Katy Graddy:
Hello everyone, my name is Katy Graddy. I'm the Dean of Brandeis International Business School, and the Fred and Rita Richmond distinguished professor in economics. Thank you for joining us as we kick off the 2021 edition of our Trends and Asset Management Virtual Events Series.
Katy Graddy:
We have a great discussion today, titled Investing For the Future Generations: Major Trends and Endowments. Our focus will be twofold. We will examine the historical performance of major university endowments and also explore some of the current challenges facing endowment managers.
Katy Graddy:
I'll introduce our speakers in just a moment, but first I'd like to mention that this event is co-sponsored by the International Business Schools Asset Management Council and the Rosenberg Institute of Global Finance. Under the leadership of Chairman Perry Traquina, the Asset Management Council has been instrumental in our recent efforts at the International Business School to build out what is already a very robust finance program.
Katy Graddy:
Perry is a graduate of Brandeis University, a member of the university's Board of Trustees, and the retired chairman and CEO of Wellington Management Company. I'd like to take this opportunity to commend Perry and our entire Asset Management Council for their contributions to our school. Thank you.
Katy Graddy:
Our sincere gratitude also goes to Barbara and Richard Rosenberg, who generously founded the Rosenberg Institute of Global Finance in 2002. The Rosenbergs have played a foundational role in elevating the study of finance at Brandeis. Thank you Barbara and Richard for your enduring support.
Katy Graddy:
Now to introduce our speakers. Joining us today are Professor Elroy Dimson, Leslie Aronzon and Nicholas Warren.
Katy Graddy:
Professor Dimson is chair of the Center for Endowment Asset Management at Cambridge Judge Business School. His research focuses on long horizon investment and responsible investing, and he has published extensively on active ownership, investment management, endowment strategy, ESG investing and financial history. I've known Professor Dimson for a very long time. He was chair of the finance department at the London Business School when I was an assistant professor there. He's also one of the world's foremost authorities on long-term returns and returns to alternative assets. I'm very pleased that he is speaking to Brandeis today. Thank you Professor Dimson.
Katy Graddy:
Joining Professor Dimson will be Leslie Aronzon, vice chair of the Brandeis University Board of Trustees Investment Committee, and Nicholas Warren, chief investment officer at Brandeis University. Leslie Aronzon is a member of the Brandeis University Class of 1984, she's a former vice president at the firm Houlihan, Lokey, Howard & Zukin where she specialized in bankruptcies and distressed mergers and acquisitions. In addition to her role on the Brandeis Board of Trustees, Leslie's actively involved in a variety of philanthropic endeavors, including the Jewish Free Loan Association of Los Angeles.
Katy Graddy:
Nicholas Warren joined Brandeis University's Office of Investment Management in 2011. Prior to his role as Brandeis as chief investment officer, he served as a managing director with Cambridge Associates and is an investment analyst at Northwestern University's investment office. He also serves on the board and is the chair of the Investment Committee for the Nellie Mae Education Foundation.
Katy Graddy:
Thanks to everyone for joining us today. We will begin our discussion with a presentation from Professor Dimson.
Elroy Dimson:
Right, well I can see a photograph of you, Katy, but I thought I'd see a moving image of myself. So welcome to you on behalf of all of those of you, since there's 17 of you, who are participating today. It's an honor to be invited to join you. And Katie was not only a colleague at London Business School, but also had good or bad fortune to be a dissertation advisor for my son when he was in Oxford and she was at Oxford. So there's a connection that is intertwined over quite a long period.
Elroy Dimson:
My interest is in investing for the long-term and all sorts of different dimensions. And what I did over the course of the last year is, with the work I've done particularly with David Chambers, was to write about some of the long-term issues and research issues are the focus of professional investment people. So the title of this work was Investing for Future generations. And the focus is on investing not for the immediate future, not for yourselves, But for your children, your grandchildren, your great grandchildren. This is tied in with the 75th anniversary of the CFA Institute. So what I'd like to do is to share with you some of the material, of which I have several in this area, and we'll have a look at it together.
Elroy Dimson:
The 75 years is the CFA Institute who self announces the Nuanced Society of Security Analysts. So they published their first journal in 1945, it rapidly changed its name. It's today called the Financial Analysts journal. It's worldwide, not just a New York group. But this is also the 75th anniversary of other important issues. The Journal of Finance, which is the trade paper, if you like, for folks like myself, came into existence in discussions in 1945 and issue number one of the Journal of Finance came out in 1946. In those days it was concerned about issues to do with macroeconomics, taxation and so forth. It's broadened out since then. So the Journal of Finance today, it looks just as dry as it did three quarters of a century ago. But the finance academic area is growing all the time, very strong.
Elroy Dimson:
But it's also another 75th anniversary. This is a picture of the Memorial Church at Harvard. And Harvard, in 1945, chose to reform its governance. There are a number of dimensions to this, one which may be close to Katy's heart, is that it decided that women were worthy of admission to such an August University. So they changed their mind and they broadened themselves up, but part of that change was a broader issue of governance, although I feel like it would be of the less important than missing female students. And that was hiring a person to run the endowments.
