The top performer was Michigan State University’s endowment. The East Lansing, Mich.-based $4.4 billion endowment returned a net 15.1% for the fiscal year ended June 30.
CIO Philip Zecher was unavailable for an interview, but in an Oct. 9 news release announcing the returns, he said, “Our strong performance this year came primarily from our large position in U.S. equities and the strong performance of our hedge fund portfolio. Like most, we saw private market investments significantly lagged their public market equivalent benchmarks. However, we continue to view the private markets as attractive over the long term.”
The MSU endowment’s total allocation to global public equities is 39%, a quarter of which is invested in index funds, Zecher said in an earlier October interview with Bloomberg.
Harvard University, the largest endowment, returned 9.6%, well above its prior fiscal year return of 2.9%.
Thanks to the robust positive return, Harvard’s portfolio increased to $53.2 billion from $50.7 billion the year before, even after the $2.4 billion the endowment contributed to the university’s operating budget for the period.
N.P. “Narv” Narvekar, CEO of Harvard Management Co., which oversees the Cambridge, Mass.-based university’s investments, in his annual letter to the Harvard community said the university now relies on endowment distributions to pay for nearly 40% of its annual operations, up from just over 33% when Narvekar came aboard in December 2016 and 20% two decades ago.
“The endowment’s orientation toward strong investment returns has been tempered by the imperative for budgetary stability. We believe that has resulted in a lower tolerance for risk than many of our largest private university peers, which can cause lags in ebullient environments, but also provide protection during downturns,” he said in his letter.
Narvekar said private equity returns lagged behind public equities for the second year in a row and reminded readers in his letter that “in FY22, private managers did not reduce the value of their investments in a manner consistent with declining public equity markets at the time.” As a result, he said private asset managers did not then raise the value of their investments in line with public equity markets these past two fiscal years.
As of June 30, private equity had the largest allocation in the endowment at 39%. The second largest, hedge funds, had an actual allocation of 32%.
Narvekar noted that the allocation to hedge funds was increased in order to limit exposure to both public and private equities and limit portfolio risk. That portfolio, along with public equities, were the strongest performers for the most recent fiscal year, he said. Further details were not provided.
As of June 30, the remainder of the endowment’s actual allocation was 14% public equities, 5% each bonds/Treasury inflation-protected securities and real estate, and 3% each cash and other real assets.
Hedge funds come through
Hedge funds may have made the difference for some endowments when comparing fiscal year 2024 to fiscal year 2023, said Kristin Reynolds, partner and practice group director at NEPC.
“There’s a whole group in the middle that I think are interesting, that have diversified strategies that are thinking about the world in a more conventional manner,” said Reynolds. “They had a high year for fiscal year 2024 if they had public equity, but also diversifiers helped in 2024. When I say diversifiers, I mean what other people might call hedge funds or output-oriented strategies. With the volatility in the markets and China having a rally, strategies that were more globally oriented but also less tied to public markets did well.”
Reynolds said those endowments may have struggled more in fiscal year 2023.
While Harvard saw its fiscal year 2024 numbers nearly reach double digits, other Ivy League institutions were not as fortunate.
Princeton University's $34.1 billion endowment returned 3.9% for the fiscal year ended June 30, the first positive return for the endowment in three years after two straight years of losses. The endowment returned -1.7% for the fiscal year ended June 30, 2023 and -1.5% the prior fiscal year.
It was the lowest return yet recorded in P&I’s endowment tracker, followed by Yale University’s $41.4 billion endowment, which posted a net return of 5.7% for the fiscal year ended June 30. Yale did not provide any information on its asset allocation, but the university is well-known as the birthplace of the “Yale model” of endowment investing, which focuses less on traditional stocks and bonds and more on illiquid assets like private equity, hedge funds and venture capital.
The top Ivy League institution was Columbia University, New York, with its 11.5% return, followed by Brown University. The Providence, R.I.-based university’s $7.2 billion endowment returned a net 11.3% for the fiscal year ended June 30.
The return was in the top quartile of endowments tracked by P&I, despite having an actual allocation to private equity of 42% of total assets. University spokesman Brian Clark could not be immediately reached for further information on the composition of the private equity portfolio.
Robert Appling, managing director at Wilshire Advisors, said there was a large spread between the top-performing private equity strategies and the lowest this past fiscal year.
“People want to have these broad terms in saying ‘private equity,’” said Appling. “Success in private equity really is not purely beta exposure to the asset class. Success in private equity is really determined by manager selection and sourcing the top quartile (of performers).”
“The composition of these endowments is also important,” he said. “What exposures do you have to certain sectors (like) venture capital, buyouts, growth equity, distressed debt and special situations can also play a factor into your one-year returns.”
Appling said that explains more of a dispersion over a one-year period among endowments with large allocations to private equity. The one-year returns, he notes, is not the endowments’ ultimate goal.
“Exposure to alternatives, specifically exposure to private equity and venture capital, have really been a tailwind to long-term success for these schools, especially for the 10-year and very long-term time periods,” said Appling. "Some sectors of private equity held up better than venture capital, like buyouts and special situations, so if your portfolio was tilted more to venture capital, you may have underperformed peers with higher allocations to those other sectors. Also, If there was more exposure to secondaries or co-investments in the private equity portfolio, that may have helped peer-relative performance as well."
Long-term success for private markets
For the five and 10 years ended June 30, endowments with higher allocations to private investments are outperforming those with lower allocations, experts say.
Some larger endowments did not provide longer-term returns, but Princeton University — which posted the worst one-year returns among all endowments this year — disclosed it has returned an annualized 9.2% for the 10 years ended June 30, well within the top quartile of reported 10-year returns, and Yale University returned an annualized 9.5% for the period.
“Private equity has been the main driver of returns for the long-term period,” said NEPC’s Reynolds. “You can imagine that the questions are around (whether) private equity drive returns in the future, and so there are a lot of discussions about private equity valuations largely coupled with public equity valuations.”
Reynolds said that while in the last two years private equity returns have been lower, she still thinks there are strong returns ahead in the long term, especially in areas like middle-market buyout funds, the kinds of areas where operators are strongly involved.
Garrett Wilson, managing director and a member of the management committee at OCIO firm Hirtle Callaghan, said in an interview that it’s important for endowments to realize they need to stay the course on private markets.
“These are long-term, perpetual endowments that should ultimately outlive or outlast all of us that are in the room or managing those assets,” said Wilson. “That idea of intergenerational benefit really is important to remind yourself of, particularly when it comes to private markets.”
