 Do (Some) University Endowments Earn Alpha?Brad Barber and Guojun Wang Financial Analysts Journal, 2013, vol. 69, issue 5, 26-44 Abstract: The authors analyzed the returns earned by U.S. educational endowments using style attribution models. For the average endowment, models with only public stock and bond benchmarks explain virtually all the time-series variation in returns, yield no alpha, and generate sensible factor loadings. Elite institutions perform better than public stock and bond benchmarks because of large allocations to alternative investments. The authors found no evidence that manager selection, market timing, and tactical asset allocation generate alpha.Do educational endowments earn superior returns? This question is interesting, given the strong returns earned by some legendary endowments (e.g., Yale University under the management of David Swensen), which have led to the widespread adoption of the so-called endowment model of investing. Using NACUBO/Commonfund data from 1991 to 2011, we analyzed the returns earned by U.S. educational endowments using simple style attribution models.We first documented the returns on the average endowment match the returns of a 60% U.S. stock (S&P 500 Index) and 40% U.S. bond portfolio (Barclays Capital U.S. Aggregate Bond Index). When we restrict the attribution model to public stock (U.S. and international stock) and bond (U.S. bond) benchmarks, the average endowment earns an alpha close to zero, the public stock/bond benchmarks explain 99% of the time-series variation in the return of the average endowment, and the attribution model yields sensible estimates of the typical stock and bond allocations (roughly 60% stock and 40% bonds).We then focused on the returns earned by elite institutions (Ivy League and top-SAT schools) and top-performing endowments (top decile of prior-year performance). These groups earn reliably positive alphas relative to simple public stock/bond benchmarks of 2%–4% per year. However, when we add indices for hedge funds and private equity to our attribution model, the style-adjusted returns for elite institutions and top-performing endowments are indistinguishable from zero, with point estimates ranging from –0.99% to 0.46% per year. These results indicate that the strategic asset allocation decisions of elite institutions and top-performing funds were the most important determinant of their superior returns over the past two decades. We found no positive evidence that manager selection, market timing, or tactical asset allocation are able to generate alpha for educational endowments.Editor’s Note: The online appendix for this article is available at www.cfapubs.org/toc/faj/2013/69/5. Date: 2013 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:ufajxx:v:69:y:2013:i:5:p:26-44 Ordering information: This journal article can be ordered from DOI: 10.2469/faj.v69.n5.4 Access Statistics for this article Financial Analysts Journal is currently edited by Maryann Dupes More articles in Financial Analysts Journal from Taylor & Francis Journals |
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