Endowment performance and smart money - There will be a need for liquidity

Many of the largest and best university endowment have reported their returns for the first half of the year. The numbers are all positive, but that does not mean these endowments have beat simple benchmarks. For the same period, a simple 60/40 SPY/AGG combination would have returned 12.95 percent return which is just above the best endowment managers in our limited sample. Simple can be better and getting the asset class selection right is still the driver of performance.

There was surprising return dispersion with the lowest manager, Yale University, generating half the return of the best, Brown University. The return dispersion for all of 2018 was only slightly larger. When volatility increases, so will return dispersion. The investment choices of managers, good or bad, become more obvious when return volatility and correlation changes.

The long-run strategy of Yale does not mean that it will outperform peers in all short-run periods. Yale was above the median in 2018. Any short-run ranking can bounce from best to worst in the short; however, it is critical to catch the absolute turning points in market cycles. 

Our greatest fear is that the move to private equity through the endowment model over the last decade will leave many university portfolios stuck with illiquid positions. Endowments do have the advantage of a long-run horizon, but there is a tipping point where liquidity becomes more valuable than high returns. As we come closer to any market turn, liquid strategies increase in value.