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The Worst-Performing Endowments Have These Things in Common

New research examines the impact of fund size, location, and affiliation on non-profit investment returns since 2009.

Endowments and foundations have underperformed broader markets since the financial crisis, lagging behind a simple 60-40 portfolio of stocks and bonds. The worst-performing non-profits, however, were large university endowments, according to a paper from the National Bureau of Economic Research.

Between 2009 and 2016, college and university endowments underperformed market benchmarks by more than twice as much as other non-profit endowment funds, such as charitable foundations, according to the paper by Georgetown University’s Sandeep Dahiya and New York University professor David Yermack.

While other endowments and foundations trailed markets by 93 basis points annually, college and university funds underperformed benchmarks by 189 basis points a year. Although the endowments of academically elite universities like Ivy League schools performed better than colleges and universities as a whole, even these earned “almost exactly zero abnormal return, a result that gives no indication of superior performance,” according to the paper.

These results “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,” authors Dahiya and Yermack argued.

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The study was based on the IRS filings of 28,696 endowments and foundations. In addition to comparing university endowments to other non-profit funds, the authors also examined differences in performance by size and location.

Large endowments, which accounted for nearly 80 percent of the assets in the study, delivered the worst performance, although small endowments also underperformed markets overall.

The best locations, meanwhile, varied depending on the fund’s size. A small foundation delivered better returns the closer it was to a financial center like Wall Street, but the reverse was true for larger funds.

“Smaller non-profits near financial centers are probably much more likely to have better-informed board members, and they may establish superior investment policies for these organizations’ endowments,” the authors concluded. “Larger funds may already have qualified board members but may be susceptible to professional money mangers’ sales pitches that lead to over-investment in exotic products with high fee structures.”

For all endowment funds, the degree of underperformance impacted the organization’s ability to raise money, with the authors comparing the flow of donations to flows into outperforming mutual funds.

“The constituent donors of a non-profit, such as the alumni of a university, are aware of how well the university performs as an investor and adjust their donations in a pattern that rewards stock market profits with the supply of new capital,” they concluded.

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