University Endowment Sued for Under performing the S&P 500 • Hacker News Board

Re: University Endowment Sued for Under performing the S&P 500

#41

Post by gcb0 » Thu, Aug 20, 2020, 1:53 AM UTC

gnu8 wrote: post #38

I'm struggling to understand why a university needs an endowment at all. Every year the universities accumulate more wealth and more parasitic non-academic staff, while simultaneously raising fees and delivering less value to students (degrees no longer guarantee jobs and student loans eat an increasing share of the graduates' earnings). Maybe it is time to confiscate these endowments and use them to liquidate studen…

Professors are actually diminishing. Tenure is down 60% last decade. And most professors must bring millions to their dept to join the "chair" club.

I guess this return is needed because, i don't know, Think about the little administrators?

Re: University Endowment Sued for Under performing the S&P 500

#42

Post by cperciva » Thu, Aug 20, 2020, 1:57 AM UTC

gnu8 wrote: post #38

I'm struggling to understand why a university needs an endowment at all. Every year the universities accumulate more wealth and more parasitic non-academic staff, while simultaneously raising fees and delivering less value to students (degrees no longer guarantee jobs and student loans eat an increasing share of the graduates' earnings). Maybe it is time to confiscate these endowments and use them to liquidate studen…

"Need" is a bit ill-defined; but when you're looking at endowments it's worth remembering that a lot of them are earmarked. For example, a donor might give $5M to establish a research chair; the $5M goes into the university's endowment fund but the income it earns is allocated for funding the position in question. Similarly, large amounts of money are earmarked for student financial aid.

Some of the endowment proceeds go into general revenues, to be sure; but confiscating endowments wholesale would have consequences which would probably surprise you.

Re: University Endowment Sued for Under performing the S&P 500

#43

Post by zhoujianfu » Thu, Aug 20, 2020, 1:59 AM UTC

TheCoelacanth wrote: post #36

slg wrote: post #34

Earlier quoted context omitted.

>If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. Why? I understand why this is the case for smaller investors like individuals, but for a school endowment isn't the sheer size of the endowment and the theoretically near infinite investment time horizon part of the risk management? Some years or even some decades it will be down, but they aren't investing with…

Maybe for somewhere like Harvard that has an absolutely ludicrously sized endowment, but a more normal university can't really afford to absorb losses like that. They need to withdraw from the endowment every year to pay expenses. If the stock market plunged and then they locked in losses by selling to pay expenses, they would run a real risk of having long term losses.

I’m on the investment committee of the board of a small school with a $300M endowment, and every year 4% is budgeted to be withdrawn to go towards school expenses.

I am new, but I find it silly they pursue this very active management, diversified across tons of different (managed) funds. I feel like they should be putting everything in whatever has the highest long term return (they have access to sequoia funds and those have consistently beat the market, yet only 1-2% goes to them), regardless of illiquidity, since their time horizon is infinite. And use borrowing to handle yearly distributions.

But due to the management structure (40+ board members, 8 on the investment committee, a team of 6 professionals who manage the money), this sort of strategy would never be considered “prudent” enough to make it through all the approvals needed.

Re: University Endowment Sued for Under performing the S&P 500

#44

Post by zhoujianfu » Thu, Aug 20, 2020, 2:02 AM UTC

gnu8 wrote: post #38

I'm struggling to understand why a university needs an endowment at all. Every year the universities accumulate more wealth and more parasitic non-academic staff, while simultaneously raising fees and delivering less value to students (degrees no longer guarantee jobs and student loans eat an increasing share of the graduates' earnings). Maybe it is time to confiscate these endowments and use them to liquidate studen…

I never understood it before, but I’m on the board of a small private college, and I finally understand that actually to balance the budget each year they need the revenue from tuition, annual gifts, AND a 4-5% distribution from their endowment.

To be competitive, a school has to maximize their revenue, and that includes all sources. Then they have to spend it all each year.

Re: University Endowment Sued for Under performing the S&P 500

#45

Post by slg » Thu, Aug 20, 2020, 2:06 AM UTC

TheCoelacanth wrote: post #36

slg wrote: post #34

Earlier quoted context omitted.

>If a school's endowment had the same return and volatility of the S&P 500, that would be quite disturbing. Why? I understand why this is the case for smaller investors like individuals, but for a school endowment isn't the sheer size of the endowment and the theoretically near infinite investment time horizon part of the risk management? Some years or even some decades it will be down, but they aren't investing with…

Maybe for somewhere like Harvard that has an absolutely ludicrously sized endowment, but a more normal university can't really afford to absorb losses like that. They need to withdraw from the endowment every year to pay expenses. If the stock market plunged and then they locked in losses by selling to pay expenses, they would run a real risk of having long term losses.

The whole point of an endowment is that it is supposed to be an ongoing investment and the percentage withdrawn every year is minimal. Over a long enough time line does "locking in losses" mean anything when averaged out with all the gains? You can look at the best and worst rolling averages for various investments here[1]. The worst 20 year span for the S&P 500 is better than the worst 20 year window for bonds.

https://www.thebalance.com/rolling-index-returns-4061795

Re: University Endowment Sued for Under performing the S&P 500

#46

Post by JackFr » Thu, Aug 20, 2020, 2:06 AM UTC

gnu8 wrote: post #38

I'm struggling to understand why a university needs an endowment at all. Every year the universities accumulate more wealth and more parasitic non-academic staff, while simultaneously raising fees and delivering less value to students (degrees no longer guarantee jobs and student loans eat an increasing share of the graduates' earnings). Maybe it is time to confiscate these endowments and use them to liquidate studen…

It’s a grift. Tuition goes up. The fraction of expenditure related to pedagogy goes down. And the university pays no taxes on its investment income.

