Study: Higher Ed Endowments Lag the Market

December 13, 2018

Endowments for nonprofit organizations in the United States post investment returns that significantly underperform market benchmarks -- and higher education endowments do worse than others, a new study finds.

Professors at Georgetown and New York Universities examined over 28,000 endowment funds by looking at filings made with the Internal Revenue Service for the study, which is part of the National Bureau of Economic Research Working Paper Series. They concluded that the median annual investment return for the entire sample was 3.75 percent between 2009 and 2016, a period that covers one of the longest bull markets in modern history, CNBC reported.

For comparison, the benchmark returns on 10-year Treasury bonds was 4.89 percent per year during the same period. Equity market index returns notched 12.21 percent per year.

“In other words, the typical endowment fund underperforms a 60-40 combination of the equity and Treasury bond market indexes by about 5.53 percentage points annually,” the study’s authors wrote. Measured another way, the abnormal investment return for the entire sample of endowments came out at negative 1.01 percent per year.

Non-higher-education endowments posted abnormal investment returns of negative 0.93 percentage points per year. Higher education institutions did worse, with abnormal investment returns of negative 1.89 percentage points per year.

Endowments at the top 20 national universities -- institutions in the Ivy League as well as those like Georgetown and Stanford -- were found to earn “almost exactly zero abnormal return.” In other words, they didn’t perform particularly well in comparison to benchmarks, but they managed to do better than other colleges and universities on the whole.

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 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.”

Higher ed endowments accounted for only 6 percent of observations in the study. But they held more than half of the assets in the sample.

Other notable findings in the study include that endowment distribution rates are conservative, “well below the funds’ long-run returns” and that donors to major endowments are more likely to contribute after a fund outperforms the market.

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