Major endowments in the United States, including those managed by colleges and universities, "badly underperform" market benchmarks, according to a new study from Georgetown University and NYU's Stern School of Business.
In a sample of more than 28,000 endowment funds drawn from filings with the U.S. Internal Revenue Service, economists found that the nation's endowments posted median annual returns 5.53 percentage points below a classic 60-40 mix of U.S. equity and Treasury bond indexes between 2009 and 2016.
The median annual return for the entire endowment sample was 3.75 percent, or 1.14 percent below the 10-year Treasury bond return.
"In other words, the typical endowment fund would have earned substantially higher returns if its trustees had followed a simplistic investment strategy of holding 100 percent Treasury bonds and taken no equity market risk whatsoever," economists Sandeep Dahiya and David Yermack wrote in a new paper. "Higher education institutions, whose endowments account for more than half of all assets in the sample despite representing just 6 percent of the observations, significantly underperform market benchmarks, with abnormal investment returns of minus 189 basis points [1.89 percentage points] per year."
While the researchers were quick to acknowledge exceptions to this rule (Yale University reported in 2018 that its endowment grew to $29.4 billion with an annualized return of 11.8 percent per year over the last 20 years), a marked uptick in political scrutiny has thrust the performance of non-profit funds and their managers into the limelight. And the results are "fairly dismal."
Results for all endowments showed a statistically significant negative alpha of 1.01 percent per year despite one of the longest bull markets in modern history. The S&P 500 – the broad market index used as a benchmark for measuring alpha – returned 14.4 percent in total annual returns over the eight years studied.