REBUTTAL: The Endowment Model Defense That Wasn’t

Abstract

In “The Endowment Model Is Just Active Management” (Siegel 2021b), Siegel chooses to expound on active investing in conceptual terms, with occasional reference to endowment management. This rebuttal contends that the Siegel article is long on intellectual theory and short on proof. The author takes issue with Siegel’s rationalization of endowments’ significant underperformance over 12 years and counting. The case for active investing looks past the elephant in the room—theory and evidence casting grave doubt on the merit of diversified—that is, myriad-manager—active investing such as that of endowments. The exceptionalism argument falls flat. The article sidesteps the glaring deficiencies of the endowment model. Siegel simply posits the presence of “skilled employees” in university investment offices who will get the job done despite obstacles of their own making. This rebuttal finds the explanation unconvincing and concludes that the endowment model is dead as a doornail.

TOPICS: Foundations & endowments, portfolio theory, portfolio construction, performance measurement

Key Findings

• ▪ Siegel’s article makes a case for endowment exceptionalism. This is a kind of cultural advantage that leads him to conclude that endowment managers should be able to generate superior returns over the long run. The exceptionalism argument falls flat when subjected to logical and empirical analysis.

• ▪ In letting the endowments off the hook for an extended period of underperformance, the article makes a specious comparison of endowment returns with those of the S&P 500 stock index during a major bull market. A proper benchmark is 72% all-cap, global equities and 28% bonds.

• ▪ The article sidesteps the glaring deficiencies of the endowment model. Siegel simply posits the presence of “skilled employees” in university investment offices who will get the job done despite obstacles of their own making.