MW Colleges could go tuition-free if their endowment-fund managers just invested in this stock index
By Gary Smith
Buy-and-hold S&P 500 investors outperform college endowment managers. Could this be why?
Last year, I proposed a straightforward solution to the crisis in higher education: Phase out teachers and students as colleges transition from educating students to helping administrators move up the administrator ladder.
Administrators decide whether to hire administrators or faculty - and it is not surprising that they prioritize themselves. From 1990 to 2022 (the most recent data I have), the number of tenured and tenure-track professors at my school, Pomona College, declined to 175 from 180 while the number of administrators (deans, associate deans, assistant deans and the like, not counting clerical staff, cleaners and so on) increased to 310 from 56. (The college's administration has stopped making this information publicly available. We can guess why.)
The tsunami of support I received for that article from "recovering academics" and other disillusioned professors confirmed that the trends I noted were not unique to Pomona College. Many cited examples of the bloat. One noted that his small college had a 12-person "Wellness Task Force" that organizes wellness events, such as a 45-minute walk around the campus. Another noted a 15-member administrative group that organizes events such as a "Winter Wellness Wonderland" where staff and faculty can write "Thank You Grams" to each other.
Neither event is inherently bad, but they surely don't require such large organizing committees. As a correspondent noted, "One thing I discovered when in the mid-90s I was for a couple of years in a somewhat senior administrative position (half-time, since I still taught each semester) - administrators needed to have their calendar full to prove how busy they were."
While no one - not even a school's trustees - can sway administrators from their belief that administrators are more important than faculty, a reader alerted me to the apparent existence of a so-far clandestine "cabal" that is evidently trying another strategy to slow the growth of administrators at schools with substantial endowments.
Trustees control how endowment funds are invested. The choice of mediocre investments can strangle the flow of endowment money to pay for yet more administrators.
Endowment income is the largest single course of revenue for many schools. For fiscal year 2025, 37% of Harvard University's total operating revenue, for example, came from distributions from its endowment. For Yale and Princeton universities and Pomona College, the respective numbers were 33%, 55% and 49%.
Schools typically target a distribution of 4% to 5.5% of the market value of the endowment (or the average value over a few years), expecting that an annual investment return of 7% to 8% will maintain the endowment's real, inflation-adjusted value. If the real value of the endowment grows over time because of more profitable investments, then additional revenue becomes available to support administrative bloat.
If, on the other hand, the endowment returns are stifled, the hiring of new administrators will be restrained, if not stopped entirely. This is evidently what the investment cabal has done. The table shows the realized investment returns in fiscal 2025 and for the 10-year period 2016-2025 for the eight Ivy League colleges, plus Stanford University, the University of Chicago and MIT. No college did as well as the S&P 500 SPX in 2025 - or for the 10-year period 2016-2025.
This dismal performance might be intentional. Consider how much larger each of these college's endowments would have been in 2025 if they had simply invested in the S&P 500 and withdrawn a constant 5% of of the endowment each year. (These figures do not include the resources used to manage these disappointing investments.)
Average 12.1 9.2 42.4 9.7 S&P 500 15.2 13.7 N/A 14.4
The market value of Harvard's endowment on June 30, 2025 was a staggering $56.9 billion. If instead it had invested in the S&P 500 for the past 10 years, the endowment would have been 66% higher, at $94.5 billion. Using a 5% withdrawal rate, the extra $37.6 billion of endowment would generate $1.9 billion in annual revenue, enough to support an additional 12,518 administrators being paid an average annual total compensation of $150,000. Those 12,518 additional administrators were effectively blocked by the mediocre endowment returns.
(Harvard's net tuition and fees, after deducting financial aid and scholarships, is around $1.3 to $1.4 billion - which means that they could have used the additional endowment income to eliminate tuition and fees entirely - though this would not have been a high priority for the university's administrators.)
Pomona College's endowment is a mere $3 billion, but if it had invested in the S&P 500 for the past 10 years, its endowment would have been about 68% higher. (This is an approximation because the college has not yet publicly announced the results for the 2025 fiscal year. An additional $2.04 billion in endowment would generate an additional $102 million in annual revenue, enough to support 680 more administrators or, as with Harvard, effectively eliminate all tuition and fees.
The other schools in the table fall in the range between 680 and 12,518 additional administrators. Without their perverse investment strategies, we would be well on our way to that utopia of all-administrator schools.
Perhaps there is another explanation for the mismanagement of endowment portfolios. One argument is the mantra that investing in the S&P 500 creates too much year-to-year volatility in the market value of the endowment and this will spill over into the annual endowment withdrawals that support the schools' budgets.
For example, a trustee on one investment committee emailed me that, "Most people would find it strange to compare endowment overall with the S&P as a benchmark. Most folks use a 70/30 portfolio (70% stocks/30% bonds) as the right benchmark. With the way the endowment is used to support the budget and all the administration, it probably wouldn't be prudent to have 100% equity allocation."
Thus, most schools invest in a diverse set of mediocre investments in order to offset the volatility of the stock market. Evidently mediocrity loves company. As John Maynard Keynes observed, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
There are three major flaws in this argument. One is that these other investments do a lousy job of stabilizing endowment returns. Post-1950, the worst single fiscal year for the S&P 500 was 2009, when the annual return was -25.5%. Yale's 2009 return that year was -24.6%; Harvard's was -27.3%; Pomona's -23.0%.
The second flaw is the misplaced concern with short-term performance. Portfolios that are 60/40, 70/30, and the like are explicitly intended to achieve "the growth potential of stocks combined with the stability of bonds." However, the inclusion of bonds or other diversifying assets focuses on the wrong objective. Growth matters much more than stability.
After the Yale endowment's disappointing 1.8% return in 2023, compared to the S&P 500's 19.8%, Matthew Mendelsohn, Yale's Chief Investment Officer, wrote that "As a 322-year-old institution, Yale benefits from the rare ability to invest with a truly long time horizon. Given this, we measure our success over decades, not days, months, or even years."
That argument is exactly correct - and exactly why endowment managers should little care about dampening year-to-year volatility. They should be looking at long-term performance, which is where stocks excel. In August 2016, I wrote that stocks were an attractive long-term investment: "I don't know what will happen to stock prices over the next few months or years, but, ten years from now, in 2026, I expect value investors who were fully invested in August 2016 to be pleased with the results."
The third flaw is the belief that the only way to stabilize endowment withdrawals is to stabilize the market value of the endowment. Schools can instead use stabilizing withdrawal rules; for example, a fixed percentage of the average value of the endowment over the past 10- or 20 years. Another simple rule is to ignore the market value of the endowment completely and withdraw an amount equal to the average income (or some multiple of the average income) generated by the endowment over the past 10 or 20 years.
The people managing these endowments are highly intelligent and well-informed. I choose to believe that their poor performance is entirely intentional.
Gary Smith is emeritus professor of economics at Pomona College. He is the author of more than 100 academic papers and 20 books, including "Standard Deviations: The Truth About Flawed Statistics, AI and Big Data" (Duckworth, 2024) and (co-authored with Margaret Smith) "The Power of Modern Value Investing: Beyond Indexing, Algos and Alpha" (PalgraveMacmillan, 2024).
-Gary Smith
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 16, 2026 14:41 ET (19:41 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments