https://www.chicagomaroon.com/article/2018/11/9/8-returns-uchicago-endowment-trails-top-universiti/
I know little about metrics for endowment performance, but this doesn’t look good. Can someone translate the goobly-gook? Why is Chicago trailing its peers on this front? An endowment that, about 10 years ago, was comparable to UPenn’s (both were around $6B in 2008), is now far off the pace (in ten years Penn’s endowment has grown to almost $14B, and Chicago’s is at $8.2B).
What’s going on?
Nothing mysterious or puzzling about this. The article clearly states the reasons behind UChicago’s trailing in ROI to its peers:
“The relatively low returns may reflect UChicago’s more conservative investment strategy, which has acted as a hedge to its aggressive spending on development.”
When you’re aggressively spending on institutional development needs, such as “shuttering a number of scattered, smaller dorms to build multiple new housing complexes, expanding treatment at the Pritzker School of Medicine, and constructing a science building to house the new Institute for Molecular Engineering (IME),” etc., then you just can’t play too risky with the endowment investment strategies.
The problem with saying that is that all (or most) of Chicago’s peers are also engaged in aggressive spending on institutional development. Maybe not quite at as transformational a pace as Chicago, but still quite a lot.
Long term, Chicago can’t remain a top-level university without a top-level endowment. It doesn’t have to have a Harvard-sized endowment (which is sort of ridiculous, and which is not necessarily being deployed effectively), but it’s not good news to be that far behind Penn and Columbia.
“The problem with saying that is that all (or most) of Chicago’s peers are also engaged in aggressive spending on institutional development. Maybe not quite at as transformational a pace as Chicago, but still quite a lot.”
We don’t really know the $$ details of how much of endowment that UChicago is “aggressively” spending vs. its peer institutions. It’s richer peers have more room to play riskier game. I’m more inclined to give the UChicago’s investment team the benefit of the doubt. It’s only wise to protect one’s assets with conservative investment strategies when aggressively spending on various development projects. UChicago must have done things right when their value of the University of Chicago’s endowment has more than tripled in the past two decades.
If Chicago’s strategy is meant to weather the storm of a bear market, then perhaps we are about to see that strategy tested. It would have been nice to have had more benefit from the bull while it was roaring, but now is probably not the time to roll the dice by taking on additional risk.
Someone on this board will know better than me, but I seem to recall that the guy who formerly directed Harvard’s investments got fired recently because the Harvard returns had been so poor, relatively. They were certainly poorer than Harvard’s ivy league compeers (other than Columbia) but much better than Chicago’s. Was this fellow on a frolic of his own or was he too pursuing a conservative strategy designed to weather a bear market? Or was he just making poor picks? It hardly matters what strategy Harvard pursues, of course: With that sort of cushion Harvard can keep on rolling the dice through good times and bad. That was why someone had to be fired.
It sounds like Chicago’s strategy has been forced on it by its lenders, given the level of its debt. Has the University of Chicago become the Greece, the Italy or the Spain of the American academic world - its investment policy subject to the veto of bond vigilantes? What comes next? Will those guys in their black hats start interfering in admissions? Will a quota of the children of the wealthy become the price of further tranches of debt?
Its ironic that Chicago has arguably the best finance faculty who won the most Nobel Prizes (Eugene Fama and Richard Thaler just in the last few years) and wrote textbooks on investing. I one time asked one of the finance professors about this disconnect and was told that unfortunately, the Booth faculty and investment office never talked to each other. If only UChicago Fund had the return of Dimensional Fund which put UChicago finance theory to practice, UChicago would be the envy of the endowment world. Of course, with equity investment the volatility would be high, but with a high alpha I imagine there are ways to hedge it.
Now UChicago has Bill Gates’ son as freshman in its college it definitely has the highest average family endowment per student among all colleges 
@TiggerDad - who are Chicago’s “richer” peers that have more room to play a riskier game? Leaving HYPS to the side, 10 years ago, Chicago was actually in a better financial position than Columbia and Penn (C and P are larger than Chicago).
Now, that competitive position has eroded.
