Do non-profit endowments beat the market with their investments? In their November 2018 paper entitled “Investment Returns and Distribution Policies of Non-Profit Endowment Funds”, Sandeep Dahiya and David Yermack estimate investment returns and distribution rates for a broad and unbiased (not self-reported or self-selected) sample of U.S. non-profit endowment funds. Using annual IRS Form 990 filings for 28,696 organizations and annual total returns for a capitalization-weighted U.S. Stock market index and a U.S. Treasuries index during 2009-2016, they find that:
- Non-profit endowments control assets of $0.7 trillion. Colleges and universities account for only 6% of the number of endowments but 54% of assets.
- The average annual return for endowments is 6.6% over the sample period, compared to 13.7% (8.0%) for the U.S. stock market (Treasuries) index.
- On average, endowments underperform an annually rebalanced 60%-40% mix of U.S. stock market and U.S. Treasuries indexes by an average 3.86% per year, with annual 4-factor model (market, size, book-to-market, momentum) alpha -1.0%.
- Smaller endowments on average beat larger ones based on both average return and 4-factor alpha.
- Higher education endowments on average do significantly worse than others. The top 20 national universities (Ivy League schools and others such as MIT, Stanford, and Georgetown) beat other universities but earn almost exactly zero alphas, suggesting that their reputations for investing prowess are myths.
- Overall, endowment distributions are less than average returns.
- Donors tend to increase contributions when endowment returns are strong.
In summary, evidence indicates that non-profit endowments, even those of elite universities, do not outperform simple investing benchmarks.
Cautions regarding findings include:
- The sample period is extremely short for evaluating long-term investment performance, especially in terms of variety of market conditions.
- The 4-factor model of stock returns is appropriate only for evaluation of the equity portion of endowment portfolios, not for overall returns.
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