When finance professor Brad Barber’s investment subcommittee was tasked with deciding how to invest the endowment of the University of California, Davis, he quickly found that “there was really very little evidence on the performance of endowments.” Barber and Guojun Wang, a PhD student at UC Davis, set out to collect data to fill the void. They analyzed their results in an article for the September/October 2013 issue of the Financial Analysts Journal, titled “Do (Some) University Endowments Earn Alpha?” I talked to Barber about his research for our ongoing FAJ author interview series.
He and Wang looked at annual returns for endowments from 1990 to the present, which they analyzed for “unusual performance among the Ivy League or top SAT” institutions to learn “what the factors were that might explain the differences in performance.” Barber and Wang also looked at performance persistence for all institutions.
Their findings indicate that elite institutions do generally outperform their peers, but Barber notes that there is a reasonable explanation for this result. He says that the most striking result of his study is that “the average returns on endowments over the 21-year period we analyzed are within 4 bps of a 60/40 allocation. . . . So the average endowment really would have performed just as well by buying an index fund in stocks and bonds.”
To hear Barber discuss the results of his research and what he thinks they mean for endowments going forward, listen to the full interview above or download the MP3.
CFA Institute members can access the full article on the CFA Publications website.
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