Why Did the Harvard University Endowment Fund Only Earn 5.8%

Video Transcript 

My name is Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions based on different facts and circumstances.

My name is Robert A. Bonavito, a New Jersey forensic accountant. Recently you've probably, or I've been reading the paper about the Harvard University endowment fund only earning 5.8%. And this is for the year 2014. And, you know, a lot of people are scratching their heads because most index funds earned 16%, and some funds did far better. So how could the smartest and best and brightest investment managers only earn, you know, they earned less than 6%.

And, you know, we do a lot of work for brokerage firms and individuals where we testify on returns and that type of stuff in court for legal matters. And I just wanna get into a little bit how you look at returns, how we look at returns. And there's something called the risk-free rate. What the risk-free rate is, it's a riskless rate, it's where there's no fault. Like for example a treasury bill or treasury bond, which right now are probably at like 2%. So if I invest in a 10-year bond, I'd expect to get 2% guaranteed, right? And the Harvard guys only earn 5.8, which is three and a half, you know, 4% percent higher than that. But if I invest in an asset that's risky, I want more money, right?

And so we have the equity risk premiums is what we call that, and that's usually 8%, okay? So if I'm investing in stocks, I would expect a rate of 10%, okay, because I wanna be paid for my risk. You know, if I pay you to sit at home and watch television, you're gonna take a lot less than if I pay you to go climb up on a skyscraper, right, because there's more risk, you want more money. It's the same thing with investments, okay? We have a risk-free rate, we got the equity risk premium, we got a 10%. And we use this in our evaluations, we use this when we testify, you know, for brokerage firms or against brokerage firms, for investment advisers, all kinds of stuff, when we do analysis of annuities and litigation matters.

So, you know, when I see that these pension funds and endowment funds are earning so much less than what, you know, a low cost index fund would earn, I have to scratch my head because I don't understand it because like I said, you're taking all this extra risk because they're not investing in treasury, you know, they're not here investing in risk-free assets, okay? They're investing in something else. And to earn half of what you would have gotten in an S&P 500 fund, you know, is something...some issue.

So, you know, I just wanna make you aware that when we go to court and we testify, we do have things that we utilize to determine whether the rates you receive is appreciate. And these are just two of them right here when we do this build up method risk free rate, equity risk premium. So something for you to think about. If you have any questions about this video, feel free to email me.