How do European endowments compare to their US peers?
Oxford University has the largest endowment in Europe and it also bears the most resemblence to Ivy League funds, but what about the other large European endowment funds?
Good morning. Our more faithful readers might recall that some weeks ago we looked at Ivy League endowments and the slight faltering of the Yale model.
I thought it would be interesting to compare and contrast the approach taken in the US with the approach taken by the eight biggest endowments in Europe (so as to mirror the eight members of the Ivy League).
This is a slightly complicated exercise since firstly, there are far fewer such funds and secondly, the ones which do exist tend to operate far more privately than their US counterparts (for this reason it’s possible I may have missed one and, if so, that is entirely my fault but do let me know if that’s the case).
Several universities told me they had a fund, but that they didn’t consider it an endowment fund since it didn’t invest with the same long-term objective in mind. In those instances I took the institution at its word and didn’t include them.
Anyway, caveats over, this is what we’ve got:
Oxford and Cambridge are obvious presences here, and likewise it is no surprise to see that they behave very similarly to Ivy League universities since they are the only two who can match the Ivy League’s scale — but even Oxbridge takes a more cautious approach to private equity than some US colleges.
Oxford, which has the highest exposure to private equity in our list at 40 per cent, is left in the dust by Yale, which has a 52 per cent exposure (Harvard and Princeton also both have marginally higher exposures).
It is in hindsight not surprising that the Central European University makes an appearance, since it was founded by billionaire hedge fund manager George Soros.
The strong Finnish presence was a surprise, however.
I spoke to Euan Finlay, head of EMEA at Partners Capital, which advises 80 endowments and foundations around the globe.
He admitted, to his credit, that he didn’t really know why some countries had a greater proliferation of endowment funds than others, but he suggested it may have something to do with a greater culture of “giving back to your school and of fundraising”.
He said: “The larger European endowments are invested quite similar to the way the US educational endowments are managed.
“But you quite quickly get into endowments that don’t have the scale to have an internal team. And as the endowments get smaller in size, they typically invest less in private markets.”
The price of this is lower returns. Our analysis of the above endowments which provided data shows an average annualised return of about 8 per cent, compared to 11.5 per cent in the Ivy League.
Finlay said that despite the lack of endowments in Europe, they are becoming more popular as universities seek to insulate themselves against dwindling state finances.
He said: “There’s more uncertainty. More geopolitical uncertainty, more political uncertainty, more uncertainty about government finances and more uncertainty about what the future of education looks like.
“Having an endowment is sensible. It is a source of stability, a source of long-term funding. It gives you protection from variations in the business model. The intellectual thesis as to why you would want one is fairly clear.”
But he warned that setting one up is not easy, since the easiest way to do so is through a donation from a benefactor or through the receipt of a windfall from an asset.
The challenge then becomes growing it, since most endowments need growth of about 7 per cent a year just to stand still. This assumes inflation running at about 3 per cent plus withdrawals of about 4 per cent a year to build a new library or lab.
Finlay said: “That’s been an easy bar. Investing in equities got it done. But on a forward looking basis, expected returns from traditional asset classes are much lower.
“These classic equity bond portfolios get you to 5.5 per cent and that’s not meeting your objective. So the conversation we have is how do you bridge the gap.
“The number one discussion topic is we look at the return expectations and we are worried they are not going to meet our return objectives.”
