“Take that, Exxon! Shove off, Chevron!”

Last summer Yale issued a list of fossil fuel stocks in which it would no longer invest. Conspicuously absent: Exxon and Chevron. Since then, shares in the two largest oil companies have produced significant gains for investors. This apparently inspired divestment activists to redouble their efforts, for both Exxon and Chevron have now been added to the list of stocks in which the Yale endowment must not invest.  

Exxon and Chevron shares are to be shunned because the companies fail to give enough support to climate-change regulations and climate-change science.

Yale Shuns (Some) Oil Stocks

Yale University aims to reduce its carbon emissions to zero by 2050. Meanwhile, it has issued a list of oil stocks in which it will not invest. Take that, Exxon! Shove off, Chevron! Bye bye, BP! 

Oh, wait. None of the above appear on Yale’s hit list of over 40 shunned oil stocks. According to the university’s list of guiding principles, “investable” oil companies produce fossil fuels only because no cleaner alternatives are readily available and take visible steps to reduce emissions where possible. Exxon, Chevron and BP apparently get passing grades. 

Determining when alternative energy sources are readily available can  be tricky. As Jim Gust called to my attention, Californians owning electric-powered vehicles probably shouldn’t expect that state's overstressed electric system to power them up this summer. 

Brown Beats Harvard, Trounces Yale

We refer, of course, to investment results, not football.

For fiscal 2019, Brown's endowment recorded an investment return of 12.4%

Harvard reported 6.5%.

Yale, a meager 5.7%

Over the same period, a plain vanilla portfolio of 60% stocks, 40% bonds returned 9.4% and the S&P 500 delivered 10.4%.

So take heart! Even the Ivy League elite aren't invincible.

Harvard Will Invest the Yale Way

In a move Jim Gust has frequently deplored, some years ago Harvard laid off its endowment's "overpaid" investment whiz. The endowment's returns have suffered. Now Harvard has decided to try the Yale model: a small in-house staff overseeing the efforts of carefully selected outside investment managers. (The system works great when the selecting is done by Yale's David Swensen.)

Take a second look at the Yale Daily News article linked above. Strikes me as pretty professional. Better than I'm likely to read in our local paper.

Who's Jinghi Cui, the student journalist? Glad you asked. She's a Yale soph who graduated from the Experimental High School attached to Beijing University. You pronounce her name JING-ee SOO-ee.

Here's another example of her reporting, this time on the pension burdens borne by Yale and other universities. Does any large private or public employer not have a pension problem?

Dartmouth 14.6, Yale 11.3 – But Not Exactly

Dartmouth's football team beat Yale, 28-27. Dartmouth's endowment has won more convincingly. For the fiscal year ending last June, Dartmouth achieved an investment return of 14.6%. Yale lagged at 11.3%.

In reality, there's less to all those numbers than meets the eye. Yale's one-point football loss resulted from an erroneous out-of-bounds

 ruling on an end-zone catch that video showed to have been a touchdown. As for the endowment returns, their precision is partly the result of accounting fiction, as Yale School of Management's Roger Ibbotson has pointed out:

"When you have private equity and venture capital assets that are not priced every day, it is difficult to know exactly what the real performance is. I don’t really like ranking the endowments annually because there’s such a significant measurement error."

Long term, the investment performance of Yale's endowment remains remarkable: an average of 12.1% per annum over the last 20 years.  The endowment's domestic equities returned 12.2%,  trouncing the benchmark return of 7.5%. Makes you wonder why David Swensen allocates only 4% of Yale's endowment to shares in U.S. companies.

David Swensen on Successful Investing

From this New York Times feature on Yale's famed investment guru:

Beware hot funds
“More assets produce more fees, but they force managers to add more positions, not just Grade A ideas,”

Don't look back

“We were talking to a manager who just had capital taken away because the fund had a bad year. The investor said, ‘Your five-year numbers are not so good, so we are firing you.’ That sounds like the stupidest thing I ever heard.

”Who cares about the trailing numbers if the fundamentals of the portfolio are good?”

