Monday, August 4, 2014

No answers but it is striking data.

I note this graph from Greg Mankiw's blog.


What is striking to me is the congruence between Ivy League university endowment returns and those one can anticipate from any mainstream investment firm with a reasonable middle time horizon and an investment strategy more skewed towards conservative than risky.

These universities across four years are earning about 4.1% which isn't too far from what your average cautious return is likely to have been achieved by middle class saving households in the same time frame.

The reason it is striking is that I seem to recall a similar table about fifteen or twenty years ago and the returns, IIRC, were in the arena of 15-20% and were probably twice or more what most households were achieving. I ascribed these returns to superior management. Most of the funds were managed by sophisticated investors who were also alumni. I think the general assessment was that these returns were simply a product of smart money.

So what has changed? I know most university endowments took a bath during the financial meltdown at the beginning of the great recession. Do these low returns simply reflect a return to caution? Were the old returns superior because they were fundamentally riskier? If so, how have they netted out over a longer time frame? Were the returns and higher risks wiped out by the recession or did they come out ahead. My impression is more the former than the latter.

The early 2000s were characterized by many regulations and efforts to reduce insider trading and improve corporate and financial governance. Are the current more mundane returns reflective of a more ethical investment regime?

No answers but it is striking data.

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