The school published their financials earlier this month. In the report you will find that allocating to an illiquid asset class is not easy to manage.
Within Private Equity and Real Assets, deviations from Policy Portfolio targets can occur without deliberate intent, due to funding and market dynamics. When the Policy Portfolio targets for Private Equity and Real Assets were established, and when they are reviewed, it is with the understanding that allocation deviations in these categories are neither easily nor cheaply controlled with great precision, and therefore will often need to be offset by allocation adjustments in other categories.
That said, the large overweight in Private Equity is unintentional and is due to two key factors. Firstly, with the benefit of hindsight, we recognize that our commitments to Private Equity funds during fiscal years 2006 through 2008 were too high. Since that time, we have reduced our commitment pace to a sustainable steady-state rate and expect to glide gradually over multiple years back to the target allocation. Indeed, this decline would be happening at a faster pace if not for the second factor—the asset category’s very strong performance. Private Equity was the Endowment’s best performing asset category in fiscal 2019 and has generated a 15.3 percent annualized return over the past five years relative to a 6.3 percent annualized return for the Endowment excluding Private Equity. Looking ahead, we are cautiously optimistic that the Private Equity portfolio will generate meaningful liquidity in the next several years. It will, however, take substantial time for exposure to decline to the Policy target level.
Private equity has outperformed all of the other asset classes.
Performance varied across asset classes. Private Equity was the sole asset class to produce double-digit gains, with a 13.8 percent return. Other equity asset classes had returns that ranged from slightly positive to slightly negative: 5.1 percent for Independent Return, 3.8 percent for Emerging Markets, negative 0.2 percent for Real Assets, and negative 1.2 percent for Developed Markets. Relative performance in equity categories was mixed, with Developed Markets, Private Equity, and Real Assets underperforming, and Emerging Markets and Independent Return outperforming their benchmarks. The Fixed Income and Cash asset class eked out a 3.0 percent gain, benefitting from interest rate cuts; our continuing shorter-than-market duration posture hurt performance this year as note and bond yields declined further.
Of course, the evaluation of our investment program should focus on the long term, and our long-term results are strong. The Endowment’s annualized return over the past 10 years is 11.6 percent, equating to a HEPI-adjusted real return of 9.2 percent, which enabled us to very meaningfully grow purchasing power after spending. The 11.6 percent annualized nominal gain compares well to the Policy Portfolio Index’s 9.5 percent increase, and it is comfortably ahead of the 65/35 benchmark’s 11.1 percent annualized return. Our performance was also strong compared to the 8.5 percent median return for college and university endowments.
For added perspective, Princeton’s Endowment would be about $8 billion smaller if our results over the past 10 years had equaled those of the median college and university endowment, assuming unchanged levels of spending.
For a school that depends on the endowment for half of its annual operating budget, surely they are grateful for that extra $8 billion.
To learn more on how they invest their endowment, listen to Princeton’s Andy Golden on Capital Allocators.
Post by Marcelino Pantoja