Harvard versus Yale is one of the oldest and most storied rivalries among educational institutions. The two prestigious Ivy Leaguers compete fiercely, each trying to outdo one and other.
Academically, the schools jostle for top rankings in an increasing number of ‘Best Schools’ lists. And both of these schools are incredibly difficult to get into. Harvard has an admission rate of just 5.9%, the lowest of the Ivy League.1 Yale is next in line with just 6.8% of candidates getting in.2
It’s also about prestige-each wants to display the more prominent list of alumni.
Harvard boasts eight U.S. presidents including John F. Kennedy as well as the world’s richest man, Bill Gates (even though he didn’t graduate). In fact, Mr. Gate’s net worth is approximately twice the size of Harvard’s endowment.
Yale will counter with their own ‘Who’s Who’ list including Bill Clinton, PepsiCo CEO Indra Nooyi, and Federal Reserve Chair and economist Janet Yellen.
The rivalry also extends into athletics. A late Saturday in fall pits these two Ivy League rivals against one and other on the football field where they play ‘The Game’, a tradition dating back to their first game in 1875. While Yale leads the overall series, Harvard has won the last nine meetings with the help of notable players including current New York Jets quarterback Ryan Fitzpatrick.
But there is also competition between these schools when it comes to finance-namely the investment returns of their endowment funds. Here is a list of the largest endowments.
The Top Ten university endowments (assets under management in billions) in the United States are:3
- Harvard- $37.6B
- Yale- $25.5B
- Princeton- $22.3B
- Stanford- $22.2B
- I.T. (Massachusetts Institute of Technology)- $13.4B
- University of Pennsylvania- $10.1B
- Michigan- $9.8B
- Texas A&M- $9.7B
- Columbia- $9.6B
- Notre Dame- $8.7B
Given the level of pedigree and reputation, it’s not surprising to see Harvard and Yale again topping this list. While Harvard has amassed an endowment fund roughly 50% larger than the Yale’s, Yale has been closing the gap, with endowment returns outpacing Harvard’s over the last few years.
In fact, Yale’s returns have led all Ivy League endowments.
A 2015 Bloomberg study showed that Yale’s 5-year annualized return of roughly 14% is tops among the 8 Ivy League schools.4
Over the same period, Harvard finished in seventh place among Ivy League endowments.5 Harvard will argue the law of large numbers given that their endowment is considerably larger, making it harder to generate outsized percentage returns. But Yale’s having none of that, and at over $25 billion, their endowment is nothing to sneeze at. The reality is, the two endowment funds are run in very different ways.
Turnover at Harvard
But Harvard isn’t sitting idly by to watch their rival gain ground. To try and turn things around, they poached a couple of hot fund managers, N.P. Narvekar from Columbia University’s endowment and Amy Falls of Rockefeller University.6 Narvekar had success at other Ivy League endowments (Columbia and Penn) and was hired to bring the same acumen to Harvard Management Company. Narvekar had previously received an MBA from the University of Pennsylvania. Ms. Fall’s hiring is interesting simply because she comes from such a lesser-known institution, New York City’s Rockefeller University.
Prior to these new hires, Harvard Management Company has had a rather unstable crop of endowment managers. Suffering from higher staff turnover, the fund never seems to allow a new strategy time to run its course and reap benefits. The fund had been run by Jane Mendillo and prior to that by Mohammed El-Erian of Pacific Investment Management Company or PIMCO.
Managing emotions when investing is a tough task, even for fund managers. Ms. Mendillo has been criticized (possibly unfairly) for liquidating some illiquid private equity positions at fire sale prices during the depths of the Great Recession.7 Not only was there a large loss incurred, but the subsequent run up was largely missed. But El-Erian’s reputation from Harvard Management made him a rock-star where he co-headed PIMCO with its founder and Masters of Finance series member Bill Gross. It was unfortunate that the Crimson couldn’t hold onto him.
Maybe the issue with Harvard’s recent performance is that there are too many cooks in the kitchen. Professionals working at Harvard Management are very well compensated for their efforts. According to Bloomberg, the fund has a staff of over 200 with some traders earning $30 million per year.8 Further, 11 of Harvard’s money managers were paid a total of $242 million over the last 5 years, according to a Bloomberg TV report.
Given their performance against their Ivy League peers, you might wonder why. Some speculate these professional’s performance targets are too easy to beat. With watered down benchmarks to hit, there’s little incentive for managers to shoot for higher returns. Some predict Mr. Narvekar may come in and disrupt this cushy compensation system, some referring to the threat as ‘Narvageddon’.
The Yale Model
Conversely, the ‘Yale [endowment] model’ embraces the outsourcing of investment duties to independent, external managers. These managers utilize alternative investments and styles, including absolute return, private equity, and real estate. Some of Yale’s core principles originated from former Chief Investment Officer David Swenson and stresses “no market timing”.9
In stark contrast to Harvard, the Yale model picks investments with “high static risk” and holds them for the long-term, weathering market ups and downs.
Static portfolio risk is a term used to describe a ‘set it and forget it’ model, rather than dynamically changing positions with differing market conditions. Because of this commitment to long term investments, Yale’s endowment can be involved in very illiquid investments, which can enjoy above average returns.
This model seems to be working. In the fiscal year ended June 2015, Yale’s one-year return trounced all almost all others, coming in at 11.5% while the return on the average educational endowment was just 2.4% according to the BACUBO CommonFund Study of 812 U.S. endowments.10,11 In other words, Yale outperformed their peers by an astounding 9.1%.
But, this model only works if the independent managers do a good job, so success depends heavily upon the ability of the endowment, or investment consultants, to select high quality asset managers.12
This Yale model is catching on in the endowment community because it’s a lot easier to get rid of underperforming ‘outside’ managers than someone from the ‘inside’.
It’s tough to tell what the future holds for these two endowments. If the market goes down and stays low for an extended period of time, Yale’s fund could underperform. If the fund needs to raise cash for expenditures they could encounter problems due to illiquidity. They may have to take on debt or sell more liquid securities it wants to hold onto. This might give the edge to Harvard.
Contrarily, if the market remains strong, Yale should continue to ride this wave of recent victories. Harvard’s fund is built for dynamically changing markets so in an upward swing, it should continue to underperform. We’ll know when their next fiscal year ends next June. Given their past, you can be sure the rivalry over investment return, or anything really, should continue far into the future.