate, and distressed debt.  Many alternative investment strategies are marketed as cachet investments.  Not surprisingly, endowment fund investment committees generally consist of well-heeled donors and other “sophisticated” investors that are also significant investors in alternative investments.

So how have they done?  According to the survey, during the past decade, the average return for these endowments was an annualized return of around 5.6% to 6.1%.  This compared to the S&P 500 index, had a 10.2% return over the same period.

To us, the message is don’t assume that tried and true strategies are too simple to work.