GW should change investment strategy to increase returns

Last month, officials released the University’s endowment return numbers for the last fiscal year. Although the returns beat the national average, GW needs to ensure that the endowment continues to grow. To promote sustained growth, GW should minimize endowment costs by moving toward low-fee, in-house investment management that maximizes the amount of interest it earns.

Although GW’s endowment growth outpaced many of its peer institutions’, its returns have not kept pace with spending. If the endowment is a savings account, the University is withdrawing more than it is depositing or earning in interest on its investments – known as returns. Because the University relies on the endowment to fund scholarships, employee salaries and operational expenses, it’s critical that GW balances its checkbook by increasing endowment returns.

This year, the endowment earned 1.2 percent on its investments. The University’s withdrawals from the endowment amounted to around 4.9 percent of the funds total value, meaning that the school spent 3.7 percent more than it earned.

GW transitioned from in-house endowment management team to the Strategic Investment Group (SIG) in spring 2014. Simply put, GW pays a team of managers to oversee the endowment and SIG gets a substantial portion of the returns on these investments as payment. Active managers like SIG – investors who attempt to beat the average return with aggressive investment strategies – generally charge 1 to 2 percent of all assets under management, as well as 15 to 20 percent of returns. Unfortunately, the exact fees that SIG charges GW for managing the University’s $1.57 billion endowment are not publicly available. But in an environment where GW’s total return was 1.2 percent of its investment, these fees are likely costly.

GW’s in-house team should base their investments on a more passive strategy. Passive funds offer low-cost investments that only try to meet the average return of the stock market, rather than attempt to exceed it. Although a small workforce would still be required to manage the passive portfolio, in the long-run, paying for a few salaries would be far more affordable than paying the annual fees that, at some actively managed funds, can be as high as 2 percent of the value of managed funds and 20 percent of the returns.

A recent New York Times article explored how small colleges with passive investment strategies are outperforming the large actively managed portfolios of prestigious schools like Harvard and Yale universities because of higher returns from passively managed funds than active ones. While hiring a team of experts to conduct research and actively manage a portfolio may seem like the preferable option, data suggest that such firms are seldom able to meaningfully outperform passively managed funds. Because active managers are more expensive than passive in-house strategies, and due to GW’s active managers’ unremarkable performance, the University should move its endowment to passive management to maintain growth with low returns.

Given the data on relative returns, some would wonder why people continue to invest in active funds. The reality is that the proposition of “beating the market” and receiving returns that are above average is an alluring possibility for investors. Every year, there are actively managed funds that beat the market by a wide margin. The problem is picking the right one among the hundreds of fund management companies. Many historically successful funds charge higher fees, and historical performance is not a great predictor of future returns. With a University dependent on steady endowment growth and active funds often offering a feast-or-famine portfolio, active funds should not be considered as a primary option.

There will be years when returns are higher, and there will be years when actively managed firms beat passively managed investments. But since the endowment is a long-run investment, and the survival of the University is dependent on it, officials should be cautious. The move toward passive and in-house endowment management may seem like a step back for a school that decided only three years ago to do the opposite. But the data show that GW could minimize the fees it pays investors, consistently outperform actively invested portfolios and maintain a more diversified and robust portfolio than it currently does.

Kendrick Baker, a junior double-majoring in political science and economics, is a Hatchet columnist. Want to respond to this piece? Submit a letter to the editor.

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