Elroy Dimson:
They hired Paul Cabot from a very distinguished Massachusetts, Boston family. This is a picture of a recent biography of him, and he was hired to run Harvard's endowment. He was capable of doing one thing at the same time, so he also ran an investment company at some distinction state street's. Any man can fit two jobs at the same time, so he was really the first professional running an endowment. So we've got these streams: the professional stream, the academic stream, and at the same time the applied professional focus. Which makes 1945, '46 the bedrock, and 2020 and 2021 the culmination of a growth of professionalism in managing endowments.
Elroy Dimson:
At one point I wrote a book with a colleague on professional investment management. I visited all of the endowment managers at Oxford and Cambridge, they each have their own endowments for each college and there are a little over 30 of these colleges, so over 60 individuals responsible for endowments all done separately. And there's only one book that I saw on most of the bookshelves, others were pretty rare, and that was David Swensen's book on his approach at Yale to managing the institution's wealth. And he brought into the spotlight his focus on equity-like returns, public markets being efficient and difficult to out guess, and his strong preference for alternative assets.
Elroy Dimson:
His focus on getting the maximum diversification, which would mean you could have more risky assets because they don't all move together, a strong focus on exhaustive manager selection, incentives that are aligned between the asset owner and the asset manager. And crucially, this coming from the man who only took the job at Yale if he could also do some teaching as well having previously been a PhD student at Yale, academic foundations. So what was done to manage the endowment.
Elroy Dimson:
And so he was hired in 1986, as a man and his very early 30s. And here you can see that asset mix, if we run through to 2020. So at the bottom you can see dark blue on the left, that's domestic common stocks. And you can see a little bit above that in pink, fixed income, that will be domestic as well. So it started out about 80% in domestic securities. And if you run your eye across the asset mix you'll find domestic equities were two point seven percent. And as for fixed income, it became invisible. It got aggregated with cash and was no longer necessarily domestic. So here's a man who did indeed diversify the endowment to a considerable extent
Elroy Dimson:
So domestic assets shrank about 80% to under three percent all together. I wanted to look at this in terms of managing University endowments, although some of the oldest endowments were in Cambridge. They the most important ones I think if, like a finance professor, I value these at least in terms of money. And as an educator, in terms of impact on the institution. There are a number of major universities that were already well endowed at the beginning of the last century. There is no data set that we could look into. In more recent times there was, but there isn't. But with a focus on financial history, what I did together with my colleagues who worked on this was to get back to original documents that typically treasurer reports from many, many decades ago. And we transcribe that data for 12 top university endowments. And that's what I'm going to tell you about. These are eight of them being Ivy League schools, and dour which were the premier schools back in 1900.
Elroy Dimson:
We collected information on asset allocation and on returns. We took him from their Treasury reports, but then we switched over to computer-readable material once the National Association of College and University Business Offices Vancouver came into existence. And then we estimate the asset class returns using data from the long-term history, which I've compiled with two colleagues.
Elroy Dimson:
So let me show you a little bit of this. We look at the average endowment that we have in our sample from 1900, in a couple of cases a little after 1900 todays. Their real returns, inflation adjusted returns, were an annualized five point six percent with a moderate level of volatility. If you look at the second row you can see what would have happened if you put all your money into common stocks and paid no management fee, suffered no bid ask spread, low cost of reinvesting, no taxes. Well you would have got six and a half percent. That's pretty close to what the average endowment was doing. If money had gone, as was the case early in the last century, into government bonds or indeed even into corporate bonds, one would have been earning an annualized two to three percent. So the endowment on balance did relatively well with relatively low risk. If you look at the Sharpe ratio on the other side, the ratio of reward to risk, you can see that looks pretty good.
Elroy Dimson:
What does this endowment allocation look like? Our study, and I'll tell you where you can find it in more detail than just at the bottom of this page, focuses on the main asset category. So we've got 12 of these college, university endowments. What we first of all did was to look at what the average allocation was to fixed income. That's the green line on this chart on the left hand side of the screen. So three quarters of assets were invested in fixed income, very safe assets. The blue line shows you what the highest allocation was, and so at any point in time in the early decades 90 to 100% of the endowment was invested in completely safe government securities. And then the bottom you can see what the lowest allocation was. So there was one school that was only 50% invested in fixed income.
Elroy Dimson:
And on the right hand side you can see the asset which you would have thought of as the other contemporary sensible sub-asset to hold, an asset which is common stocks. And so you can see there that on average it was less than one 10th of the value that was put into the stock market. One school had a higher allocation to equities compared to the others, but that was still only about fifth of seventh. And at the bottom you can see that there was at least once school, because what we're showing you is the lowest allocation in each year, it's not necessarily the same university all the way through, you can see there was at least one university that was affected at zero in equities.
