With all the talk about saving money, you would think that universities would opt for what seems to be a lucrative way to raise endowment returns.
However, according to a study by Markov Processes International regarding college endowments, higher education endowments have underperformed “traditional” investments for the past decade. Traditional investments include funds in a stock-fixed income allocation. Alternative investments are invested in hedge funds and private equity.
On average, the study reported that endowments in alternative investments earned 4.6 percent in returns per year, compared to the 5.3 percent in returns for stock-bond index fund portfolios. Chapman’s endowment has outperformed comparable universities by earning 10.3 percent in annualized returns for marketable investments and 11.9 percent for private investments.
Harold Hewitt, Jr., Chapman’s Chief Operating Officer, said that the school only invests between $3 to $5 million out of its $391 million endowment in private equity.
“A sizeable allocation [in private equity] is too risky,” said Hewitt.
The university instead plans on gradually increasing its allocation in private equity. Hewitt said there are two reasons for a gradual approach. Firstly, few investors would invest in a private fund that is dubious in quality, so Chapman wants to invest small amounts without risking a substantial sum. Secondly, since it’s difficult to invest in top-earning funds without a large allocation of over $100 million or reputation, Chapman needs to gradually build its portfolio over time.
The growth of Chapman’s endowment mostly stems from its performance in investments, while the rest is from donations and additions from the operating budget. Trustee oversight especially helps the endowment grow because the committee is very active in managing the endowment, Hewitt said.
As of January 2018, Chapman allocates 23 percent ($90,425,524) of its endowment in U.S. equity, 15 percent ($58,654,287) in non-U.S. equities, 9.3 percent ($36,344,479) in fixed income, and 13 percent ($52,982,000) in local buildings.
Compared to other colleges with a similarly sized endowment, Chapman invests around the same percentage in each category, except non-U.S. equities. According to the National Association of College and University Business Officers and Commonfund Institute, universities with an endowment between $101 million and $500 million allocate 27 percent in U.S. equity, 13 percent in fixed income, and 22 percent in non-U.S. equities. Chapman’s seven percent difference in non-U.S. equities when compared to similar endowments has contributed to the university’s success.
Chapman’s endowment is managed by an investment committee that comprises of Chapman governors, trustees, and administration and staff. The committee is advised by Cambridge Associates, an investment consulting company with which the committee meets with four times a year. The committee tweaks the endowment on a regular basis based on the Cambridge Associates’ advice and current market statistics.