7.4%

Average annual return from a 60 percent stocks, 40 percent bonds portfolio over the 20 years ending last June

12.6%

Average annual return earned by Yale's endowment over the same period

Alternative Assets Blur Annual Returns

The average university endowment has about half its money in alternative assets – real estate, private equity, hedge funds, whatever. Over 70 percent of Yale's endowment is in alternatives. As this article from  the Yale Daily News points out, calculations of these endowments'  annual returns cannot be precise. Five or ten years returns are a better guide to actual performance – and over those time periods, Yale looks pretty good.

Yale Beats Harvard, But . . .

Yale's endowment eked out an investment return of 3.4 percent for the fiscal year ending last June, handily beating Harvard, whose endowment lost 2 percent.

Many endowments suffered negative returns in fiscal 2016. Untutored amateurs who simply invested in a S&P 500 index fund did better, making about 4 percent.

Like the rest of us, university endowments are learning that we live in interesting but difficult times. After necessary expenditures, Yale's fund actually shrank during fiscal 2016.

Remember the good old days, when Yale boasted an annualized ten-year return of almost 18 percent?

Yale 11.5, Harvard 5.8

For the fiscal year ending June 30, Yale's endowment recorded an 11.5% return, down from the previous year's 20.2% but handily beating Harvard's 5.8% return. (MIT outpaced even Yale, returning 13.2%.)

Hedge funds and private equity (giddy up, you unicorns!) now dominate Yale's portfolio. Because they're favored by Yale's endowment manager, David Swensen, these alternative assets should remain popular with UHNW investors.

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Speaking of unicorns, if you're looking for an Advent calendar for a private equity player, The Metropolitan Museum of Art has just the ticket.

Should Investors Divest From Fossil Fuels?

Maybe yes 
From a Reuters dispatch at Business Insider:

Since the divestment movement launched three years ago, some 650 individuals and 180 institutions, including 50 new foundations, which hold over $50 billion in total assets, pledged to divest from fossil fuels over five years using a variety of approaches.

Would Rockefeller go green?

One of the signatories is the Rockefeller Brothers Fund. Stephen Heintz, an air [sic] of Standard Oil tycoon John D. Rockefeller, said the move to divest away from fossil fuels would be in line with his wishes.

“We are quite convinced that if he were alive today, as an astute businessman looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy...."

(At least they didn't call him an airhead.)

The Church of England also has decided to sell its investments in coal and oil-sand producers.

Maybe no
Swathmore, described as the birthplace of the divestiture movement, has declined to dump its fossil-fuel stocks. The college opts to stick with its investment guideline that requires management for “the best long-term financial results, rather than to pursue other social objectives.”

Two big guns of university investing, Harvard and Yale, also have declined to divest.

What next?
The Rockefeller Brothers Fund has dumped its coal investments and proposes to gradually ease out of oil. Institutional investors who decline to do the same may see socially responsible investing as a slippery slope. Few public corporations are free from all social stigmas.

For instance, maybe endowments should  divest companies that pay CEO's more than twice what said CEO's are worth. But then, where could they reinvest?

University Endowments Record Double-Digit Returns

Yale's endowment recorded a 20.2% investment return for the fiscal year ending June 30, keeping up with the torrid pace set by the S&P 500.

Reported results from other university endowments:

Dartmouth, 19.2%

MIT, 19.2%

Penn, 17.5%

Harvard, 15.4%

Originally this post erroneously credited Dartmouth's results to Brown.

Good Night, Poor Harvard

As an investment manager, are you just average, maybe a bit below average? Take heart. You still beat Harvard.

For the five years ending last June 30, the annualized investment return for Harvard's endowment was 1.7%. No Ivy League institution did worse.

Jane L. Medillo, the endowment's manager, will leave at the end of the year. She once worked at Yale, where David Swensen for many years achieved remarkable investment results. Lately, not so much. For the five years ending last June, Yale's endowment had an annualized return of 3.3%.

Columbia 17, Princeton 15

Roar, lion, roar! We mentioned the tepid performance of Yale and Harvard's endowments last year, so it's only fair to salute Columbia and Princeton for doing much better.

Note that Princeton's wealth is managed by Andrew Golden, a disciple of Yale's David Swensen.

Harvard 11, Yale 9

After losing close to 30 percent in fiscal year 2009, the endowments of Harvard and Yale have staged modest comebacks. In the 12 months ending last June, Harvard's endowment recorded an 11 percent return. Yale was up 8.9 percent.

