Endowments consistently underperform their benchmarks, a new research paper issued by the National Bureau of Economic Research said.
The paper, Investment Returns and Distribution Policies of Non-Profit Endowment Funds, written by Sandeep Dahiya from Georgetown University's McDonough School of Business and David Yermack from New York University's Stern School of Business, estimates endowments' median annual returns are 5.53 percentage points below a 60/40 mix of U.S. equity and Treasury bond indexes and the endowments have statistically significant alphas of -1.01% per year. These estimates are based on data from more than 28,000 organizations drawn from IRS filings for 2009-2016.
The report contends that although smaller endowments tend to produce less negative alpha than larger ones, all size classes still significantly underperform. Higher education endowments, the majority of the $700 billion asset class, perform substantially worse than endowments in other sectors.
Distribution ratios, meanwhile, are conservative, well below the funds' long-run returns.