Elroy Dimson:
That, if you add the green lines together in your head, doesn't add up to 100%. For example on the right of panel A, you can see there's a under 10% in fixed income by the current time. And on the right you can see that there was about 20% invested in equities. What's the gap between the two? Well it's real estate and alternative assets. And so you can see here in panel C, the proportion invested in real estate was on average about 20% and it went lower as time went on. That consisted of at least one university endowment having essentially zero, which was the lowest allocation, but there's one that's up there around about 50% for quite a long time. That is the same endowment all the way through. That is Columbia, which to its good fortune, owns a large swathe of New York real estate. And you see a little blip in that, a big blip, that was at a stage where there was a revaluation of gifts that they received. If you took that out, the green line would be even lower. So you can see Columbia's pulling up the average for everyone.
Elroy Dimson:
And then there's alternative assets, private equity, hedge funds and so forth, that's on the right. And you can see these were assets which were totally new to the Ivy league and the other league of university's that we look at, and really only took off in the '80s and only became important after the '80s.
Elroy Dimson:
So what did these equity allocations look like? In this chart you can see what was held in equities, in common stocks, by the ivy league. That's the first column of numbers. So typically it was not much over 10% during the first decade of the last century, about 20% in the second decade. It grew over time until by the time we were entering '60s, 60% or there abouts of the Ivy League endowments were invested in common stock. That's higher than the non-ivies. So you can see we have four of the non-ivies, and these are universities like Princeton, Chicago, and you can see that they start out lower than the Ivies, and they remain well. So the difference being too, typically five to 10% difference. So it was five to 10% less in equities for the non-ivies schools.
Elroy Dimson:
Then we look at the allocation to alternatives, and our data starts in the '80s because there was nothing before that. So you can see the first column there is the Ivy League in the '80s, '90s, 2000s and 2010s with alternatives growing from near zero up to more than 60%. The non-ivies were initially behind, so if you look at the 1990s the Ivies were ahead, they held 18% compared to nine percent of the non-ivies. And you can see the difference on the right hand side, once we're into the '90s Ivy League schools held more than non-Ivy League schools. And there at the bottom you can see within the Ivy League schools the difference in the big three, the big three are Harvard, Yale, and Princeton, and the other five. And you can see that within the Ivy league schools you can see that, for example in the 1990s, there was over 18% held in alternatives by the big three compared to nine point something percent by the other five Ivy League schools. And so you can see on the right hand side the difference between the two, the Ivy League schools had held more in alternatives, and within the Ivy League schools the big three held more than others.
Elroy Dimson:
So to sum up so far, before World War Two fixed income dominated. The equity rating then grew to something of the order of 60% as we went through the '60s, the '70s and the '80s. And one other big change, and that is the introduction of alternatives in the 1980s. The weighting and alternatives rose to about 50% of wealth, with the big three leading the rest of the Ivy League. So one of the natural questions is how does an endowment manage its assets? One answer that one would get is that these endowments have a very long life, the college that I'm affiliated with in Cambridge has been going for over 700 years. But if you were to ask the managers of an endowment in many places, whatever the wealthy endowments you ask, "What's your time horizon?" The answer will be something like, "We've been giving for X years, we've been going for 100 years, and I don't know really what our horizon is but we certainly want to be in a good financial state in the next 100 years."
Elroy Dimson:
So what does that mean? It means that you would like to be acting in a way which is not following the herd, but it is culturally divided. And so what we've done is to look at the major stock market crises that have happened in the 21st century. There was one right at the beginning of the 20th century, around about 1901, but we want to look at before and after we started our data in 1900. So we get the Panic of 1906, the Wall Street Crash, the recession of '37, the oil crash of '73, four, the end of the dot-com bubble, the global crisis. We've left out of this crises which were of very little relevancy, which couldn't be looked at with annual data. So October '87 for example, there was a blip in the market because everything was put right before the end of the year in which it happened, and the global pandemic which shall repair itself even more. So the question that intrigued as also is, did endowments invest countercyclically or not?
Elroy Dimson:
If there are countercyclical what they would be doing is selling risky assets before a crisis. And after a crisis, once the price of risky assets has fallen, they'd be buying afterwards. And they couldn't afford to do this because they have a very long horizon. They might be investing procyclically. What you do if you are a procyclical investor is you buy the risky asset before the onset of the crisis. So you see prices going up, and you want to jump in. You're a standard Bitcoin investor and in a lot of those examples lately. So you signed up to Reddit and you watch what people are buying, and as something becomes popular you want to participate. And then you'd sell afterwards when you realize that the assets you've bought are going through a difficult time and falling.
Elroy Dimson:
So how can we investigate the behavior of endowments? We look at the asset exchange, we split that into two components. This is a fairly standard procedure in academic research, and some extent in practitioner research. We split it into a passive and an active component. The passive component would be a change in a percentage that's allocated, for example, to common stocks, because of a change in the level of stock market index. An active component is the change in the asset mix which cannot be attributed to movements in market prices. And then we look at that active change, as a strategic change of the investor, before and after the crisis. So we ask ourselves, and we do this all homestead but I'm saving you from the numbers, did endowment on average invest countercyclically? Well before the crisis year they cut exposure to risky assets, and after the crisis year they bought. They did exactly what you would expect of a long time investor, and they did this before anybody was thinking of countercyclical strategies in a way that you would today. So they bought cheap and they sold high, and that has contributed to their superior performance.