Over the last ten years, Yale's return did beat Harvard's. But both schools, and a number of others, suffered liquidity problems as a result of an increasing emphasis on alternative investments –timber, oil, real estate, private equity, etc.

Bloomberg Businessweek reports that cash shortages led to unprecedented borrowing:

Harvard University, Yale University and Stanford University, with combined endowments about equal to the gross domestic product of Lithuania, are among 15 of the wealthiest colleges and universities that borrowed $7.2 billion because their highbrow investing left them suddenly strapped for cash.

Why Top Colleges Squeeze You Dry

Most members of the incoming class of 2014 at the Ivies and other elite colleges won't have to pay list price. But those with the best-heeled parents (such as your best wealth-management clients) will get squeezed.

Why? Basically, writes Andrew Manshell in this WSJ opinion piece, because the colleges know they'll pay up.

Jim Gust will likely second Manshell's opinion that endowments are under-spent:

While the prevailing wisdom in higher education (purveyed principally by endowment investment managers and advisers) is that even the 5% endowment payout rate targeted by most schools threatens the preservation of capital, well-designed financial research shows that, particularly given that colleges are constantly fund raising for new endowment resources, higher spending rates are sound. It could be argued that the richest institutions—such as Harvard, Williams, Wellesley, Amherst, Yale and Princeton—might be free and operate from only endowment funds, if they chose to.

Endowments: Small is Beautiful

University endowments lost, on average, almost 19 percent in the fiscal year ending last June. But Harvard, Yale and other biggies fared worse, as shown in the NY Times graphic below. Reason: Alternative investments:

Institutions with endowments greater than a billion dollars had 61 percent of their investments in such alternatives last year, compared with 52 percent the previous year. In contrast, universities with endowments under $25 million had only 13 percent of their assets in such investments, up from 11 percent the previous year.

The Great Depression at Yale

Yale's highly-touted investment whiz, David Swensen, recorded worse-than-average losses for the university's endowment last year. Too much messing with hedge funds and alternative assets? Maybe. But during the Great Depression, a conservative investment stance didn't keep Yale's endowment out of trouble.

Here's a snippet from Gaddis Smith's feature story on Yale during the Great Depression in the Yale Alumni Magazine:

Although the university had avoided common stocks and kept most of the Yale endowment in bonds, income from the endowment declined by 21 percent. Gifts to the alumni fund, which had exceeded $1 million for the first time in 1926-27, dropped 85 percent to $142,732 in 1934-35. Not until 1950-51 would gifts be above $1 million again.

Smith's article is worth reading for the feel one gets of the divide between the haves and the have nots during the Depression. The dislike – nay, hatred – that a good number of the haves harbored for FDR can hardly be overstated. According to my memories from toddler days, it easily equalled the venom that "birthers" and others direct at our current President.

“Mr. Bubble” and His Famous Chart

Contrary to our earlier report, Yale's endowment lost a few percent less than Harvard's. But both posted decidedly below-average returns for the twelve months ending last June. Lately, Yale's David Swensen doesn't look quite so ultra-smart.

Happily, Swensen isn't Yale's only investment egghead. Robert Shiller warned Greenspan about "irrational exuberance" in the stock market, then recognized the real-estate bubble. As David Leonhardt of The New York Times writes in a Yale Alumni Magazine cover story, Shiller is now celebrated as the creator of "The Chart … one of the signature pieces of economic research of the past generation."

"The Chart" and other Shiller charts are here. They'll help you show investors why recovery from the Great Recession probably won't be quick and easy.

Yale Beats Harvard, Sort Of

Yale's endowment lost about 30% of its market value in the 12 months ending last June 30, dropping to about $16 billion from $22.9 billion. Harvard's endowment lost "only" 27.3% over the same period, dropping to $26 billion from $36.9 billion.

Update. The Wall Street Journal declares the Yale-Harvard investment-losses game a tie. (The shrinkage in Yale's endowment presumably reflected spending as well as investment losses.)

Poor Harvard

What grew even faster than Harvard's endowment? Harvard's spending, writes Nina Munk in Vanity Fair: And then the bottom fell out of the market. "At Harvard … adjusting to the end of the gilded age, the champagne age, is proving especially wrenching …."