The Best and the Brightest Fail at Investment Management

Non-profit endowments, particularly those of elite academic institutions, have failed to deliver investment outperformance. Those colleges and universities have significantly underperformed a passive benchmark on an absolute and risk-adjusted basis.

Despite the fact that about 35,000 nonprofit organizations (NPOs) have endowment funds, with a total of $800 billion in assets under management, little is known about how NPO endowment funds invest or what returns they earn. Sandeep Dahiya and David Yermack contribute to the literature with their March 2020 study, Investment Returns and Distribution Policies of Non-Profit Endowment Funds. Their comprehensive data sample was 29,892 NPOs drawn from Internal Revenue Service filings for 2009-2017. Their calculation of annual percentage investment returns for each fund was based on an assumption that inflows of gifts and bequests, as well as outflows of distributions occur halfway through the fiscal year. Thus, they calculated the return by dividing net investment gains by the beginning-of-year assets plus half of new contributions minus half of distributions. Following is a summary of their findings:

  • Within the universe of nonprofits that file with the IRS, colleges and universities accounted for 6% of the observations and 54% of the assets.
  • The typical endowment size is quite small, with a mean of $26.8 million and a median of $1.2 million, but the largest funds run into the tens of billions.
  • The “large” cohort of endowments, those worth more than $100 million, accounted for 4% of the observations and 78% of the assets. The very smallest endowments, those with asset values below $1 million, comprised 41% of the observations but only 0.5% of the assets invested.