Investment Management

The goal of our endowment investment policy is to support current and future generations of MIT scholars with significant resources. To meet this goal, we must generate high real rates of return over the long-term to maintain the purchasing power of the Endowment. At the same time, we must maintain adequate stability in our investment portfolio to avoid overly disruptive volatility in the annual flow of funds to the operating budget.

To achieve these objectives, we have built our investment policy for the Endowment around three core principles: 1) an equity-orientation, 2) a focus on inefficient markets, and 3) diversification. We pursue equity investments to generate the high real rates of return needed by MIT to support world-class education and research over the long-term. We gravitate towards inefficient markets to provide MIT with the best possible opportunities to outperform industry averages. We impose diversification on the Endowment to reduce the volatility of our portfolio and to protect ourselves from making overly large bets on any one asset class.

MIT's investment philosophy is expressed in the Endowment through three main avenues: asset allocation, manager selection, and strategic tilts. Each of these areas is described in more detail below.

Asset Allocation

MIT's investment process starts with the selection of asset allocation targets. Currently, MIT selects from among the following eight asset classes: U.S. public equity, international developed public equity, emerging markets public equity, fixed income, marketable alternatives (hedge funds), real estate, real assets (oil & gas, timber, commodities), and private equity (venture capital and buyouts). 

The asset allocation targets are determined through a combination of quantitative and qualitative techniques. Our quantitative modeling is heavily influenced by finance theory and long-term expected rates of return. Our qualitative assessment of opportunities is determined by prevailing market valuations and realities.

Shown below is our current target asset allocation. As can be seen, the portfolio has a strong equity bias with less than 10% of the portfolio dedicated to plain vanilla fixed income securities. The portfolio is focused on inefficient markets with over 70% of the investments in private equity, real estate, real assets, and marketable alternatives. The portfolio is well-diversified with no more than 28% of the portfolio in any one asset class.

Manager Selection

MIT executes its investment policy primarily through external fund managers. Working with external fund managers allows MIT to tap into the best investment talent globally. By identifying a wide variety of top-tier investment managers with specific competencies, MIT is able to construct a broadly diversified portfolio while accessing deep sector expertise. MIT maintains close ties with its investment managers, opportunistically allocating capital to those uncovering the most attractively valued situations.

MIT maintains very high standards for the external investment managers with whom it is willing to partner. First and foremost, we select ethical and responsible fiduciaries of capital who treat MIT's money as if it was their own and who invest significant amounts of their own capital alongside of MIT. We select investment managers who build their businesses for the long-term and who maintain a long-term investment horizon for the investment of capital. MIT avoids black-box strategies, requiring investment managers to be transparent to clients in all respects. MIT's investment managers tend to be boutique investment managers that focus on a single investment strategy and are experts in their field.

MIT conducts significant due diligence before establishing manager relationships. Wanting to establish relationships that last for decades, we spend an enormous amount of time prior to making an investment gaining comfort with the manager's ethics, investment strategy, organization, and back office infrastructure and controls. This disciplined process and hard work has paid off in performance above industry averages. Not surprisingly, we have earned the largest excess returns in the most inefficient markets.

Strategic Tilts

The third part of MIT's investment process is the allocation of capital within asset classes to the most compelling area of opportunity. We routinely evaluate market conditions looking for opportunities to make a strategic tilt within an asset class. One recent example of a strategic tilt was our decision in March of 2007 to shift our fixed income portfolio exclusively into U.S. Government Bonds. At that time, we believed we were being very poorly compensated for the risk of holding mortgage-backed, asset-backed and corporate fixed income securities. This move proved timely as subsequent events in credit markets punished all but the highest quality fixed income instruments.  Currently, we maintain a strategic tilt in our U.S. equity portfolio that goes against our normal small-cap bias in favor of well-known, large-capitalization, high quality global businesses.