I wonder if there is something else afoot: C and P also engaged in aggressive investment in institutional development, but they’re also relying on eye-popping fundraising to buoy their investment. Penn finished a ~$5B campaign in 2013 and then, just a couple years later, embarked on ANOTHER capital campaign designed to raise around another $5B. So, while UPenn will have raised roughly $10B by 2021 or so, in the same period of time, Chicago will have raised around $5B. Put another way, C and P’s hedge against institutional investment isn’t conservative endowment strategies - it’s fundraising and riding a gravy train.
(I should add, in years where Chicago’s endowment stagnated, Penn, through a lot of fundraising, was able to achieve modest to significant gains based on contributions to the endowment. Now, Chicago is in a position where it may never catch up. And, it’s gone to being one of the wealthiest of the Non-HYPS schools to falling well behind the pack.)
Blergh.
There are two distinct questions here. One is investment performance. The other is fundraising. The fundraising part is more important in describing the relative positions of these schools. Cue knows well enough the reasons for Chicago’s challenges in that department: It didn’t attract the sort of kid in the first place and certainly didn’t turn out the sort who went on to make fortunes some part of which they recycled back to their alma mater. The few kids of the rich who did end up at Chicago were generally ivy rejects who did not like the atmosphere of the place. And if you weren’t an alumnus at all but merely a very rich person lusting to get a building or a professorship named for yourself on the taxpayer’s dime, you wouldn’t think of throwing your funds away on a place like the University of Chicago. You would choose a place with snob appeal, where you got maximum bang for your buck. Who would get impressed with a place whose name nobody would recognize - or take to be that of a community college? A building at such a place bearing your name would give you no bragging rights at the club. That’s about the size of it, isn’t it?
To complete with richer schools,I think UChicago should actively think about selling naming rights for the university, for say $10 billion. For a while, it can be the University of Chicago, and after a sufficient time, drop the “of Chicago”.
If you think about it, there are only two colleges at this level that still have naming rights worth selling: UChicago, and UPenn.
Eh @marlowe1 - I don’t know. Some of the biggest fundraising Universities don’t have glossy brand names or preeminent status. NYU, USC, U. of Washington, are just a few that have raked in the cash recently.
This has more or less been the decade of comprehensive, urban research Us - from Columbia and UPenn to Hopkins and USC, these urban R1s are super popular now.
Can someone explain again why a conservative investment strategy in a bull market is the way to go? If Chicago invested as heavily (or as wisely?) as Penn, and now had a $14B endowment (as opposed to $8B), and the market crashes and they lose 30% of their value - aren’t they still better with a $10B endowment, as opposed to $7-8B?
What am I missing here?
Fama is financial economist. Thaler is a behavioral economist. Hansen is an econometrician. While I have an extremely high regard for all three (all are most recent Booth Nobel Laureates), they are not exactly the guys you want to turn to for better return on investment.
On the other hand, if you look at the resume of the University Trustee, there are some big shots in the investment world.
https://trustees.uchicago.edu/university-trustees/
John Liew is the co-founder of AQR (the principal founder is Cliff Asness GSB PhD and RA to Fama 
). Ken Griffin is founder of Citadel. Dave Rubenstein is the founder of Carlyle Group. Emmanuel Roman is CEO of PIMCO. So you have some major heavy weights in bond fund, quant fund, private equity and alternative investment. These guys have AUM number in tens or even hundreds of billions (or even trillion for PIMCO). I would like to think if President Zimmer needs to improve return, he has plenty of big brains he can turn to.
I am not defending the lagging return in the U of C endowment. But I suspect that there may be more behind the scene stories/constraints that we are not aware of. If it is just a case of improving return, why doesn’t Zimmer just hand the money to the star hedge fund managers on Board of Trustee and be done with it?
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As it happens, this is demonstrably false. Look at the Crown family, which has Henry Crown Field House, Crown House in G-G Commons, and who knows what else. I am not certain anyone in that family has ever attended the University of Chicago. James Crown chaired the Board of Trustees for a term a while back, when Zimmer got hired and the expansion began; his degrees are from Hampshire College (!) and Stanford.
There’s also $1.2 billion in yet-to-be-funded capital commitments to private equity funds.
– The next new dorm is being financed, and will be owned, completely by by a developer.
