Regarding the role of endowment size, the authors believe these schools are able to achieve economies of scale, for example by hiring professionals with expertise in various investment disciplines.  SAT scores do not contribute to performance, but the authors suggest they may be a proxy for other factors, such as administrative skill, the wealth and connections of the alumni network, and prestige of the “university brand,” all of which may enable these institutions to hire more skillful managers.

The study notes “remarkable persistence in the performance of endowments year after year.”  This persistence is at the individual endowment level; individual schools that outperform continue to do so.

The Role of Asset Allocation

The authors looked at the role of asset allocation across five asset classes: equities, fixed income, real estate, alternative assets (hedge funds, private equity, venture capital, and commodities) and cash.  Over the time period studied, there was a shift from equities and fixed income (declining from 83% to 73%), roughly offset by an increase in alternatives (from 11% to 21%).  Allocations to alternatives are highest among the Ivy League schools, followed by the larger schools and those with high SAT scores.  Yale is at the extreme, with an allocation at the end of 2006 of 69% of its funds in alternative assets.

The endowments with the highest performance in the study are those with the most aggressive allocation to alternative assets, which has led many institutions to emulate their approach.  But the authors argue that such mimicry may not lead to comparable results in the future, as capital inflows to alternative strategies have diminished overall returns and made it harder to identify superior managers.

Endowment performance roughly tracked asset class benchmark performance from 1994-1999 but, starting in 2000, consistently outperformed benchmarks.  The data are insufficient to pinpoint a reason, but most likely it is a combination of superior security selection and allocations to sub-classes like emerging markets, which outperformed during this period.   Within the Ivy League schools, only 66% of the performance was explained by benchmark returns, versus 73% for the universe. These endowments are “doing more than just correctly timing by asset class,” the authors conclude.

Allocations to alternative assets are what set Yale, Harvard, and other top endowments apart.  Performance within alternative assets varies widely, and the study shows that those endowments that were early to allocate to alternatives achieved better results.  Latecomers to alternative assets found many of the top funds closed to new investors.

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