by David Chambers, Charikleia Kaffe & Elroy Dimson (Cambridge Judge Business School)
This blog is part of our EHS 2020 Annual Conference Blog Series.
Endowments are investment funds aiming to meet the needs of their beneficiaries over multiple generations and adhering to the principle of intergenerational equity. University endowments such as Harvard, Yale and Princeton, in particular, have been at the forefront of developments in long-horizon investing over the last three decades.
But little is known about how these funds invested before the recent past. While scholars have previously examined the history of insurance companies and investment trusts, very little historical analysis has been undertaken of such important and innovative long-horizon investors. This is despite the tremendous influence of the so-called ‘US endowment model’ of long-horizon investing – attributed to Yale University and its chief investment officer, David Swensen – on other investors.
Our study exploits a new long-run hand-collected data set of the investments belonging to the 12 wealthiest US university endowments from the early twentieth century up to the present: Brown University, Columbia University, Cornell University, Dartmouth College, Harvard University, Princeton University, the University of Pennsylvania, Yale University, the Massachusetts Institute of Technology, the University of Chicago, Johns Hopkins University and Stanford University.
All are large private doctoral institutions that were among the wealthiest university endowments in the early decades of the twentieth century and which made sufficient disclosures about how their funds were invested. From the latter, we estimate the annual time series of allocations across major asset classes (stocks, bonds, real estate, alternative assets, etc.), endowment market values and investment returns.
Our study has two main findings. First, we document two major shifts in the allocation of the institutions’ portfolios from predominantly bonds to predominantly stocks beginning in the 1930s and then again from stocks to alternative assets beginning in the 1980s. Moreover, the Ivy League schools (notably, Harvard, Yale and Princeton) led the way in these asset allocation moves in both eras.
Second, we examine whether these funds invest in a manner consistent with their mission as long-term investors, namely, behaving countercyclically – selling when prices are high and buying when low. Prior studies show that pension funds and mutual funds behave procyclically during crises – buying when prices are high and selling when low.
In contrast, our analysis finds that the leading university endowments on average behave countercyclically across the six ‘worst’ financial crises during the last 120 years in the United States: 1906-1907, 1929, 1937, 1973-74, 2000 and 2008. Hence, typically, during the pre-crisis price run-up, they decrease their allocation to risky assets but increase this allocation in the post-crisis price decline.
In addition, we find that this countercyclical behaviour became more pronounced in the two most recent crises – the Dot-Com Bubble and the 2008 Global Financial Crisis.