It’s no secret that the SEC dominates college football. It has won 14 of the past 20 championships, with Alabama alone taking six of those crowns.
Interesting fact: The Ivy League has actually won more NCAA football championships than any other conference, with 46 national titles under its belt. The Big Ten is second with 39, followed by the SEC with 29.
The Ivy League hasn’t won a national championship since 1925, but before then, it dominated. From 1900 and 1925, Ivy League teams won 20 out of 25 college football National Championships! Crazy huh?
Times have changed with the SEC now dominating college football, but there’s one area in why the Ivy League dominates, and that’s with their university endowments. Not only do Ivy League schools dominate in the size of their endowments – taking up the top two spots and five of the top 10 in the country – but they also dominate in performance.
Before we dive into the numbers, what exactly is a university endowment?
University endowments are basically a school’s trust fund. It’s how universities fund their current operations while preserving assets for the future through donations and investments. Their account balances and the returns these endowments generate help pay for research, salaries, and financial aid. With no big bowl games or other big-money athletics to rely on, this is how Ivy League schools fund their operations, and this is where they dominate.
Over the past 10 to 20 years, the Yale Endowment model has received accolades for its investment performance and approach. Over the past ten years, the Yale Endowment has returned an average of 10.9% annually, more than doubling the national 10-year average of 5.3%. Yale’s Endowment balance is currently around $32 billion. Only the Harvard Endowment is higher, with around $40 billion.
So what do the Yale Endowment and other Ivy League endowments do differently than other university endowments? How does its investment approach differ from the Main Street investor?
The Yale Endowment is not looking to hit a home run.
While day traders constantly chase the next big thing and are always looking to hit a home run. Yale Endowment’s approach is different. That’s because it has to worry about the current generation of students and faculty, but it also has to worry about future generations.
With multiple generations to worry about, this is where the Yale Endowment motives and those of day traders diverge.
The two main priorities of the Yale Endowment are to:
- Generate enough cash flow to meet current operating expenses.
- Grow capital for future generations.
Investing for income and building multi-generational wealth is the reason Ivy League endowments invest differently.
The Yale Endowment Model is considered the gold standard for Ivy League investment models. This is all thanks to one person: David Swensen, who has been the chief investment officer at Yale University since 1985.
Swensen invented The Yale Model with Dean Takahashi, a variation of the Endowment Model, with an allocation of a majority of the portfolio in alternative assets instead of public equities. Under Swensen’s guidance, the Yale Endowment saw an average annual return of 11.8% from 1998 to 2018. During this same time, the S&P averaged an annual increase of just 6.16%.
Alternative investments like cash-flowing assets like private equity, commercial real assets, natural resources, and others fit well within Yale Endowment’s twin objectives of cash flow and appreciation.
Before Swensen took the reigns, Wall Street products constituted a majority of Yale’s investment portfolio, with alternatives constituting less than 5%. Today, those allocations have flipped, with alternatives taking up most of the portfolio and public equities making up less than 3% of its portfolio.
The Yale Endowment also prefers illiquidity. Investing for the long-term insulates its investments from market volatility and takes investor emotion out of the equation.
The Yale investment model isn’t just for the elite. Now more than ever, cash-flowing alternative assets are available to more qualified investors.
There’s a reason elite investors like Ivy League endowments and the ultra-wealthy gravitate towards cash-flowing alternatives.
They’re ideal for meeting current financial needs while building multi-generational wealth. This is because part of the cash flow can be reinvested to generate multiple streams of income.
Finally, illiquid alternative investments are also insulated from herd mentality – making them recession and inflation-resistant.