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Do (some) University Endowments earn Alpha?

In plain English this translates to – Do the professionals manage to do better than the indices? Every quarter the Financial Analyst Journal lands on my doorstep and without fail I read it cover to cover. Over the years it has provided a ton of academic evidence that supports our investment philosophy but I have never commented on it. A few weeks back the latest edition arrived and the most interesting article within was a paper discussing whether professional money managers actually deliver risk adjusted returns above the benchmarks.

The authors (Brad Barber & Guojun Wang) analysed returns of hundreds of US educational establishments over a 21 year period ending in 2011. Their conclusions were as follows:

    1. The average endowment earns an alpha close to zero – the stock and bond benchmarks together explain 99% of the time-series variation in the return. These results are consistent with the notion that market movements rather than asset allocation are the most important determinant of time-series variation in performance.
    2. Elite Institutions do earn positive alphas when compared to a simple stock and bond portfolio however when one includes alternative indexes into a stock and bond portfolio these Elite Institutions show an alpha that is indistinguishable from zero.
    3. These results indicate that the asset allocation of elite institutions and top performing funds are the most important determinant of their superior returns over the last two decades.
    4. The results failed to provide evidence that some combination of manager selection, market timing and tactical asset allocation generates alpha for investors.

So there we have it. One swallow (piece of research) doesn’t make a summer but it is worth listening to David Swenson (2009, p48) who summarises the challenge facing endowment management as well:

“In spite of the daunting obstacles to active management success, the overwhelming majority of market participants choose to play the loser’s game. Like the residents of Lake Wobegon who all believe their children to be above average, nearly all investors believe their active strategies swill produce superior results. The harsh reality of the negative-sum game dictates that, in aggregate, active managers lose to the market by the amount it costs to play in the form of management fees, trading commissions and dealer spread. Wall Street’s share of the pie defines the amount of performance drag experienced by would-be market beaters.”


James Sellon
Managing Partner

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