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Asset Management Culture

At Ivy League Endowments, Performance Dragged Down by Managers’ Picks

Private equity had a good year, but individual selections of stocks and other assets hobbled overall showing, report says. 

By Sarah Min

What is going on with Ivy League universities? 

Despite a strong year for private equity and venture capital, Ivy League endowments—which have outsized allocations in those asset classes—failed to make the grade on their returns. 

Schools in the Ivy League averaged just 6.7% in fiscal year 2019, lagging behind the showing of a benchmark US portfolio of stocks and bonds, according to a report released Tuesday from Markov Processes International, an investment research firm. The benchmark portfolio, with a 60-40 stock-bond split, averaged 9.9% over the same period. 

The trailing performance of prestigious schools came during a strong year for many asset classes. In the investing world at large, there were stellar results in private equity, which jumped 14%, and venture capital, which climbed 21%. Broadly speaking, other asset classes also posted better returns, such as bonds (8%), and public equities (10.4%). 

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Researchers in the report had a simple explanation for straggling performance from the schools: individual managers’ uninspiring security selection. 

According to the report, the generally poor returns of the Ivies is “the result of individual choices by these endowments from among the investment opportunity set and, in turn, by the investment decisions of their underlying managers, particularly in private market assets.” 

That would explain the head-scratching performance across schools, the report said. For example, schools like Yale and Princeton, which had higher allocations in outperforming private equity and venture capital assets, still underperformed most of their peers, coming in fifth and sixth place, respectively. 

On the other hand, Brown, which had the highest asset allocation in one of the worst-performing asset classes, hedge funds, was the only one to beat the performance of a domestic portfolio. The Rhode Island school also beat its target rate by more than double last year with a 12.4% showing, which raised the endowment to a record $4.2 billion. 

Part of this is explained by the wildly varying performance among private assets. Another explanation is the difference in selection returns across university portfolios. The report found that all Ivy League universities did poorly when it comes to individual selections—with the exception of Brown. 

“We believe that the selection return estimate is the best indicator of how an endowment is doing in comparison to its most closely matched investment opportunity set,” the report read. 

Other asset classes that may have helped drive gains may be other asset classes, such as emerging market bond or small-cap stocks, the report said. Endowments also have other costs, such as fees and write-offs, that subtract from performance. 

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Home > News > Market Moves > Value’s Latest Dive Shocks Cliff Asness
Market Moves

Value’s Latest Dive Shocks Cliff Asness

AQR co-founder had called for adding more low-priced stocks, figuring their bad times had ended. Oops.

By Larry Light

Cliff Asness, a leading light of factor investing, is stunned that one such factor has taken an unexpected plunge. That would be value investing, which after a decade of lagging, finally picked up speed late last year. Until 2020 threw it back on its heels.

In November, the co-founder of AQR Capital Management recommended putting a slightly higher weighting on value stocks last year than their sorry performance seemed to warrant. He whimsically likened such a move as a “venial sin”—namely a minor transgression that didn’t merit eternal damnation. The reason: Asness is a strong critic of market timing.

But here, based on better 2019 results, he felt that value’s days in the basement might finally be over. And indeed, the value segment of the Russell 1000 logged 26.1% total return last year, much less than the growth component’s 35.8%, yet a decent seeming turnaround nonetheless.

Over the past 10 years, growth has surpassed value 4.4 percentage points on average, the difference between growth’s mean annual showing of 16.1% and value’s 11.7%.

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And what happens? Perhaps because of the coronavirus or some other reason, value has taken a dive this year, logging 0.9%. Meanwhile, the market as a whole has recovered from the shock over the epidemic and soared to new heights, largely thanks to big growth players like tech. All in all, growth is up 8.9% to date.

Asness was gobsmacked. In a commentary he issued Wednesday, the headline read: “Never Has a Venial Sin Been Punished This Quickly and Violently!”

As he wrote, the slight favoring of value shouldn’t have been undone with such speed: “While we know such tilts are rarely, if ever, instantly rewarded, it’s also rare for them to be instantly incredibly punished (simply because “incredibly punished” is, thankfully, a rare thing). Well, welcome to 2020.”

With some rue, he recalled how in 1999, during the last days of the dot-com bubble, he also had advised sticking with value. The next three months were horrendous for value, he admitted, although he added that his forecasts typically cover several years, and in the end value “worked out well.”

Factor investing involves balancing the differing investing styles, which include value and growth. Trouble is, stocks have this way of surprising investors, not always pleasantly.

Asness pledged to keep at his process, undeterred by temporary setbacks. And he advised doing so despite the sure knowledge that bad times for the market overall, not just value, will at some point descend. And only by stouthearted devotion to factor-investing principles can his portfolio come out ahead in the long run, he argued.

“We’ve seen this movie before a few times and we know how, but definitely not when, it ends,” he declared. “We believe that sticking with the process is the only way to achieve the long-term gains we seek (and which won’t always be provided by a long-only market that continues to levitate).”

Related Stories:

Don’t Try to Time Factors, Says Cliff Asness

AQR’s Asness: How I Learned to Stop Worrying and Love Smart Beta

Factor Investing Doesn’t Always Deliver the Magic

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