Elroy Dimson:
So the conclusions we, in the article, and I'll tell you how to get on with it if you haven't seen it, we look for trends in the long-term strategy endowments. We find that Ivy League universities lead the switch towards equities, the risky assets of the day and the favorite assets of the day. And then they lead the switch all over again to alternatives. And amongst them the big three were the first movers.
Elroy Dimson:
How does this all fit in with celebrating the 75th anniversary of Financial Analyst Journal, the CFA Institute, the launch of the Premier Journal? For academics interested in this field, we believe that this strategy was supported by professionalization and asset management and long horizon endowments chose to invest countercyclically. It meant something important to them.
Elroy Dimson:
So this is the moment which you take out your phone if you aren't able to do a screenshot, if you're interested in one route to looking at our paper you would look at Social Science Research Network, and you would look for a paper with the ID number 3694139. So if you just type that in you'll get straight to it. Or the Financial Analysts Journal has been quite generous on this, they made it their lead article. And so there should also be a payable-free or payable-bypassing access to our article 75 Years of Investing for Future Generations. I share credits on this with my colleague David Chambers and former PhD student Charikleia Kaffe who's now living in... Where we tuned into today's session. So that gives you something roughly about a long-term look at long-term investors. And I hope that has whetted your appetite for the research that we've been doing.
Nicholas Warren:
Hello everyone, it's a pleasure to be with you all. And when we were preparing for this what I thought... I have five slides for everybody, and what I thought I would do in terms of taking the research that Elroy has done and then bring it to a little bit of the Brandeis context, I wanted to spend a few minutes just giving you guys... Putting in context the history of the Brandeis endowment in terms of the long history of endowment management, then I thought we could take a look at what the big three are doing more recently over the last five years to see if we can identify any trends. And then bring that back to the Brandeis context to kind of tell you what we're doing, and then have a conversation about trends in the industry. So let me share my slides here.
Nicholas Warren:
Great. So Brandeis, the endowment of Brandeis is an incredible modern success story of an endowment growing. This chart only goes from 1986, but Brandeis as a University was founded in 1948 and, as Elroy was showing, his research started in 1945, so the endowment context is even longer than the Brandeis history. But over the last couple of decades the Brandeis endowment has become the 95th largest endowment in the country. Which is very impressive when you consider that other top tier schools, on average, are 100 years older than Brandeis. And Harvard, Princeton and Yale, the big three, are two to 300 years older than Brandeis. They have had many generations of people that have gone, been alumni, contributors as alumni, and then have included their university in their wills. Most of the Brandeis alumni base is still a living alumni base.
Nicholas Warren:
So I put on here, you can see, in 1997 is when I started at Northwestern, the Brandeis endowment was just about $200 million. It was not large enough to have a professional office, which the big endowments had. When I was at Northwestern we had 3.5 billion and we had a staff of about 12 people. The pioneering portfolio management book that Elroy had pointed out in his that was written by David Swensen really came out in 2000, that was kind of when the common knowledge of the endowment model was born. And the Investment Office Brandeis wasn't even started until 2007 when there was enough assets under management to support our own investment office.
Nicholas Warren:
So it's important to understand the differences between why the big three might lead and everybody else might follow, so I thought I'd show a couple of metrics of how we differ from the bigger endowments. At Brandeis we have six investment staff and three operational staff. When you look at Harvard, Princeton and Yale, the big three, Harvard has 153 employees, many, many investment staff, Princeton has 29 investment staff and 24 operational staff and Yale has 27 investment staff and they have five lawyers just working on their partnerships. So you can see that we have about just under 1.2 billion, and the big guys all have 26 to $40 billion.
Nicholas Warren:
So what does that lead us to? We truly try to have the same depth of research, because we're trying to do that exhaustive manager research to be able to add value by manager selection, but because we have a smaller staff we just have to do it over a much smaller subset of asset classes. So where the big guys can cover real estate on a global basis, we only cover US commercial real estate in a small subset of asset classes, types of real estate. That strategy has been very successful for Brandeis, we've added over the last 10 years about two and a half percent annually through our manager selection by focusing on that same level of deep research as you would find at the big three.
Nicholas Warren:
Another big difference between that kind of drives our asset allocation and trends we follow is that Brandeis University is a well off university, but it's not wealthy. We have $195,000 per student, whereas Harvard, Princeton and Yale have one point six to three point four and two point three million dollars per student respectively. If you combine that with the fact that Brandeis has a, as a research university, has a large research footprint, we're very... 75% of our revenues come from tuition, and we have a small student body. It just means that our degree of flexibility is more limited relative to peers in our budget. So that's led us to have a lower risk tolerance, we have a 70% kind of equity equivalent exposure relative to our peers which have 85%. If you think of market returns of eight to 10% nominal over a 10 year period to having 10 to 15% less invested is one to one and a half percent kind of a difference between what kind of risk we can take.
