Ivy League Endowment Report Card: "F"

Last Updated Jun 30, 2009 6:22 PM EDT

For years, the heavy hitters who ran the endowments at places like Yale and Harvard were not only the envy of other universities, but of ordinary investors too.

The Ivy League geniuses, however, are looking more like failing students lately. The five schools with the largest multi-billion-dollar endowments -- Harvard, Yale, Stanford, Princeton and MIT -- warn that their losses for the fiscal year that ends tomorrow will range from 25% to 30%.

Ironically, it's the schools with relatively dinky endowments that were better at staunching the bleeding. According to an article in today's Wall Street Journal, colleges and universities with endowments of less than $100 million recorded average losses of 16%.

With less of a cash cushion, the poorer schools invested more heavily in bonds. In contrast, Yale, which experienced a 25% drop in its endowment value, has socked 4% of its cash into fixed incomes and a stunning 70% in alternative investments. In fairness, I should mention that Yale, up until this year, has probably overseen the most successful university endowment on the planet.

Larry Swedroe, a fellow CBSMoneyWatch blogger and the author of The Only Guide to Alternative Investments You'll Ever Need, makes a compelling argument for why universities with multi-billion-dollar endowments can use risky and highly illiquid alternative investments: "Harvard's endowment has an infinite time horizon," he says.

While that's true, Harvard and other Ivy League schools heavily depend upon their endowment for daily expenses. These schools dip into their endowments for 25% to 40% of their operating revenue. Less wealthy schools, which rely largely on tuition to fund their operations, use endowment proceeds to pay for about 5% of their operating costs.

What's sad is that so many college investment officers during the bull market turned into Yale and Harvard wannabes. There are hints, however, that colleges of all sizes are beginning to rethink their embrace of alternative investments. And to me, that sounds like an "A+" idea.

Dunce image by magicalobizuth, CC 2.0.