Thanks to decades of decorated and generous alumni including Nobel Prize winners and U.S. Presidents, Harvard University’s endowment holds the title for largest university endowment in the world: a staggering $37.6 billion. Following the 2015 fiscal year, the Harvard Management Company reported a 5.8 percent rate of return on their endowment investments. Colgate has edged them out by a slim margin, reporting a 5.9 percent rate of return in 2015. Colgate’s endowment is roughly $837 million, meaning the Raiders outperformed the Crimson despite having a fraction of the resources.
Over the past decade, Colgate’s average annualized returns have exceeded 8 percent, while Harvard’s returns during the same time frame are only 7.6 percent. These seemingly marginal differences are actually monumental for Colgate given the relative size of its endowment. With 45 times the resources, Harvard has access to any and all asset types, as well as the most expensive and effective investment managers in the world. This should allow them to find riskier assets that yield higher returns. While they made a 20 percent rate of return on real estate investments and a 30 percent rate of return on venture capital investments this year, obviously a majority of their investments performed far worse.
Colgate outperforming Harvard is part of a larger trend: across the nation, less elite counterparts are giving many Ivy League universities a run for their money. Across the nation, such universities are competing with, if not beating the performance of many Ivy League universities. For example, among schools with endowments over one billion dollars, Bowdoin College bested the competition with 14.4 percent returns this year. Even more surprising, an article in The New York Times last month reported schools with endowments under $25 million are seeing higher returns than schools with over one billion dollars. Headlining the upset, Southern Virginia University saw 10.2 percent returns this year and 11.2 percent average annualized returns in the ten years prior. The latter decennial statistic trumps the performance of endowment mammoths Yale, Princeton, Stanford and MIT. Against all intuition, it seems bigger is not necessarily better when it comes to endowment performance.
How could Southern Virginia and Colgate stay above the trend with such limited resources? Southern Virginia claims the largest endowments rely too heavily on alternative investments such as hedge funds and private equity, which constitute almost 60 percent of investments made by endowments over one billion dollars, and only 11 percent of those under $25 million. Colgate has taken a stand somewhere between the two extremes, diversifying across asset classes into domestic and international equities (stocks), fixed income (bonds) and alternative investments.
If you are looking for someone to thank for the financial aid package that met 100 percent of your demonstrated need, or simply for the perfectly groomed trees on Willow Path, the Investment Office is a good place to start. Chief Investment Officer Joseph S. Hope and the Endowment Management & Finance Committee indirectly make these allocation decisions by strategically selecting investment managers who do the actual investing. They have leveraged alumni support to capitalize on lucrative investment opportunities, living in the top quartile of endowment returns over the most recent measurement periods. Through investments in successful investment managers, the endowment contributes 25 percent of the operating budget, largely to support the financial aid recipients that make up two-fifths of the student body. It has buoyed the university through the financial crisis and funded countless programs that benefit the entire Colgate community. When it comes to growing our financial resources, Colgate is punching above its weight and its students are cashing in on the prize.