A Better Approach to Systematic Outperformance? 58 Years of Endowment Performance

Abstract

College and university endowments are charged with earning returns sufficient to meet their internal return needs and objectives. Fifty-eight years of endowment return data now exist, providing an excellent opportunity to assess the effectiveness of the endowment management. This article is the first to examine endowment returns in relation to both internal and external goals over the entire 58-year period. We find the average return of endowments over the long term has underperformed the annual return need, a typical long-term return goal, and the traditional passive 60/40 benchmark. We conclude that the average endowment would have been better served by simply indexing to the passive 60/40 benchmark.

TOPICS: Foundations & endowments, wealth management

Key Findings

• • Over the 58-year period data are available, the average endowment significantly underperformed its annual return need, its long-term return objective, and the traditional 60/40 passive benchmark.

• • Although the average endowment appears unable to mimic the returns of the largest endowments, it can readily capture the returns of the passive 60/40 benchmark. Relative to the average endowment, the traditional 60/40 mix provided superior absolute and risk-adjusted returns over the last 46-year period.

• • Trustees of the majority of endowments would be well served to consider the implications of these findings in managing endowments to succeed in funding their prime directives.