Endowment Rates of Return Underperform Market Benchmarks

Endowment Rates of Return Underperform Market Benchmarks

Investment returns on nonprofit endowments — including those at colleges and universities, hospitals, museums, and scientific and religious institutions — badly underperform market benchmarks, a study by finance professors at Georgetown University and New York University finds. 

Based on IRS data gathered from 28,696 nonprofit endowments, the report, Investment Returns and Distribution Policies of Non-Profit Endowment Funds (38 pages, PDF), estimates that the mean annual investment return for nonprofit endowments between 2009 and 2016 was 6.65 percent, compared with benchmark returns of 7.96 percent for long-term government bonds and 13.7 percent for U.S. equities. "In other words," the authors write, "the average endowment fund would have earned substantially higher returns during our sample period if its trustees had followed a simplistic investment strategy of holding 100 percent Treasuries and taken no risk whatsoever."

Nonprofit endowments of all sizes significantly underperformed market benchmarks, with the median rate of return among large endowments (at least $100 million in assets) averaging 6.1 percent annually between 2009 and 2016 and 70 percent of those endowments underperforming the U.S. stock market, while the median rate among small endowments (between $1 million and $10 million in assets) averaged 4.4 percent, with 59 percent underperforming the market. 

Higher education endowments — which accounted for more than half the assets in the sample — fared significantly worse than endowments in other sectors such as the arts, human services, health care, and religion. According to the study, the risk-adjusted return of the twenty largest university endowments barely exceeded that of U.S. stocks (by 0.001 percent annually), with 40 percent of those schools underperforming the market, while, taken together, all colleges and universities in the study underperformed the benchmark (by 0.0189 percent). 

The study also found that distribution ratios were well below the endowments' average long-term returns — a mean distribution rate of 5.67 percent and a median rate of 2.37 percent, with more than a third of the funds not making distributions at all. 

"These portfolios aren't designed to beat the market, but to be resilient over long periods of time," Cathleen Rittereiser, executive director of Commonfund Institute, told the Wall Street Journal.

The study "comes to quite different conclusions than other organizations have found, including our own annual studies," said Matthew Hamill, a spokesperson for the National Association of College and University Business Officers, which publishes an annual report on educational endowments. "We will take a hard look at it as we assess our data and findings."

Sandeep Dahiya, David Yermack. "Investment Returns and Distribution Policies of Non-Profit Endowment Funds." Report 11/27/2018. Jason Zweig. "Why Charities Have Been Such Bad Investors." Wall Street Journal 11/27/2018.