Nicholas Warren:
So that's the Brandeis context. What I thought I'd share is the Harvard, Princeton and Yale as the allocation changes. This is a simple average of the asset allocation of the three, the big three. And I wanted to see what... When we're considering asset allocation and when our peers are considering asset allocation we often are trying to... We're investing for the long-term, we want to understand what's going on over a very long period of time and stay invested, but we also want to know how we're going to make money over the next five years. So usually when you see an asset allocation it's a result of what has happened performance-wise with the decisions that were made five years ago, and what are the decisions we're making today that we'll hopefully benefit from for the next five years? So when you look at asset allocations and changes you need to disaggregate what's coming from the past performance, and what's coming from moves and asset allocation that are the trends that you're trying to look forward to.
Nicholas Warren:
And what's interesting about... We'll cover a couple of big changes here just to highlight them. Public equities has continued to trend down over the last five years. Elroy had shown that long, long history of the decrease in public equities, and it's continued in the in among the big three as pointed out, because the idea that the public markets are much more efficient than the alternative asset strategies, and also recently it's because as valuations have gone up that has just meant that future returns are likely to be lower as people have already discounted the future cash flows at much lower rates. So therefore, the given the need to generate returns to drive performance for them, they brought down public equities and put it into areas where managers can add a greater level of returns from their skill.
Nicholas Warren:
You can see venture capital has gone up by five percent over the last five years. This has mostly been performance. It probably would have gone up more if the big three hadn't been managing this exposure pretty aggressively. The returns have been spectacular in venture capital over the last five years, and the talk among most endowments that have large amounts of capital allocations is what do we do about the risk? The risk in our portfolio has gone up so much because of the success in the public markets of venture capital that people are talking about doing other things like bringing down public equities, bringing up cash. That was a decision five years ago and 10 years ago to stay invested in venture capital that's really being harvested today.
Nicholas Warren:
Buyouts have also done particularly well. And you can see that they have not changed much over the last five years, and wouldn't expect that to be the case going forward. The hedge funds have actually gone up. This was a bit of a surprise to me to see to what extent the hedge funds have gone up in the big three. As people have brought down public equities and they have needed to put that capital somewhere else, and they've had coming money coming out of real estate and energy, it's been going into hedge funds which have a lower exposure to public equity markets, but also have the ability to earn higher excess returns.
Nicholas Warren:
And then real estate has been a little bit of anomaly as Elroy has shown you over the long history, the big endowments haven't had a huge history in real estate, which is very different than the high net worth families in this country and other countries. And the real estate has actually performed fine, so this is actually a trend. The big three are actually bringing down their real estate. The main reason, I think, is because generally venture capital and buyouts have been going up. You can see at the bottom of the chart that liquids have gone down a little bit. So venture capital buyouts have gone up that's increased the illiquidity their endowments, they've had to bring down their illiquidity elsewhere. And that's come out of real estate. Real estate is a strategy that can give you good returns, but only about two times the money you invest, whereas buyouts and venture capital can give you three to five times. So as they spend their illiquidity they've been focused on venture capital and buyouts.
Nicholas Warren:
And then energy and natural resources is mostly fossil fuels, which have just gotten absolutely killed over the last five years in terms of returns, so most of this has been the... Just the allocation has gone down because the returns have been so poor here. Most people are not increasing their allocations, and many universities have actually been decreasing their allocations here given the pressures on campus to to divest from fossil fuels. And one of the secrets that when Elroy showed the long-term chart, the big and diamonds have always hated fixed income and cash because it has a low expected return. And recently it has been trending up, and the increase has all been in cash. So when we did this analysis I was surprised to see how much the big three had increased their cash allocations on their fixed income allocations, given that when I first started in endowments Yale was running at negative five percent and anything having over five percent fixed income was kind of anathema in the Big Three. That's really come up recently.
Nicholas Warren:
So that's very messy, the asset allocation. We do a risk measurement at Brandeis where we kind of take a look at how much equity equivalent risks do we have in our portfolios. So we took a look at the asset allocations of the big three versus all the endowments greater than 500 million. And I'd say the big three, I would agree with the research, these are the leaders that everybody follows, and the 500 million plus are the endowments that might have an investment office or are very important to consulting relationships and they tend to be the fast followers. So as you can see, essentially the big three have led and everybody else has caught up, and we're at an interesting moment where everybody has been trying to catch up through this whole market from 2010. And actually the big three have been decreasing their risk. They probably perceive their risk as going down less than this chart implies just given their huge venture capital allocations, but it is interesting that the trends have been different for the big three versus everybody else.
Nicholas Warren:
So what does this mean for Brandeis? So I'll just quickly go through our changes. We followed the big three in the public equities, we brought that down and continue to bring that down. Our venture capital, we had nothing in 2011 and we've increased ours over the last five years, both because of adding to our investment because we were trying to grow that portfolio, and just phenomenal returns. Buyouts we've been trying to increase, so that's been a trend for us and we expect that to continue. Hedge funds, because of our lower risk tolerance we've historically had a larger allocation of hedge funds so that we could take advantage of the skill sets of those managers to generate excess returns over markets, but also to keep a lower exposure to markets.
