I was just talking with my boss about this a few minutes ago. Some of these articles really miss some major points, thought the VF seems better so far (haven't finished it yet).

Specifically, the authors of these articles don't seem to understand the long-term goal of these endowments, which is to maintain the purchasing power of gifts in perpetuity.

I am in the middle of David Swensen's book on endowment portfolio management--he runs the Yale fund, which is very similar to Harvard's. He makes the point that most gifts to the endowment are tagged for a specific purpose, like funding a professorship or research program. And they are intended to pay for that purpose forever. That means the endowment must grow at least at the rate of inflation--and actually more than reported inflation, since educational inflation has historically been greater than the broad measure of prices. New gifts don't help because those also tend to come along with new spending initiatives.

This dynamic requires the endowment to invest in assets that can keep up with inflation. That means public/private equities (stocks), real estate, timber, oil & gas reserves and certain hedge fund strategies. All those asset classes, along with all risky assets, got crushed in this most recent downturn. But occasional market crashes are to be expected, and are worked into the endowment's philosophy. The only asset class that didn't get crushed is Treasuries. But these endowments simply cannot hold just Treasuries (or move allocations dramatically in real time), because it would gradually destroy purchasing power.

The upshot of all this is that both Harvard and Yale have done fabulously well, even taking into account these recent declines. Each fund was so far ahead of its inflation target that a 25% decline in value still left the funds above their bogey.

If the schools got greedy and cooked up spending plans contingent on continually rising markets, that was a huge mistake. I bet Swensen and Mendillo try to fight back those plans as much as they can, but when they're sitting on these huge piles of money it must be nearly impossible to rein in enthusiasm. This is a problem, but it's much better than having to deal with an anemic endowment that can't keep up with inflation.

That's very interesting! Thanks mullacc.

Taking away hot breakfasts... that's drastic!