– This fall, the university issued $400 million of bonds to refinance debt coming due, and in connection with that agreed to lower its working-capital-loan commitments from $600 million to $450 million.
I admit that I don’t understand the ways of the very rich, but does anyone disagree that far fewer of them know about or are impressed by or care about the University of Chicago than they do the brand-name schools? I don’t know how one would go about proving the truth or falseness of that proposition, but if my own experience counts for anything, the case is proven. Certainly, the fact that one rich guy, the Chairman of the Board of Trustees, made a generous contribution doesn’t demonstrate its falseness.
It’s at least a couple of generations – maybe three – of a wealthy family in Chicago. They give generously elsewhere, too – the law school building at Stanford is named after some of them. I don’t have the time to look, but I believe that from its inception the University has enjoyed the support of a number of wealthy families in Chicago, without necessarily having many scions of those families earning degrees there. Sure, there are certainly more such families at Harvard. But it just wasn’t true that no one not an alumnus “would think of throwing [their] funds away on a place like the University of Chicago.”
Some rhetorical excess there intended to make the point - to rephrase more precisely, though that’s against my nature - that super-rich non-alumni will generally [note bene] desire to attach their names to the institutions that give them maximal bragging rights. I also suspect the insidious operation of UCDS [joke].
The investment portfolio looks generally similar to those of most of UChicago’s peer group: a lot of public equities, private equity, hedge funds (often, as here, referred to as “absolute return”), real estate and natural resources. Maybe UChicago’s endowment manager had an off year relative to those at the peer schools - or maybe they’re not as skilled (you’d have to study the composition of the portfolios and compare the records over a longer period to make a reasonable judgment about that).
In that regard, the UChicago press release states:
Columbia and Penn seem to be the two schools being discussed the most upthread as points of comparison. I’m having trouble finding information on the longer-term performance of Columbia’s endowment (and the guy who had been running it went to Harvard a couple of years ago, so the management style may be changing somewhat), but Penn’s endowment returned 9.9% over the past five years, 7.7% over the past 10 and 7.4% over the past 20. I’d guess that the 1.9% annual differential with UChicago over the past 10 years, coming at a time when Penn was outraising UChicago (see below) is why the gap has opened up.
What is certainly true is that Columbia and Penn are, at least recently, raising more money than UChicago. Here are some figures from the last few years:
2017: Penn $626m, Columbia $603m, UChicago $483m
2016: Columbia $585m, Penn $543m, UChicago $443m
2015: Columbia $553m, Penn $517m, UChicago $444m
2014: Penn $484m, Columbia $470m, UChicago $405m
2013: Columbia $645m, Penn $507m, UChicago not listed (but must be below $424m, the cutoff for the schools listed)
So, during this time period, Columbia raised $2.86b, Penn raised $2.68b, while UChicago raised (at most) $2.2b.
https://news.uchicago.edu/story/university-chicago-endowment-grows-82-billion
http://www.investments.upenn.edu/about-us
https://cae.org/images/uploads/pdf/VSE-2017-Press-Release.pdf
https://cae.org/images/uploads/pdf/VSE-2016-Press-Release.pdf
https://cae.org/images/uploads/pdf/VSE_2015_Press_Release.pdf
https://cae.org/images/uploads/pdf/VSE-2014-Press-Release.pdf
https://cae.org/images/uploads/pdf/VSE-2013-Press-Release.pdf
Chicago’s (relatively) lackluster fundraising can be attributed to one main weakness: the lack of a preeminent medical /engineering plant. I know, I know I’ve said it before, but look:
In the list @DeepBlue86 provided, almost all the top fundraising schools have big, top-notch medical (or big engineering) plants: Stanford, Harvard, MIT, Hopkins, UPenn, Columbia, Duke, etc etc.
There’s also, lets face it, just more money flowing on the coasts. Chicago, Northwestern, Wash U, Notre Dame, etc. just don’t get funding at the same scale.
Even before UChicago took on lots of loans, its endowment earned less than its peers, definitely way less than Yale. Booth’s endowment managers are way better… my problem with the University’s endowment managers is NONE of have ever come from Booth. Who are hiring these people?
@cue7 Isn’t Chicago’s med school highly regarded?
@Cue7 ND’s endowment is the 10th largest in the US.