Huge outperformance at Harvard's endowment has allowed its size to surge above Yale's endowment, which amounts to just $18 billion. Harvard has become increasingly reliant on its endowment to cover costs related to running the school, according to the AP.
Interestingly, Yale's endowment manager David Swenson recently wrote a book, Unconventional Success: A Fundamental Approach to Personal Investment, in which he essentially advocated a diversified portfolio of index funds for the average investor.
Understandably, endowments take this approach one step further. Instead of allocating themselves in index funds, they invest in hedge fund managers with potential. But the size and scale of these endowments allows them to negotiate the fees down. As a result, the endowments might pay 1.2% per year and 15% on profits while a normal fund of funds charges investors 3% per year and 30% on profits (to cover the extra layer of fees). Its the combination of lower fees and talented managers that allow many of these endowments to perform so well.
Endowments also have the potential to "seed invest" in former employees who want to run their own funds. These arrangements allow endowments to have a cut on the fees and often own stakes in the underlying hedge funds. But its this very arrangement that hurt Harvard's endowment when Sowood blew up, because Harvard was a big investor and supporter of the fund. Sowood's blow-up sent Harvard's endowment down 1% in July, according to the WSJ.
Endowment managers are in a very interesting position. The largest ones, with their size and scale, can negotiate down the fees on the best minds in investment management. With their huge asset bases, they can adequately diversify amongst many strong fund managers to help level their performance. But their size isn't always a good thing -- it's a lot harder to beat the market with $34 billion than it is with $100,000, that's for sure.
Endowments also have the potential to "seed invest" in former employees who want to run their own funds. These arrangements allow endowments to have a cut on the fees and often own stakes in the underlying hedge funds. But its this very arrangement that hurt Harvard's endowment when Sowood blew up, because Harvard was a big investor and supporter of the fund. Sowood's blow-up sent Harvard's endowment down 1% in July, according to the WSJ.
Endowment managers are in a very interesting position. The largest ones, with their size and scale, can negotiate down the fees on the best minds in investment management. With their huge asset bases, they can adequately diversify amongst many strong fund managers to help level their performance. But their size isn't always a good thing -- it's a lot harder to beat the market with $34 billion than it is with $100,000, that's for sure.
Closing Bell: Stock bulls and dollar death (DDRX,GMCR, PEET, SBUX, EBAY, CI, TECD)
So long peak oil, here comes peak uranium
Black Friday expected to be strong, no promises for Christmas
Reader Comments (Page 1 of 1)
8-22-2007 @ 4:13PM
cgk said...
Mr. Kelly's article mistates a basic fact: you cannot compare Harvard's 2007 numbers to Yale's 2006 ones. Yale's endowment is not "just 18 billion"--that was 12 months ago (as of June 30, 2006). It is widely expected that Yale's figure will top 21 billion when announced, and that the actual return on endowment money will be better--as it generally has been for over a decade--than Harvard's.
This does not, of course, diminish the point that Harvard's endowment is by far the largest educational endowment in existence.
8-22-2007 @ 4:16PM
AK said...
pfff. who cares what they did from june to june? What really matters is how they did from june to NOW.