Massachusetts Institute of Technology (MIT), one of the leading educational institutions in the world, has reported a decline in its endowment due to weak investment returns. With an impressive $23.5 billion endowment, MIT’s holdings suffered a 2.9% decline in the fiscal year that ended on June 30. It is worth noting that MIT is among the first major university endowments to disclose its financial results, and Harvard University, known for having the largest fund among U.S. universities, is expected to release its own report soon.
The results presented by MIT shed light on the potential downsides of focusing on alternative investments, including venture capital, hedge funds, private equity, and real estate. These types of investments have gained popularity among major college and university endowments, thanks to the influential “Yale model,” pioneered by the late David Swensen, former Yale endowment chief (1954-2021). Interestingly, Yale’s endowment currently holds less than 5% of its total value in listed domestic equities.
Duke University, which also heavily invests in alternative assets, recently announced a 1% decline in the value of its $11.6 billion endowment in the fiscal year ending in June.
While alternative investments faced challenges during this fiscal year, listed stocks performed exceptionally well. The S&P 500 index, for instance, delivered a remarkable return of 19.6%. Conversely, bonds, as represented by the iShares Core U.S. Aggregate Bond (ticker: AGG) exchange-traded fund, experienced a slight decline of 1% over the same period from July 2022 to June 2023. A blended portfolio consisting of a 70% allocation to the S&P 500 and 30% to the bond ETF produced a respectable return of 13.4%, according to estimates.
The Wilshire Trust Universe Comparison Service, a widely recognized benchmark for institutional portfolios, reported an 8.1% return for the fiscal year ending in June, further highlighting the disparity between MIT’s performance and broader market trends.
Despite the lackluster investment returns, MIT provided minimal commentary on the matter. The treasurer’s report briefly mentioned that a “retrenchment” in the value of MIT’s venture capital portfolio significantly contributed to the decline in fiscal year 2023.
MIT’s struggle with investment returns exemplifies the challenges faced by institutions that adopt a similar investment strategy. As the education sector continues to navigate uncertain financial terrain, it remains to be seen how universities will respond and adapt their investment approaches moving forward.
MIT Endowment Sees Lackluster Returns
The MIT endowment recently reported lackluster returns for the year ended June 2022, following a remarkable gain of 55.5% in the previous year. This significant gain was largely attributed to successful ventures in the field of venture capital. However, in the most recent year, the endowment experienced a loss of 5.3%.
It’s important to note that endowment portfolios differ greatly from those of individual investors or the traditional stock and bond allocations advocated by financial advisors. The MIT Treasurer’s report does not provide an exact breakdown of the asset allocation, but it is worth mentioning that private equity investments, which possibly include venture capital, amounted to $10.5 billion as of June 30th. Additionally, domestic equity investments totaled approximately $2 billion.
Endowments of this magnitude often have less than 20% of their holdings invested in U.S. stocks. This strategic approach takes into consideration the notion that less-liquid asset classes such as venture capital, private equity, hedge funds, and real estate have the potential to offer higher risk-adjusted returns.
Over the past three years, the MIT endowment has seen an overall increase of about 43%, according to our estimates. While this percentage falls slightly behind the S&P 500’s performance of 50%, it comfortably surpasses the returns of a 70/30 stock and bond mix, which have yielded approximately 32%.
One of the key concerns for MIT and other endowments is whether markdowns on venture capital and other alternative investments have reached their bottom. It’s worth noting that MIT also holds substantial unfunded commitments to private equity, amounting to approximately $3 billion as of June 30th.
Unfortunately, we were unable to reach MIT for comment as their press office was closed for the holiday known as Indigenous Peoples’ Day.