There is an entrenched bureaucracy whose role is nothing more than self-perpetuation.

I don’t want the government micromanaging universities, but to retain tax-free status and subsidized student financial aid I don’t think it’s unreasonable that a certain percentage of budget go towards, you know, teaching students.

Re: University Endowment Sued for Under performing the S&P 500

#47

Post by zhoujianfu » Thu, Aug 20, 2020, 2:10 AM UTC

mbbennis wrote: post #17

ALL_IN_VTSAX wrote: post #7

All-in VTSAX is a tried and true strategy

I've seen this strategy around the web on reddit and bogleheads and I appreciate the sentiment, but 2020 has made me more aware of risk than ever before. I feel like the past decade has given investors a false sense of confidence about their stomach for risk. Especially young investors who enter the market AFTER 2008. On top of that, the extremely risky options available on platforms like robinhood make investing in…

If you’re a university endowment you’re forever a 22 year old. You never need the money, your timeline is infinite, and you can easily borrow the 4-5% a year you distribute to your operating expenses if you have nothing liquid or there’s been a recent large market drop.

Re: University Endowment Sued for Under performing the S&P 500

#48

Post by throw0101a » Thu, Aug 20, 2020, 2:19 AM UTC

zhoujianfu wrote: post #43

TheCoelacanth wrote: post #36

Earlier quoted context omitted.

Maybe for somewhere like Harvard that has an absolutely ludicrously sized endowment, but a more normal university can't really afford to absorb losses like that. They need to withdraw from the endowment every year to pay expenses. If the stock market plunged and then they locked in losses by selling to pay expenses, they would run a real risk of having long term losses.

I’m on the investment committee of the board of a small school with a $300M endowment, and every year 4% is budgeted to be withdrawn to go towards school expenses. I am new, but I find it silly they pursue this very active management, diversified across tons of different (managed) funds. I feel like they should be putting everything in whatever has the highest long term return (they have access to sequoia funds and t…

Even most Ivey League endowments haven't beaten a 60/40 portfolio over the last ten years (the S&P 500 has been on a tear):

* https://www.markovprocesses.com/blog/ivy-league-endowments-f...

A 2018 study:

> Dahiya and Yermack found that the performance of the typical endowment fund [in 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever.

* https://www.etf.com/sections/index-investor-corner/swedroe-w...

Study:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117

Re: University Endowment Sued for Under performing the S&P 500

#49

Post by throw0101a » Thu, Aug 20, 2020, 2:22 AM UTC

Lazare wrote: post #8

solaxun wrote: post #3

Earlier quoted context omitted.

Not a lawyer, but I doubt it's a case. Endowments have much longer investment horizons and typically lower risk appetite that wouldn't typically have an investment policy tilted towards 100% equities. They likely have a fair amount of investment in fixed income, which is always going to under-perform equities in the long run. That said, ~5.5% below the market every year is a pretty shitty result, at least worth putti…

> Endowments have much longer investment horizons and typically lower risk appetite that wouldn't typically have an investment policy tilted towards 100% equities. That does make some sense, but actually endowments typically invest quite a bit in in riskier asset classes. From https://caia.org/aiar/access/article-1160 : > The average US endowment fund held roughly 70 per cent in traditional asset classes (public and…

A 2014 Vanguard research paper:

> Two important observations emerge from the figure. First, large endowments have clearly generated strong excess returns, but the majority of their success occurred during the early and mid-2000s. Second, as small and medium endowments ramped up their allocations to alternative investments over the ten years through June 2013 and as more investor money has flowed into alternative categories such as hedge funds, positive excess returns have not been forthcoming. Unfortunately, small and medium endowments did not participate in the early success of alternative investments realized by their larger counterparts, and recently—after years of increasing their exposure to alternatives—they have trailed the return of the 60% stock/40% bond benchmark by larger gaps than at any point in the full 20-year period.

* https://www.vanguardcanada.ca/documents/assessing-endowment-...

There seems to have been a few 'golden years' for alternative assets at the time of publication.

Curious to know how the years 2014-2020 have treated them. A more recent 2018 study:

> Dahiya and Yermack found that the performance of the typical endowment fund [in 2009-2016] was so poor that it would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100% Treasury bonds and taken no equity market risk whatsoever.

* https://www.etf.com/sections/index-investor-corner/swedroe-w...

Re: University Endowment Sued for Under performing the S&P 500

#50

Post by ThrustVectoring » Thu, Aug 20, 2020, 2:29 AM UTC

bluedevil2k wrote: post #33

He makes a good point about paying tens in millions in fees to outside investment managers. Their fees are never worth it. I would imagine the entire investment management team could be a group of 5 people with investment experience who decide how to allocate the money into different Vanguard funds. Returns would be the same, maybe higher when you take out the 1-2% that management is taking out and putting into their…

Why pay five salaries when you could follow Nevada's state pension fund management strategy and have one guy whose job description is almost entirely telling people he's not interested in making changes?

https://www.fnlondon.com/articles/nevada-pension-fund-manage...