- The endowment investment team at Carthage College in Kenosha, Wisc., has managed to achieve a 10-year annualized return of 6.2% — a rate that beat out elite competitor Harvard, which saw a 4.4% average return for fiscal year 2017. In fact, Carthage's performance is better than 90% of other institutions, according to data from the National Association of College and University Business Officers, reports Bloomberg.
- In an interview with Education Dive, William Abt, Chief Investment Officer for Carthage, who has been serving the four-year liberal arts college since 2001, explained his strategy for growth centered around staying away from "alternative investments" — such as hedge funds, private real estate, venture capital — "that are extremely expensive and don't do very well on average," and instead invest in low-cost market tracking "index mutual funds," with the help of consultants at Vanguard Group Inc. For an institution with a smaller endowment, Abt said he was focused on not getting caught up in one- or two-year returns, but "concentrate on 10-year rolling annualized returns."
- In fact, Abt explains that for any institution with a $500 million or less endowment, it should not be taking on the same investment strategy of an elite institution like Yale or Harvard, because "they have the best ability to get the best money managers with alternative types of investors." Over the 10-year period, Abt explains that the slow and steady approach helped the institution go from a $30 million endowment when he arrived to $120 million.
Part of Carthage's strategy in growing its endowment was to deviate from standard reasoning around how a typical college divides up its investment portfolio, with Abt explaining that, on average, a school has around 52% of its endowment in alternative investments, which can be risky, sometimes not have much of a high return, and often cost a lot to manage.
The reasoning behind this, he said, is that many believe "alternative investments don't have the volatility that stocks or equity funds do." However, even if that's absolutely true, he says, "as a school we are not concerned that our portfolio will have more volatility, because we are invested in perpetuity. Our investment horizon is as long as possible. It's not like our 401K has a time horizon of 25 or 35 years. The college's time horizon is forever. You have to think long-term."
By doing extensive research and settling on group Vanguard Inc. in 2003, Carthage maintains a portfolio that is 85% equity, 10% fixed income and 5% based on index funds, with a low portfolio expense ratio of 10 basis points — or 1/100th of a percent of the return — with another 5 basis points for Vanguard's advisory fee. Abt said this is much lower than what the average college pays out in expenses, which are around 2%.
Ultimately, Abt explains that when he was approaching the best strategy for growing Carthage's endowment, he recognized that the school would never be able to get with the top money managers, like elite institutions can afford, and this required him to look for a more strategic approach outside of alternative investments that require a great deal of consulting. He says that while it might not be the best strategy for every school, he stands by a reasoning that most small institutions should not be trying to replicate what the elites are doing.
"David Swensen, who is the chief investment officer at Yale — and we know Yale's returns historically since he's been there have been great. He spoke at a NACUBO conference back in 2006, and he told the audience that most of us can't do what he's doing at Yale, you can't compete," said Abt.
"And that's because they have a head start and the resources to do things most schools cant. Bottom line if you're a really good money manager with a good venture capital firm and you get a call from Yale university and another call from Carthage college — which one are you going to be interested in? If you are 500 million or less you really should look at what you're doing."