Nicholas Warren:
And real estate might be the one place where we differ from a lot of the bigger universities. We find that it's an incredibly attractive strategy for us, we like to buy broken real estate, fix it and sell it to people who want to pay for fixed real estate. So we actually expect our allocation to go to 10 to 15% over the next five to 10 years. And Energy and Natural Resources, if we were to talk again in five years from now hopefully this will go up, because our fossil fuels will go down and hopefully we'll reinvest that in the transformation for green energy in this country. There is a lot going on there, and you can't see it in the asset allocations but we know from our research that the big three are doing really interesting things there, but it hasn't yet been seen by the broader market. And our fixed income has gone down instead of going up, but it'll probably stay here until we find other things to do. And you'll see overall we have a much more liquid portfolio again, because of the degrees of flexibility we need for as a university relative to the big three, being a well off but not wealthy University.
Nicholas Warren:
So I will stop there and turn it over to Leslie to start our conversation.
Leslie Aronzon:
Thanks, Nick. Thank you to both Elroy and Nick for those presentations. I have a couple of questions that I'd like to go into a deep dive with both of you. You both mentioned the trends in asset allocation, particularly Elroy going back to the early part of the last century mostly in fixed income, moving into equities and now easing off of equities. Going to the Nick's slides three and five, which are the ones that show the changes in the big three and their asset allocations, and then slide five is the changes from Brandeis' perspective on asset allocations. Elroy, can you give us some predictions about what you think allocations might be over the next five years or so? And as a corollary to that, what asset classes might be added to the mix as we move into different types of alternatives away public equities?
Elroy Dimson:
Let me start with the disclaimer. If you come to a finance Professor and you ask for a forecast, if you think it's useful it's probably still only got a chance of being correct in 100 years time. My studies run for 100 years. I think that there is still a sense in which one should be worrying about liquidity. We have partly forgotten what happened only a little over a decade ago when there was hoarding that went up outside the schools of the wealthiest institutions. So at the time I was still in London Business School which had a tiny endowment, but you could see what happened in Yale which I used to visit once or twice every year. Or half it. And they had just holdings that were blocking your view of buildings that had simply stopped. So these were institutions that were able to spend from endowments generously because they had a large income that emanated from the endowments.
Elroy Dimson:
So the income came from the endowments, and when they had to stop they experienced difficulties that my former employer, London Business School, didn't experience at all. We had so little for the endowment that our economic model was quite different. So I think I'm still influenced by the fact that there is some danger of be being caught out by illiquidity, and the enthusiasm for private assets, which I see a great deal of, and I see this in Cambridge where the aggregates of endowments across the university and its colleges makes it the largest endowments in Europe.
Elroy Dimson:
There's still a lot of interest in private equity because it looks stable and safe. That is, to some extent, an illusion just like real estate, private equity and other assets. The prices don't move, but that does not mean the values don't move. And so if the values move along the way, prices have to catch up. So as to massive allocation, I remain still fairly keen on having some equity exposure that isn't all put into illiquid assets. Hedge funds can retain that degree of liquidity to some extent, private assets are much more tricky. So that sort of gives you a feel, perhaps, for the panels of assets that I'd be choosing from.
Leslie Aronzon:
Well you bring up a very good point too, which is liquidity needs. Because, as you say, you both said, we all want the endowments to have long-term survivability going on 100 years or whatever, but really they need to be managed for short term needs. Which force some institutions such as Brandeis, our short term needs because of via the endowment are quite different than the short term needs of say, the big three. Therefore, should Brandeis and other smaller institutions or endowments be following the lead of these big three? And the Ivies in general?
Elroy Dimson:
That's absolutely crucial. I used to teach a program at Yale for about 12 or 13 years with Will Getsman who you might know. One course every odd numbered year and Sue every even numbered year for asset managers. And many of them complain that they would have trustees who would say, "We need to be on a certain financial footing, let's do a Yale." Do a Yale means what you do today was such a profitable decision when Yale took that decision 20 years earlier. So it is not the case that doing what others have as their heritage is going to be right for you.
Elroy Dimson:
Another tweak, again with a slightly Yale-ish aspect to it, is how you achieve superior returns. You achieve superior returns by taking advantage of opportunities that others leave behind. So for example, if you believe there is an illiquidity premium it is because other investors don't like illiquidity, they'd rather be liquid. Other things have constants. And therefore the price for illiquid asset will be lower than the price for a liquid asset with characteristics which are otherwise the same. So what that means is that if you have a tolerance for liquidity, maybe the big three or Oxford and Cambridge in Britain, have that tolerance. And that means that people on the other side of the transaction should be doing the opposite. It only makes sense to try to invest contrary to the crowd if there's other people going with the crowd the wrong way. It's an in-built advantage for those that are well funded.
Elroy Dimson:
So Brandeis' quite modest about its wealth, but it is still in the top 100. And I think you're at the transition point between saying, "We can't compete with those big guys." To say, "We do a little bit of what they do. We can draw down some of our wealth to bridge funding gaps, we can take that chance." But so you've got to be fairly brave as an institution to go a long way in that direction.
