The study shows that investment officers at top-performing endowments are more highly compensated, and the same holds true for investment officers at larger schools.  It may be that superior performance is rewarded through compensation, or that schools with deeper pockets pay more handsomely.  The data is inconclusive.  But endowment managers across academia are generally paid far below their peers in the hedge fund industry.

Implications for Advisors

The authors note several questions which the study does not answer:

• The extent to which the organizational structure of endowment managers contributes to performance has not been studied.  But the authors note that the top-performing endowments have boards that set broad policy decisions, are experienced, have worked together for many years, and have an academic and analytical orientation which fosters a culture of periodic self-assessment and evaluation.
• Whether the strategies pursued by the top endowments over the last 20 years will remain successful in the future is unclear.  The authors believe these endowments benefited from an environment that was “kind” to investors, allowing them to pursue strategies that were uncorrelated to public equity markets.  This success was made possible by organizational structures that permitted, or perhaps encouraged, unconventional strategies.  Whether such strategies can still be identified in the future, and whether endowment boards will pursue them, is unclear.
• Lastly, and perhaps most pointedly, the authors warn of the dangers of imitation.  As more capital follows an investment strategy, returns will diminish.  In the past, there was significant lag from when top institutions began to pursue a strategy and when others followed suit.  But top endowments are now much more closely scrutinized, dramatically compressing the time lag.  Those hoping to imitate the decisions of top endowments going forward will face incredible competition.

Top endowments have been remarkably successful, but the authors say “much remains to be understood about the sources of their performance, whether they can continue to succeed, and whether the approaches of the successful endowment managers can be generalized to the broader investment community.”

We spoke with Lerner, who offered the following additional advice, specifically regarding the current market conditions: “I think taking a ‘contrarian’ point of view and not panicking are critical hallmarks of their success.  Once again, being cautious about liquid assets (which offer much less security than initially meets the eye) is also underscored.”

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