Research on Performance at Nonprofit Endowments

When it comes to investment management fees, you don’t necessarily get what you paid for.

One of our key findings is that higher fees are negatively related to net investment returns. Organizations that manage their endowment funds on their own earn lower net investment returns compared to those using advisors. Organizations that use advisors and pay higher fees as a percentage of AUM tend to earn lower net returns. Since both returns and fees are negatively related to fund size, it is possible that size drives both fees and returns. To understand further how fees are related to returns, we perform two analyses. First, we regress returns on fees, while controlling for fund size as well as sector-by-year fixed effects. Second, we use sector-by-size-adjusted returns and regress them on investment management fees. In both cases, we find strong negative relationships between fees and net investment returns. In other words, nonprofits that pay higher investment fees for the management of their funds tend to earn lower investment returns.

The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds

How do endowments classify the separate asset classes in their portfolio?

Due to the unstructured nature of asset reporting, we manually classify all reported assets into several broad asset classes: (1) public equity; (2) fixed income; (3) private equity; (4) cash instruments; (5) hedge funds; (6) real estate; (7) real assets and real return; (8) trusts; and (9) cooperative investments. The “cash instruments” category includes cash, investments in money market funds, certificates of deposit, and annuities. Absolute return investments are classified under “hedge funds,” while the “real estate” category includes real estate investment trusts (REITs) and infrastructure investment funds. The “Real assets and real return” category includes natural resources, commodities, other physical assets, as well as inflation-protected government bonds. This category also includes real-asset and real-return funds, which have the stated objective of generating stable, low volatility return in excess of inflation. Finally, “cooperative investments” include federal credit unions, rural electric cooperatives, and credit union service organizations. We further break down public equity into four additional categories: (i) individual securities; (ii) pooled investment vehicles, such as mutual and exchange-traded funds; (iii) international equity in developed markets; and (iv) emerging markets equity.

Read more about the research on nonprofit endowments here.

What Drives Outperformance at Endowments & Foundations, Institutional Investor

Crystal Bridges Museum of American Art in Bentonville, Arkansas.
Photo by Mick Haupt on Unsplash

Post by Marcelino Pantoja