Your Survival Guy has been warning retirees that money managers are planning to put private equity in your 401(k)s, and this morning Spencer Jakab of The Wall Street Journal explains why doing so has been a mistake for the big Ivy League college endowments. Jakab writes:
They’re packed with brainiacs, but Ivy League colleges sure lack street smarts.
Some market wisdom they’re about to relearn: “Liquidity is always there, except when you need it.” After costs rose and donations plunged during the financial crisis, Harvard’s endowment had to come up with cash in a hurry because of its complex investments. It dumped assets at distressed prices and was forced to borrow money.
University endowments are now even more committed to expensive, hard-to-sell alternatives like private equity (PE). And more dependent on them. Last year Harvard relied on the endowment for 37% of its budget, up from about a fifth of the budget 20 years ago. It worked until it didn’t: Instead of elite returns, the largest endowments did worst last fiscal year. Small ones, which don’t have investment offices that pay Wall Street salaries, did best.
That gap could widen. When stocks plunge, PE funds can make an endowment look good because of a lack of updated market prices. Eventually, though, they must reflect reality—like when a huge client has to sell.
Private equity isn’t magic. Its returns resemble small and microcap stocks juiced by borrowed money, notes Verdad Advisors. Indexes tracking such stocks are in a bear market, down by about 25% from their peaks, and losses would be magnified with leverage.
Another drag? Costs. Investment consultant Richard Ennis estimated in December that Ivy League endowments would have been worth 20% more if they had just been invested in a classic stock and bond mix most people have in their 401(k)s since the financial crisis. A big reason: The all-in expense of their alternative funds is a hefty 3% to 4%.
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