Secrets of the Academy: The Drivers of University Endowment Success

by Josh Lerner, Antoinette Schoar & Jialan Wang

Overview — University endowments are important and interesting institutions both in the investing community and society at large. They play a role in maintaining the academic excellence of many universities that rely heavily on income from their endowments. In contrast, poor finances can undermine a school's ability to provide academic services altogether. Endowments have also received much attention recently for their superior investment returns compared with other institutional investors. In this study, the authors document the trends in college and university endowment returns and investments in the United States between 1992 and 2005. Key concepts include:

  • Many unanswered questions remain about university endowments.
  • Results suggest that endowment sizes are skewed, with the rich universities getting richer while other schools fall behind.
  • Much of the growth in endowment size has been driven by investment performance. The top endowments posted impressive returns in 2005, averaging a net real return of 12.3 percent compared with 4.4 percent posted by the Standard & Poor's 500 index in the same year.
  • Across endowments, institutional characteristics such as endowment size and admissions selectivity are better predictors of success than the allocation to risky asset classes. Moreover, top endowments seem to possess superior asset selection ability beyond their strategies for allocating funds to certain asset classes.
  • Ordinary investors could not necessarily achieve similar results by mimicking the strategies of top endowments. Indeed, the same strategies that have worked so well for the endowments in the past two decades may not do so in the future.

Author Abstract

In recent years, university endowments have received much attention for their spectacular returns and innovative investment strategies, but few papers have examined trends in the endowment sector at large. In this paper, we analyze a sample of 1,300 educational endowments between 1992 and 2005. A striking phenomenon emerges of the "rich getting richer," a dramatic widening of the size gap between the largest endowments, led by the Ivy League, and the average endowment. Growth in endowment size has been driven largely by high investment returns, which are in turn related to the quality of the student body and the use of alternative assets. Elite endowments seem to benefit not only from economies of scale in investment management, but genuine skill and expertise in choosing the right investments at the right times.

Paper Information