Leslie Aronzon:
So Nick, I'd sure like to have you comment on that, in particular how does Brandeis differentiate itself? And what about assets that might, as Elroy says, fall out of favor? Perhaps hedge funds people are pulling back a little bit. Would you say that that creates an opportunity for Brandeis, or even institutions such as Brandeis, to follow that... Either be counter to a trend of some kind of asset that's falling out of favor, or to follow the big three? Which, as Elroy pointed out, is hard to do given timing, which perhaps you can talk about as well.
Nicholas Warren:
Absolutely. I mean I came from... Originally was trained at Northwestern, so I was kind of in that big endowment training of deep research and the endowment model. And so we try to do that, we try to do the exact same thing on the research on individual managers and opportunities, that's what the big three do, but we try to do it on a smaller number of assets, a smaller number of asset classes, and we try to do it with a risk overlay that prevents us from doing as much as they do. So we're trying to meet the institutional needs, but also generate the value added that they can add, but we just don't get to take advantage of if the markets up 10%, we just don't get as much market exposure to kind of compound with our excess returns on.
Nicholas Warren:
But that's been really valuable because, to bring it specifically to the coronavirus episode this year, we've been talking about countercyclical investing and liquidity and how important it is. When we came into March a lot of the big endowments, because they are wealthier and can actually absorb a much bigger drought, they were fine having a 20% drawdown of their endowments in the first quarter, which was a very common experience of the bigger endowments. We only had 10% drawdown which allowed us to have the financial flexibility to say, "Oh we can spend a little bit more, and we don't have to worry about the endowment, and we'll be okay." And we and we managed with more liquidity than the bigger guys, because we knew we might need to rely on that.
Nicholas Warren:
In the last crisis Harvard and some of the others, they took out one billion, two billion dollar liquidity loans to kind of bridge their near term liquidity needs. Because, as Elroy pointed out, what's interesting is you want to follow what they're doing on the research side but you don't necessarily want to follow their asset allocation fully because your institutional-specific needs are different than theirs. And they can take more risk than probably the average institution can, because they have these other tools. I mean after the last crisis there was only a few institutions in the US that were left as triple A rated in the bond markets, it was pretty much those big three and every other... Not even corporate America could compare in terms of their ability to borrow capital at cheap rates in the middle of a crisis.
Nicholas Warren:
I missed the second part, I forgot the second part of your question.
Leslie Aronzon:
If there are certain asset classes that are kind of going out of favor, is that an area where Brandeis could lean in? Or follow the lead?
Nicholas Warren:
We've done that in the past, there's two great examples. Today venture capital is as hot as it's ever been, but when we invested in venture capital it was 2012, I had just started at Brandeis, we didn't have a venture capital portfolio and the venture capital universe had bad returns for 12 years, and people were starting to finally give up on their venture capital allocations. There was only two of us in the investment office, so we didn't have time to research a series of 10 managers, but we found a fund of funds that had access to all the best managers that nobody could gain access to. And because their clients were pulling back, they raised $400 million of fund before we got involved. They not only raised 400 million in the fund that we were raising again, they had access to the best venture capital managers in the world. And we were able to take $20 million of a $400 million dollar fund and become the third largest investor because other people were essentially giving up on venture capital. We did two funds with them putting about just under $40 million in value in, and it's created over $100 million of assets now and it still has a lot of stuff that has not even played out yet. So I mean that was a very, very specific example of a countertrend investment.
Nicholas Warren:
Also, right around 2011, 12 we started getting excited or interested in healthcare, mainly on the science and the biotechnology side. Biotechnology had just had 20 years of horrible returns and venture capital, but the underlying science had changed. And we were not alone in finding this, the big three were also very big in all of the managers that we invested with. But the industry as a whole had kind of given up on biotechnology, and we put about 12% of our portfolio into healthcare and that's been tremendously helpful over the past 10 years, having that allocation. The venture capital we're selling as fast as we can, the companies as they come to us, trying to ease back on that risk, but we are continuing to push forward on the healthcare risk because we think the science is still there and it's very interesting. So we're taking different approaches, even though now biotech is seen as something amazing, our on-the-ground research with our managers and with the companies is that the science that needs to be funded is still overwhelming the increased interest in providing capital to that space. And there's still tremendous opportunity there.
Leslie Aronzon:
So you talk about some new asset classes, what about any hot asset classes that you might want to get into or stay away from? Crypto or something along those lines?
Nicholas Warren:
Oh. I don't think we have enough time left to talk about crypto. But I would say we haven't fully understood yet, we're doing a ton of research on it but it's still hard for us to get excited about investing in at the moment. Which obviously has been the wrong SPAX right now have gone from zero interest a year ago to a huge amount of interest today. We don't see SPAX as good or bad, but we won't get involved in investing in SPAX because the underlying incentives of the individual deal... We have managers that are investing in SPAX, we have managers who are forming SPAX, we have managers that are investing alongside SPAX as they take private companies public. So we have a lot of that exposure in our portfolio as it's become a tool for the investment industry, but we are not getting excited about investing in a manager SPAX or anything like that because in general one-off SPAX can be interesting, but the whole universe of the structure has alignment issues going back to the endowment model.
