Higher Education Endowments Underperform the Market

Study of more than 28,000 endowments says ‘wisdom’ of top universities is ‘a myth.’

US endowment for nonprofit organizations—particularly ones for higher education institutions—have significantly underperformed market benchmarks, according to a study of more than 28,000 endowment funds published by the National Bureau of Economic Research, a private nonprofit research organization. 

“We study the investment returns and distribution policies of non-profit endowment funds, which have grown into a $0.7 trillion institutional investor class in the US economy,” said the report. “Although higher education endowments represent somewhat more than half of the total asset class, our results suggest that the research focus on them may be somewhat misleading, as they have inferior investment performance on an absolute basis.”

Professors at Georgetown University and New York University analyzed data provided by 28,696 nonprofit organizations in annual Form 990 filings with the Internal Revenue Service (IRS), and concluded that the median annual investment return for the entire sample between 2009 and 2016 was 3.75%. This occurred during one of the longest bull markets in US history, when equity market index returns returned 12.21% per year.

This was also 5.53 percentage points below a 60-40 mix of US equity and Treasury bond indexes, and below the 10-year Treasury bonds’ 4.89% return per year during the same period.

The findings “support the conclusion that the investment wisdom of top universities is largely a myth, as one could expect to earn these types of returns simply by chance,” the authors of the report wrote. “Frequent mentions in the media of the out-performance of top schools seems likely due to the outsized success of just one university, Yale.”

In 2018, Yale’s endowment earned a 12.3% investment return (net of all fees) for the year ending June 30, raising its total value to an all-time high of $29.4 billion from $27.2 billion at the same time last year.

Higher education endowments accounted for only 6% of the observations in the study, despite holding more than half of the assets in the sample.

The report also said that endowments’ returns appear to be connected to the quality of investment advice they receive, as smaller organizations close to major financial centers earned significantly higher investment returns, while the opposite is true for the larger endowments. It also said that most endowments appear to follow conservative distribution policies, with a median payout ratio below 2.5% of their assets.

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