The Troves of Academe: Asset Allocation, Risk Budgeting and the Investment Performance of University Endowment Funds
Keith C. Brown, Texas
Lorenzo Garlappi, Texas
Cristian-Ioan Tiu, SUNY-Buffalo

We use a unique data set for university endowment funds to study the relationship between asset allocation decisions and the performance of multiple asset class portfolios. Our analysis shows that although endowments differ substantially in their capital commitments to various asset classes, the volatility and the associated policy portfolio returns are remarkably similar across the sample. Moreover, while the risk-adjusted performance of the average endowment is not reliably different from zero, more actively managed funds generate statistically and economically significant annual alphas that are three to eight percent greater than those for more passive endowments. This finding is consistent with endowment managers attempting to exploit their security selection abilities by over-weighting asset classes in which they appear to have superior active management skills. Contrary to both efficient market theory and prevailing industry beliefs, we find that asset allocation is not related to portfolio returns in the cross section but does appear to indirectly influence risk-adjusted performance.

Academic endowment funds represent a large and growing fraction of institutionally managed investment funds. This research will examine how these funds make investment allocation decisions. Investment managers will be interested in these results because they serve this market and because these decisions can be large enough to affect the market. Donors and the endowments themselves also will have a strong interest in the results as stakeholders in these funds.