How many of you remember the 1960’s television show, the General Electric (G.E.) College Bowl? It started out on radio in 1953, and moved to television from 1959 to 1970. Moderated by Allen Luden, then Robert Earle, it was a game that measured teams of students – their intelligence and quick recall of facts – based on the sort of questions asked on ‘Jeopardy’.

'College Bowl 2016’ has been updated, and now deals with the hotly competitive returns of College Endowment Performance.

And results for 2016 were just released by the National Association of College and University Business Officers – aka Nacubo - and the Commonfund Institute. For the 2nd year, schools with the smallest endowments thumped their billion-dollar-plus rivals – i.e., Ivy League schools. 

• HARVARD said its investments declined by 2%, and its endowment total dropped by $2 billion to $35.7 billion. Harvard is now shaking up its endowment management.
• YALE did much better than many of its peers, gaining 3.4%, which still lagged the 4% return over the same period for the S&P 500-stock index and wasn’t enough to offset spending. Yale’s total endowment dropped by $200 million to $25.4 billion.

Compare those returns to HOUGHTON COLLEGE, a liberal arts institution affiliated with the Wesleyan Church in western New York, with. Houghton has just over a thousand students and an endowment of $46.4 million.

Houghton emerged in the top quartile of all endowments, according to Nacubo, with a return of 11.85%, for the fiscal year ended 9/30/16. For the calendar year, the results were also impressive, at 7.54%. Houghton was able to lower its spending rate - the amount it withdraws each year to fund operations - to an enviable 4.5%, and may be able to lower it further, to 4%.

HOW DID TINY HOUGHTON DO IT?    The answer is pretty simple: Houghton got out of hedge funds and all alternative investments a 1-1/2 years ago, and moved the entire portfolio to a mix of low-cost index funds and mutual funds at the fund giant Vanguard.

Houghton’s endowment is now invested in a simple mix of 76% in stocks, evenly divided between U.S. and foreign, and 24% in fixed income, according to Vincent Morris, who joined Houghton last year as its VP for finance after a stint in risk management at the insurance broker Arthur J. Gallagher. Roughly half the endowment is in low-cost index funds, and the rest is in actively managed mutual funds.

Houghton’s investment committee met this week, and is likely to move even further from active management, Mr. Morris said. “I went to the University of Chicago, where I sat in a lot of investment classes,” he told me. He learned how difficult it was for active managers to outperform market averages, “especially year after year,” he said, adding, “I’m a big believer in passive investment.”

As for hedge funds and other high-cost alternatives, “the whole two-and-20 model” — in which investors typically pay 2 percent of assets under management and 20 percent of any gains — “is ridiculous,” Mr. Morris said. “The cost structure is outrageous. As they say on Wall Street, ‘Where are the customers’ yachts?’ I’m not going to play that game.”

EXPOSURE TO ALTERNATIVE INVESTMENTS.    As Houghton’s experience suggests, the past year’s disparity in results between the large and small endowments can almost entirely be explained by the differing allocations to alternative investments, especially hedge funds.

• Endowments larger than $1 billion had 58% of their assets in alternative strategies on average, with 20% in hedge funds and 12% in private equity.
• Smallest endowments - those of < $25 million - had just 10% in alternatives, with 6% in hedge funds and a mere 1% in private equity.