'Marketplace' Report: Yale Outsmarts the Market The list of the top-performing college endowments came out Thursday. Yale University's investments have beaten the S&P 500's performance for the last five years. Marketplace's Steve Tripoli explains how college endowments work and how schools like Yale manage to beat the market year after year.
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'Marketplace' Report: Yale Outsmarts the Market

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'Marketplace' Report: Yale Outsmarts the Market

'Marketplace' Report: Yale Outsmarts the Market

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From NPR News, it's DAY TO DAY.

Here are some new stats to fuel the heated rivalry between Yale and Harvard. Yale, 28; Harvard, 23. Now, we're not talking sports. We're not even talking academic showdowns. That's the 28 percent investment return for Yale University's giant endowment last fiscal year. Harvard's endowment earned 23 percent, and that's an admirable return too. According to a new report, many university endowments are earning big bucks these days.

Steve Tripoli from MARKETPLACE is here to tell us how.

Okay, Steve, what's their secret?

STEVE TRIPOLI: Well, Alex, you know, since we're calling this like a game, let's go right to the tape. Allen Proctor, who used to be Harvard's chief financial officer, told me this morning that university endowments have some big advantages that you and I don't have.

Dr. ALLEN PROCTOR (Harvard University): An endowment basically has an infinite time horizon. So if you had a bad year, you have decades to recover that money. What that means is individual investors generally cannot take on as much risk as an endowment's funds can take on.

COHEN: Now, we're talking about schools like Harvard and Yale, so I'm sure that they have some really sharp, professional money managers, maybe even couple of alums in the mix?

TRIPOLI: Right. David Swensen, Yale alum, is the head of Yale's endowment and he is a legend. He has beaten the average endowment and foundation's investment returns by more than five percent annually over the past 20 years, and that is a truly gigantic advantage when you take it over time.

COHEN: Now, with - if you've got a sharp manager like Swensen at the helm, I guess that means you don't worry as much about taking extra risks?

TRIPOLI Right. And you have time on your side as well. And these endowments do take risk. They're in hedge funds, timber forests, private equity. You know, those bigger risks do usually mean bigger gains over time, but you've got to be able to weather the bumps.

COHEN: I'm sure that many listeners right now are thinking I can just copy what these schools are doing and I'll come out on top too. But that doesn't necessarily work, right?

TRIPOLI: Well, it's funny because a couple of years ago, David Swensen at Yale set out to write a book about how individual investors could come closer to Yale's returns. And in doing that research, he came to the opposite conclusion, that most individuals not only can't do that but that it's dangerous for them to try, and not just because of shorter time horizons and lack of professional expertise.

COHEN: And what are some of the pressures that individual investors are facing that makes it not a smart move?

TRIPOLI: Well, Swensen has been saying out loud in recent years that us little guys are being abused, especially by the mutual fund industry. He says many funds charge far too much in fees and those fees really eat into returns over time, and he says too many investment advisers have conflicts of interest that have been putting our money into less than optimal places.

COHEN: Does he have any thoughts on what we can do about that?

TRIPOLI: He does. Swensen thinks the best bet for individuals is to invest in a broadly diversified set of index mutual funds. Now, these are funds that passively track major stock and bond indexes. He says that doing that neatly addresses a few problems, that once you got the market rate of return, which is more than most of us get, and because index funds merely track indexes and don't require active management, they have far lower fees than active funds, and also no conflicts of interest.

COHEN: Thank you, Steve. Steve Tripoli of public radio's daily business show MARKETPLACE. It's produced by American Public Media.

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