Letter from the US: The Yale effect
Good things come in small packages. It sounds so true reading the latest annual National Association of College and University Business Officers (NACUBO) Commonfund study of endowment performance. In fact, the top-performing endowments over 10 years among all universities reporting data are two small Virginia institutions: the Radford University, with an endowment of $55.5m (€50m) and an annualised 10-year return of 12.4%; and the Southern Virginia University, with an endowment of only $1.1m and an annualised of 11.2% over 10 years. Both endowments have done better than other larger universities, with average annualised return over 10 years of 7.2%. In particular, they outperformed Yale’s endowment, which returned 10% a year over 10 years.
This achievement has opened a discussion about the so-called ‘Yale method’ – investing in alternative assets such as hedge funds and private equity rather than just equities and bonds. Most large endowments have tried to emulate the Yale method. According to the latest NACUBO-Commonfund study, hedge funds, private equity and other alternative strategies represent 57% of the assets held by endowments over $1bn. But the results have not been as good as expected.
The two Virginia universities have instead been conservative, investing only in individual stocks and low-cost index funds. The Southern Virginia University is the most interesting case study, because Radford co-invests 80% of its assets with the University of Richmond.
When Southern Virginia University controller and CIO Jesse Seegmiller took over the endowment, all the money was in certificates of deposit: he switched 80% into equities and 20% into fixed income and cash. It was in the middle of the 2008 financial crisis, “a no-brainer time to invest in stocks”, he recalls. His decision has paid well since the bull market started in 2009.
For the international portfolio, Seegmiller uses low-cost exchange-traded funds, and for US equities he chooses 15 to 20 companies following a “growth at a reasonable price” investment philosophy. “My investment strategy has a value element, in the sense that I want to buy companies at good value,” says Seegmiller. “But also I want to invest in companies that grow faster than others.” The portfolio includes Apple, Gilead Sciences, Tractor Supply, LKQ Corporation, FactSet Research Systems and Roper Technologies.
The selection is based only on public records. “Being the chief investment officer of the endowment is only a part-time job for me, because I have many other responsibilities,” he says. “But even if I had time to go and visit the companies, I wouldn’t do it, because I think I would become the victim of biases.”
Now that the bull market might be finished, Seegmiller is not going to change asset allocation in favour of more fixed income. “On the contrary, I think that the market’s deeps are buying opportunities,” he says. “I am not worried about the ups and downs of the market. We have a very long-term perspective, and we hold only very liquid assets, so if we need to sell there shouldn’t be a problem. Clearly, if I had to manage a huge fund I would be concerned about the impact of my trading on the market. I also would diversify managers of the assets. But I still would not over diversify the equity portfolio, I would keep concentrating my bets on a small number of companies.”
Above all, Seegmiller would never buy alternative assets. “In 2008 some endowments had liquidity problems because of the alternative assets they owned,” he says. “I am not even sure how to define alternatives. Private equity funds give some information about what they do. But other alternative funds don’t say much about their investments; they could be interesting as a diversification of investing styles, but they come with high expenses.”
And keeping costs low is the other ingredient of Seegmiller’s success: “We don’t pay fees. We don’t have consultants. I feel I know enough in order not to need them.”