June 30 has come and gone, which means that asset owners, like endowments and pension funds, are gearing up to publish their annual returns for the fiscal year.
Despite insistence by chief investment officers that 10- and 20-year returns matter more to these long-term-focused institutions than one-year numbers, the annual horse race has begun.
In the press and among asset owners, it’s impossible to escape comparison between institutions. But industry experts say that these comparisons are flawed. Not only do they miss clear differences in performance reporting standards — they also fail to consider each institution’s particular tolerance for risk, goals, and individual needs.
“The questions start coming in nearly instantly on where people think our returns will stack up compared to various cohorts,” said Matt Bank, partner and deputy CIO at OCIO firm Global Endowment Management.
He expects this year to be especially challenging on the comparison front, as there will once again be significant dispersion between the allocators that held a lot of public equity versus those that held private assets in their portfolios. “Most endowments are built to select really good managers,” Bank said. “That’s not something you can always see over a one-year period. It takes time for sources of luck to wash away and reveal skill.”
Bank said it’s a constant conversation with boards and other stakeholders, like students, alumni, donors, and faculty, to educate them about the differences between institutions.
Part of it comes down to the reporting timeline. Some institutions publish results within 60 days of the quarter’s end are providing lagged — call it stale — returns. That’s often because asset classes like stock and public fixed income have readily available prices and can be reported as of the quarter’s end. Private market investments, whose valuations are determined by the investment committee on a lagged basis, often will be reported by institutions as of the previous quarter.
CalPERS is a great example of this. The fund released its preliminary annual performance in mid-July. In a footnote, the pension giant specifies that its private equity and private debt fund returns were reported as of the quarter prior. But other organizations wait to get their private equity performance before publishing returns. To compare CalPERS to one of these institutions would be unfair — but that doesn’t stop it from happening.
“It’s the Endowment Olympics, except there are no rules,” said one CIO, who asked to remain anonymous, via email.
There are other factors, too. Some endowments and pension funds choose to include investment office expenses and excise taxes, while others avoid doing so. A lot of that ends up in footnotes, or the fine print at the bottom of reports.
David Morehead, CIO at Baylor University wrote on X: “I think the key thing is to always frame it as ‘these are returns for institutions that have different goals and objectives, and so returns aren’t directly comparable.’” He added that contextualizing returns with details on leverage and risk would make a huge difference.
A second CIO suggested there should be an objective third party that reports on returns and risk metrics. This could include total risk, which is hard to compare across funds; policy benchmark risk, which is the amount of risk a board has deemed acceptable to take on; and policy relative risk, which would measure how close a portfolio is to its stated risk tolerance.
“All these are not easy to calculate, all of them have uncertainty, all of them are hard to extract who is actually the decider,” they said. “But uncertainty is not an excuse not to measure, track, and report on these.”
Bank pointed to Yale Investment Office’s 2021 returns announcement from CIO Matt Mendelsohn as a good example of contextualizing returns. That year, Yale had returned 40.2 percent, a massive gain that was aligned with many of its venture-heavy peers.
“While we are pleased with this gain, we define success over longer periods of time, measured by our ability to provide stable and growing support to the university so that it can carry out its mission,” Mendelsohn wrote.
The announcement goes on: “Tempered adjustments are of particular importance when investment returns are abnormally high because endowment gains are predominately unrealized — that is, not converted to cash — and the endowment value could fall if market conditions deteriorate.”
With the possibility of a down year looming, investors and the press alike would do well to remember this missive.
Or perhaps more simply: “You have to understand what race you’re running and just run your race,” Bank said.
