A Flat Year: Despite endowment’s ‘mediocre’ return, Princo sees relatively strong results

Princeton’s endowment shrank $570 million to $22.2 billion, following an investment return of just 0.8 percent for the fiscal year ending June 30, the University announced Oct. 7. The results were disappointing compared to the previous year, when the endowment climbed $1.7 billion on an investment return of 12.7 percent.

The new figures bring the University’s 10-year average annual return on the endowment to 8.2 percent, below the low-double-digit average return the Princeton University Investment Co. (Princo), which manages the endowment, had discussed as a goal. Still, Princeton officials expressed satisfaction with the result. The endowment supports about half of the University’s annual budget.

“Even with the positive return, the overall value of the endowment declined because of the annual distributions we make to support the operating budget,” Provost David Lee *99 said in a statement. “The endowment allows the University to sustain the excellence of its research and teaching programs as well as to maintain its commitment to its generous financial-aid program and full access for any student who is admitted.” The University spent $922 million from the endowment during the past year.

Andrew Golden, Princo president, said in an interview that this year’s investment return was “mediocre at best.” But he said it’s still a strong performance relatively speaking, given the types of challenges that highly-diversified endowments like Princeton’s faced in the past year.

Even with the modest investment return, Princeton outpaced all but one Ivy League university. Yale saw 3.4 percent growth, while all others saw decline — including Harvard, which lost 2 percent, and Cornell, which lost 3.3 percent. MIT also reported a 0.8 investment return. Golden said that since June 30, performance has been better, though he declined to say by how much.

READ MORE: Three Things to Know About Princeton’s Endowment

Princeton would have had a better year last year if it had just had broad exposure to the U.S. stock and bond markets, he said. The Standard & Poor’s 500 was up 4 percent during the fiscal year, while U.S. bonds were up 6 percent. “This was a year when keeping it simple would have been better,” Golden said.

Golden said he remains confident in Princo’s overall approach, which does not seek to track overall market or economic conditions but rather to take advantage of specific opportunities within different types of assets, such as real estate or venture capital. That has paid off for the University over many years. “If you look at our past history, a very large share of our returns has been about outperforming within niches,” he said.

Golden said about half of the positive investment return last year was the result of strategic moves by Princo’s staff, such as taking advantage of a market selloff after the United Kingdom voted to exit the European Union. Princo outsources most of its decisions to outside funds, but occasionally moves on its own. “Unlike the conventional wisdom, we did sweat the small stuff,” he said.

Golden said that while in the past Princo would review its long-term goals every year, it has now begun an 18-month cycle. He said the change may not be permanent, but was done to reflect Princo’s long-term planning process and give staff time to accomplish other objectives.

“If you look at our past history, a very large share of our returns has been about outperforming within niches.”

Andrew Golden, president, Princeton University Investment Co.

In the fiscal year ending June 30, Princo’s best-performing asset class was private equity with a 5.5 percent return. Real assets (like real estate and commodities) earned 3.1 percent, independent return (like hedge funds that bet on specific events) 1.4 percent, and fixed-income and cash 0.4 percent. The worst performing were domestic equities at -8.4 percent, emerging-market equities at -7.3 percent, and developed-international equities at -3.2 percent.

Princo aims to invest 25 percent of its endowment in private equity, 25 percent in independent return, 19 percent in real assets, 10 percent in emerging market equities, 10 percent in domestic equities, 6 percent in developed international equities, and 5 percent in fixed income and cash.

Golden said he did not expect the types of economic developments that have been in the news lately — such as China’s slowdown or growing worries about whether the U.S. is in for a protracted period of slow growth — to alter Princeton’s overall investment strategy.

But he did acknowledge that shifting economic conditions could change the high-level numeric goals for endowment growth. For years, Princo has discussed an annual investment-return goal in the low double digits. That could change — though time will tell if it does.

The old double-digit expectation assumed inflation, or rising prices, would be in the 3 to 5 percent range per year. In this model, an investment return of, say, 11 percent, would be inflation- adjusted to 7 percent if prices had risen 4 percent that year. That would give the University enough endowment growth to continue to spend 4 to 6.25 percent of the endowment on the budget, as has long been the goal, even if annual investment returns prove volatile.

Now, many economists are beginning to suspect that due to a less-robust global economy, inflation could be subdued for an extended period, perhaps below 2 percent. That could curtail investment gains across most types of assets. In this model, Princeton might see an average annual return below 10 percent.

If this happens, it should not be a reason for concern, Golden said, adding that he fully expects investment returns to sustain the endowment spending targets.

“Our after-inflation returns have been sufficient to meet our mission even during the decade that includes the global financial crisis,” he said. “We’re betting on them being sufficient going forward.”