• Baylor’s endowment returns are beating even the Ivy League’s; here’s why that matters

    Pat Neff lit green at dusk/sunset

    If you read The Wall Street Journal last week, you likely saw not one, but two stories on the performance of Baylor’s endowment — one on how Baylor’s returns are beating even the Ivy League’s, and a second one on how Baylor’s culture has made this possible. (The first even ran on the front page of last Thursday’s print edition!)

    For those without a WSJ subscription, the gist of the story was this: In higher ed, the Ivy League schools have long been the gold standard when it comes to getting the best return on your endowment investments. (Good returns, in turn, allow for more student scholarships, better academic funding, etc.) Over the last few years, Baylor’s returns have been just as good or better than the Ivy League’s — akin to beating Alabama in football, or Kansas in men’s basketball.

    That’s a big deal; we asked Dave Morehead, Baylor’s chief investment officer, to help us understand why.

    First, it’s important to know that the endowment isn’t like a checking account that Baylor can just use for whatever it wants.

    “It’s more like a ‘restricted savings account,'” says Morehead. “The bigger your savings account is, the more options you have. If you want to lower tuition, you can. If you want to start new programs, you can. If you want to hire more faculty, you can. But it’s restricted, both by law and by donor request, because donors have particular things they want to support.

    “Right now, the endowment is still small, relative to the size of the university. But, because of compounding math, it’s at an inflection point. Right now, the endowment gives the university about $80 million a year. In 20 years, the endowment could, if we do a good job, be giving the university more than $500 million per year. That would mean more scholarship money, more money for professors, and more funding for whatever else is needed.”

    By spending only the returns and keeping the capital intact, over the long term, endowed gifts provide much more benefit than if the money is spent all at once. Think of it this way: If I give you $20, you could go buy 20 $1 candy bars right now, and that’s all you would ever get. Or, you could buy one candy bar right now and invest the rest of the money; then the fund would buy you another candy bar next year, and another the next, and the next, forever — so you’d end up with way more than 20 candy bars, and never run out.

    Through careful management and the generous gifts of donor, Baylor’s endowment has reached $2 billion — which sounds to the average person like an incredible amount of money. And it is — but… Legally, the school can only spend about 5% of its endowment, to ensure that the fund continues to exist and grow. Last year, that amount only covered about 8% of Baylor’s budget. Continuing to grow the endowment, through both management and fundraising, will help Baylor take more of the burden off tuition while also helping the university fund new programs.

    “It’s not all that different from a retirement account,” says Morehead. “The more you save for retirement, the more options you have in retirement. If you don’t save very much, then you can’t go on so many trips.”

    That Baylor is beating the Ivy League schools at their own game has given BU new standing in the financial world, just like Baylor’s basketball success has made people look at BU differently in the world of athletics.

    “This endowment return thing is wholly the domain of schools like the Ivies, MIT, Duke, Notre Dame, Michigan, UVA, UNC, Stanford, etc.,” explains Morehead. “Those are the schools that ‘win’ in this realm. Just like football wins are a big deal in Texas, endowment returns are a huge deal in the Northeast, and they’re all very competitive about it. People wait with baited breath to see how their schools’ endowments performed.

    “This success is something that the Baylor Family should feel really good about, because if Baylor is performing at this level, then in high finance, they now all know about Baylor. We put the Baylor flag in the middle of their football field. Baylor now, in this realm, is being discussed in the same breath as Yale, MIT, etc., and in the halls and text threads of Goldman Sachs and Morgan Stanley. Baylor is, in this way, asserting itself in a realm where it had not previously had a seat at the table.”

    An interesting side note: Baylor’s entire investment team (except for Morehead, who does teach in the Hankamer School of Business) is made up of BU graduates.

    “I would put our team up against anyone’s,” says Morehead. “They’re all Baylor grads. And guess what? We’re winning. We’ve beat Yale — the best of the best — over the last seven years, and Yale is filled with Yale alums. BU alums are beating the Yale alums for the last seven years running. We’re working our tails off so that, every year, we can provide more money for Baylor University, and the university can do whatever needs to be done.”

    Sic ’em, Baylor investment team!