Japan Solves University Endowment Problem

The biggest university endowment in the world is Harvard at near $53 billion; the largest one in Japan is Osaka University with investible holdings at almost $4 billion. Other major universities in Japan, such as Waseda or Keio, run even smaller endowments. Surprisingly, the elite University of Tokyo manages only about $120 million in reserves. This reality is awkward for politicians and educators alike.

In the absence of an appropriate backstop, universities in Japan are limited, for instance, in their abilities to fund original scientific research. The Ministry of Education reported last year that Japan ranked the worst it has ever ranked globally—in tenth place—in the volume of scientific papers published between 2017-2019.

One reason that Japan has such a weak university endowment profile is that individual and corporate donations are scant. Another is that schools traditionally rely on tuition-based funding, with operating surpluses being allocated to interest-earning cash accounts or, more generously, low-yielding bonds. Advanced technical projects are usually underwritten by the government on a piecemeal basis.

That is now set to change, dramatically. Last year Tokyo announced legislation that sets up a ¥10 trillion ($82 billion) National University Fund to be managed by the Japan Science and Technology Agency. These reserves, in turn, will be offered to individual universities on a matching basis for cash they raise themselves. The formula has worked elsewhere. Using this approach, the National University of Singapore boasts reserves of about $5 billion.

Almost overnight, Japan’s National University Fund is on its way to becoming the largest endowment fund in the world. It is being seeded with ¥4.5 trillion ($37 billion) in public monies, an amount roughly equivalent in size to the Princeton University endowment. The fund’s charter will afford it the ability to invest in an array of alternative investments, including private equity and venture capital. Complimentary legislation allows public-sector universities to be more aggressive in their own investment policies, something that only private-sector universities have enjoyed, at least in theory.

One outlier is Tokyo-based International Christian University, a small, but prominent, private institution with an endowment of about $500 million. Its current allocation to hedge funds approaches 30%, with a commitment to Japanese public equities at a similar scale. The success here is self-evident; its ten-year rate-of-return has been 4.7% during a period in which the long-term Japanese government bond has delivered a near-zero yield.

The compounding of better-than-cash returns will make a material difference for Japanese universities over time. For comparison, US endowments like Dartmouth, Duke, MIT, and Yale, all reported eye-popping returns of greater than 40% in the fiscal year ending June 2021. Admittedly, the S&P 500 had an extraordinary run during the same period, but the portfolios represent a diversified basket of securities, albeit with heavy exposure to technology companies. These investment committees presumably spend a great deal of time thinking about downside risk.

In Tokyo, bureaucratic biases have apparently taken their toll on the roll-out of the National University Fund. The organization is now accepting funding requests from institutions, but officials are apparently having trouble finding senior talent to staff its operations. The Financial Times reported in October that only a single investment manager, the chief investment officer, had been hired. He laments in an interview, “It is true that we are trying to gather talent, but the reality is that I’m the only one who has been hired so far.” Apparently, the salaries being offered are materially below market standards for the asset-management industry, although they are consistent with government pay scales.

To access this master funding pool, universities will have to adopt best-in-class investment and governance standards, something that only the most prominent institutions can likely achieve. In practice, those guidelines include actually having a professionally-managed endowment fund, while achieving certain benchmark returns. The omnipresent “administrative council,” a governing body that is common among Japanese institutions, may be poorly suited for this task.

Our Vantage Point: The state of Japanese university endowments has long caused hemorrhaging in this knowledge-driven economy. Policymakers have sutured the wound, but the pace of institutional reform will be measured and methodical.

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