“Invest Well. Do Good.”
Princeton University Endowment Outpaces Ivies As Princo Seeks to “Invest Well” and “Do Good”
By Donald Gilpin
“Invest Well. Do Good,” reads the headline on the website of the Princeton University Investment Company (Princo), which manages most of the University’s $25.9 billion endowment, the largest endowment per student in the country and one of the five largest overall.
Recent results for the endowment — a 14.2 percent investment gain for the fiscal year that ended June 30, 2018 — and its support of an increasing share — 55 percent for 2018-19 — of the University’s annual budget indicate that Princo has indeed been investing well and doing good.
The endowment, which supports a financial aid program that helps to provide access to a Princeton education to students from all economic backgrounds and makes it possible for them to attend regardless of ability to pay and without the need to take out loans, increased by about $2.1 billion from June 2017 to June 2018, taking into account investment returns, gifts, and spending.
“The earnings from our endowment cover more than half of the University’s operating budget, as well as help fund our high priority strategic initiatives,” said Provost Deborah Prentice. “Without a strong endowment, we would not be able to support our students in the way that we do.”
Princo’s investment results for the last fiscal year surpassed returns from other Ivy League schools, which ranged from 9.2 percent at Columbia to 13.2 percent at Brown. Median returns for university endowments tracked by the Cambridge Associates research firm registered a gain of 8.3 percent over the same one-year period.
Harvard’s endowment returned 10 percent for the 2018 fiscal year, with Cornell checking in at 10.6 percent, Dartmouth at 12.2 percent, University of Pennsylvania at 12.9 percent, and Yale at 12.3 percent, according to an October 2018 report in Institutional Investor. MIT reported a 13.5 percent return and Stanford registered an 11.3 percent gain.
Princeton University’s Office of Communication reported that over the past 10 years the average annual return of the endowment has been 8 percent, “which places Princeton among the top percentile of 458 institutions listed by Wilshire Trust Universe Comparison Service.”
A November 2018 Institutional Investor article, however, reported that, from the perspective of the past 10 years, neither Princeton nor any other Ivy League University beat the 10-year performance, 8.1 percent increase, of a simulated plain vanilla portfolio made up of 60 percent stocks and 40 percent bonds.
Princo President Andrew Golden declined to be interviewed for this article, but in a November Princeton Alumni Weekly (PAW) report he emphasized Princo’s long-term perspective and downplayed the importance of annual, or even 10-year performance results. “There’s always a bunch of luck for the returns in one given year,” he told PAW. “The returns in any one given year reflect literally decades of decisions.” He noted, as quoted in Wikipedia, “When you have a mission to preserve purchasing power into perpetuity, in some sense a year is a pretty short period of time.”
Golden has been managing Princeton’s endowment since 1995. Before that he worked at Duke Management Company and before that, from 1988 to 1993, as portfolio manager at Yale’s Investment Office. At Yale, he served under the legendary David Swensen, creator of the Yale Model, which Princeton and most schools with large endowments now follow. The Yale Model strategy, as outlined in Swensen’s landmark work Pioneering Portfolio Management: An Unconventional Approach to Institutional Investments (2000), entails investing in alternative asset classes, such as hedge funds, real estate, and private equity.
In seeking long-term returns above 10 percent per year, Princo relies on “an aggressive, equity-based approach,” according to its recent document on investment strategy. Princo works with about 80 different investment managers across the globe, and further leverages its advantageous long-range horizon, relatively low spending requirements, the endowment’s size, Princeton’s large network of alumni, and the reputations of the University and Princo.
Princo’s investment strategy report notes that non-traditional asset allocation is “a critically important element” of its approach. Although 95 percent of the portfolio is assigned to equities, only 9 percent is earmarked for U.S. equities, with 6 percent dedicated to developed international equity, 10 percent to emerging international equity, 26 percent to independent return (hedge funds), 27 percent to private equity (private companies), 18 percent to real estate and natural resources, and 5 percent to fixed income and cash.
Though 95 percent equities indicates a high level of risk, Golden emphasized Princeton’s strong financial position and long timeline, and pointed out, “The multi-asset class approach also offers diversification benefits that help to control risk in most environments.”
Golden mentioned private equity (a whopping 18.2 percent annualized return over the past five years) as last year’s best performing asset class and one of the main drivers of last year’s performance. Hedge funds earned about 7 percent and fixed income and cash investments saw little growth.
In speaking about the Yale Model in an interview reported last December in the New York Times, Golden noted, “I wouldn’t recommend it for my mother.”
Alternative assets, particularly hedge funds, have been criticized for their high fees, typically 2 percent plus 20 percent of gains, and for their illiquidity, keeping money locked up for long periods of time. Those concerns seem particularly relevant when plain, low-fee, index-fund-type investments can produce better results over a 10-year period.
Emphasizing that “focusing on the calendar just leads to short-termism,” Golden, according to the New York Times, pointed out that though the Princeton endowment dipped toward the end of the tech boom in 1998-99, at least in relation to the overall market, it then fared relatively well through the ensuing bursting of the tech bubble and has far surpassed the performance of a standard 60/40, stock/bond mix in the period of the past 20 years.
Golden suggested that only a full market cycle, market peak to market peak or trough to trough, most likely more than 10 years, can provide a meaningful comparison.
Princo, with its headquarters on Chambers Street, across Nassau Street from the main University campus, and its own 12-member Board of Directors, is officially part of the University, “a University office operating under the final authority of the University’s Board of Trustees,” and yet independent from the University. “Organizationally distinct from the University, but not a separate legal entity,” Princo employs an investment team of 22 and an operations team of 18. Golden reports to both the University president and to the chair of the Princo Board of Directors.
Princo’s website emphasizes the greater flexibility and responsiveness of employing external management and notes that the Princo staff is fully empowered to hire and fire external managers and to shift assets among sectors, authority which “provides Princo a competitive advantage relative to most peer endowments.”
Its detachment from the day-to-day workings of the University’s multiple concerns and constituents might also have helped to spare Princo from the kind of political turmoil that has raised the issue of socially- and environmentally-conscious investing and targeted investments in fossil fuels and the prison industry at Yale, Harvard, and other major universities in recent years. Princeton’s investment portfolio has not come under fire since the 1970s and 1980s, when students demonstrated against investments in the defense industry and in apartheid South Africa.
Despite Princo’s banner year in 2018, the jury remains out, as the bull market seems to continue — high volatility and quasi-corrections notwithstanding. Will Princo’s 2019 investment results for the fiscal year ending June 30, 2019, again lead the Ivy League? Will they again struggle to keep pace with the plain vanilla index fund portfolio? Will the true test for the Yale Model and for Princo come when a stock market downturn turns into a prolonged bear market and completes the market cycle?
Continuing to “invest well” and working to “do good” might become even more challenging for Princo in the coming months and years.