Nicholas Warren:
And then, to Elroy's point, private equity has been just on fire. And I was glad to hear you talk about the illiquidity premium being the illiquidity premium exists... The theory is that it exists because people demand a higher return for having illiquid assets, with the advent of that going from a couple 100 billion industry 20 years ago, to a couple trillion dollars today and the desire for pensions to go into it and the knowledge. What's interesting, from what we hear from large asset managers who are trying to help big pensions figure out what to do, large pensions... I see it only getting more problematic because large pensions all need a 7% return, none of them think public equities will give it to them so they all are feeling forced into doing private equity. And when people are forced into doing something the illiquidity premium, the theory behind it, just goes away. People are actually paying to get access to it because they are being forced into it, not because they are demanding higher returns from it.
Nicholas Warren:
In addition to the fact that buy multiples my from four to six 20 to 30 years ago to 15 today, that the tailwind is gone and interest rates have gone from 12 to almost zero. So that tailwind for the industry has gone, so it's a... We are buying individual buyouts but just like every other investor, we think that our children are smarter and more attractive and we do a better job selecting them.
Elroy Dimson:
Can I pitch in then on the subject of children? Maybe it can also extend to grandchildren. I get asked from time to time by individual investors what they should do now that real interest rates are negative. My answer is that it's a good idea to invest in something which gives a positive real return. So I'm rather predictable. The positive real return, from most studies that I've read, comes from education. So investing in children's and grandchildren's education should be more attractive now, leaving COVID year to one side, more effective now than it was some years ago. Some years ago you would put your money into financial assets and hope they'll be more to spend in the future.
Elroy Dimson:
Now having smart kids and well educated kids is worth a lot. By the same logic, I think investing in homes, owner-occupied homes, and collectibles. Automobiles, jewelry and so forth. This there's no opportunity cost to them to the money you pay, and so people are bidding up. Price is also for, in utilities terms, rather useless sorts of items like... Well I got my head bitten off by your dean, like artworks. So one of the explanations for prices choosing a hedge for rare collectibles, is because it costs us less to invest in them. So I think sometimes it needs a different take on what the balance is between different players in the marketplace. And you're absolutely right Nick, the focus has to be on these fleeting periods of imbalance and demand between different people. Together with the fact that some investors can get on the roundabout and jump off the right time, and others have investment committees and organizations that once the decision has been taken, they're unable to move away from it when they would need to.
Leslie Aronzon:
I like your comment about investing in our children and our grandchildren's education and the future. And I'm sure, Nick knows, that's the tension that he has long-term viability versus short term needs, but the short term needs of the University of course are for the future. And we're now out of time, but that went quickly. And we could keep going, I'm sure, for hours. And thank you both so much for coming to this panel today, and everybody who has participated on it. That was very interesting. And I'm going to pass it on to Perry Traquina now to wrap us up.
Perry Traquina:
All right, thank you Leslie.
Perry Traquina:
Hello everyone, thanks for participating in today's panel. My name is Perry Traquina. I am a Brandeis alum Class of '78, and I have the pleasure of working with Leslie Aronzon on our investment committee, and the good fortune of having been able to work with Nick Warren since he arrived at Brandeis in 2011. And I want to thank Leslie and Nick and the entire investment team in our investment office for all the work that they do to make the endowment successful. That endowment supports the university, our faculty and our students, and we're really pleased at the work that they have done in supporting the Brandeis endowment. I also want to thank Professor Dimson for sharing with us today his fascinating research on the last 75 years of investment performance, there's a lot of material there. And again I want to thank Professor Dimson for being on our panel today.
Perry Traquina:
In addition to being on the Brandeis Investment Committee, I also am the Chair of the IBS Asset Management Council as Dean Graddy mentioned earlier. Along with my fellow council members we are proud of the impressive Brandeis faculty and alumni who work in the fields of finance and asset management, and the council really exists to amplify their work. And today's event is one example of how we aim to bring thought leaders and practitioners together on topics that are important to the field. And in that vein we have, and I would encourage you to join, two panels that we will be bringing forward in the spring. The first on March 24th at noon Eastern Standard Time, we will host a panel entitled Innovative Financing for the COVID-19 recovery: The view from the IMF, UN and World Bank, which will feature three IBS alums from those multilateral organizations. That event will be moderated by Professor Peter Petrie and is co-presented by the Perlmutter Institute for a Global Business Leadership.
Perry Traquina:
And the second one will take place on April 14th again at noon time, Eastern Standard Time, and we will host a timely panel entitled Environmental Investing. Featuring several leaders in that field, this event will be moderated by Rob brown friend, Brandeis alum, and also council member on the Asset Management Council. This event is part of our business of climate change initiative and we will be co-presenting that event with the Rosenberg Institute for Global Finance.
Perry Traquina:
After today's event you will receive an email, we will ask for your feedback on today's event. Please take the time to fill that out, it informs us on what we plan on doing in the future with respect to asset management events. And next week a recording of today's session will be available online on our trends and asset management website. That URL is included in the chat.
Perry Traquina:
So again speaking for the panelists today and all of us at IBS and the Asset Management Council, I want to thank you for your participation. I hope you enjoyed it, I hope you found it informative, and we look forward to seeing you again soon. Thanks very much.