The Modern Endowment Story: A Ubiquitous US Equity Factor

Abstract

The endowment model, presumed to be a paradigm of value-adding asset class diversification, is a thing of the past. Large educational endowment funds in the United States have heavily concentrated their investments—public and private—in ones that are moderately to highly correlated with the Russell 3000 Index. In this article, the author estimates that large endowments have underperformed by 2.24%–2.5% per year during the 13 years ending June 30, 2021. The author estimates that their annual cost of investing is approximately 2.5% of asset value. Given the extreme diversification of the composite, which comprises more than 100 large endowment funds with an average of more than 100 investment managers each, there is every reason to believe that cost is the principal cause of endowments’ poor performance. During the most recent five to seven years, which the author refers to as the Modern Era, endowments have exhibited an effective US equity exposure of 97% of asset value, with frictional cash accounting for 3%. The overwhelming exposure to the US equity market raises important strategic questions related to risk tolerance and diversification for trustees and fund managers.