This three-part series examines the investing landscape for educational institutions and describes what endowments can do today to help improve investment outcomes. In Part 1, I look at the endowment model.

Part I:

Why the endowment model caught on

Academic institutions traditionally turn to investing in financial markets to boost endowments. Since the mid-1980s, the legendary Yale endowment model has been the dominant investment strategy. This strategy involves shifting significant assets from publicly traded equities and fixed income securities to hedge funds, private equities, commodities, and real estate. For Yale, the results of this strategy shift were epic. Their endowment skyrocketed and, naturally, other academic institutions jumped on the bandwagon, seeking similar gains.

Higher education has flocked to alternatives

Academic institutions of all sizes increased their alternative strategy allocations from 1986 to 2016.

Source: National Association of College and University Business Officers (NACUBO) and Commonfund Institute Study of Endowments.

There’s a catch

Unfortunately, while the shift in asset allocation worked for the early adopters, the mass rush to alternative strategies has not worked for the majority of endowments. And more recently the performance of alternatives has gone in the exact opposite direction than one would expect, given the significant increase in risk exposure vis-a-vis idiosyncratic risk, manager risk, liquidity risk, and leverage inherent to alternatives.

So why do institutions commit themselves to a model that’s not working? We’ve heard decision-makers on investment committees repeating a story that goes something like this:

“Returns from traditional asset classes will be low. Returns associated with illiquidity can provide perpetuity organizations with a much-needed lift. Talent has systematically transferred from traditional active into alternative and unconstrained approaches, so alternatives are the best if not the only way to achieve the returns we need.”

Many investment committees believe the only way to meet their goals is to pursue an alternatives strategy, despite evidence to the contrary. For example, Vanguard analysis shows that the average endowment has underperformed a globally diversified 60% equity/40% fixed income benchmark in every 10-year period since 2011.¹  This is striking given that the volatility and exposures of the average endowment today looks more like an 80/20 portfolio rather than the traditional 60/40!²

Why endowments are hurting

Endowment investment offices should take note of two important trends impacting their ability to meet their objectives—rising fees and compressing returns.

According to Callan’s 2017 Investment Management Fee Survey, endowments and foundations paid a median of 0.68% in investment fees (not including any other fees to run an endowment) up from 0.55% in 2014. This was nearly twice the fees of corporate and public plans. Why? According to Callan, the median cost for private equity was 0.87%, while private real estate and hedge funds clocked in at 0.88% and 1.49%, respectively.

While fees have risen, returns have not. Data from Empirical Research Partners from July 2008 through June 2016—a period that includes the financial crisis and bear market—shows that the returns associated with venture capital and distressed debt were equivalent to the returns of domestic equities. Private equity lagged as did equity real estate, hedge funds, energy/natural resources, and commodities/managed futures. In fact, those last four segments underperformed fixed income (commodities and managed futures were significantly negative)!³  So much for diversification! And what happened to that liquidity premium?

At one time, the outperformance of alternatives meant this was a beneficial strategy for endowments. However, now that the advantage enjoyed by early adopters has vanished and the performance gap between the highest- and lowest-performing NACUBO endowment cohorts has collapsed, this is no longer the case.

College endowment returns have declined and compressed

As this chart shows, in 2002, the highest 10-year annualized return for study participants was 12.8%. In 2017, the highest return was 5%.

Source: Vanguard using data from the NACUBO-Commonfund Study of Endowments as of fiscal year-end June 30, 2017. The top and bottom of each bar represents the median return of the best- and worst-performing NACUBO cohort as defined by endowment asset size.

Look to Vanguard for an alternative to alternatives

Colleges, universities, and private secondary schools with adequate financial resources are more stable and resilient, and can better serve the expectations of faculty, students, and other stakeholders. We understand the critical role endowments play in academic institutions of all sizes. This is why as an Outsourced CIO, Vanguard has developed proven strategies to help academic institutions be better stewards of endowment income.

In the next segment of this three-part series, I’ll dig deeper into the fundamental changes in the marketplace that have undermined the performance of alternative strategies. In the last installment, I’ll describe the approach Vanguard employs as a fiduciary that can help institutions attain their financial goals.

Stay tuned.

To learn more about Vanguard’s outsourced CIO services for nonprofits visit our nonprofit solutions site to submit an RFI, or contact your local Nonprofit Solutions Director at 888-888-7064 or

¹ Source: Vanguard using data from NACUBO. Total institutions underperformed by these percentages for each 10-year period: 2011 0.14%, 2012 0.37%, 2013 0.12%, 2014 0.29%, 2015 0.46%, 2016 1.05%, and 2017 0.98%. 60/40 benchmark is 42% U.S. equity, 18% non-U.S. equity, and 40% U.S. fixed income, U.S. equity is represented by the Wilshire 5000 Total Market Index before 5/31/2003 and the MSCI U.S. Broad Market Index since. Non-U.S. equity is represented by the MSCI World Ex USA Index before 12/31/1995 and the MSCI ACWI Ex USA since. U.S. fixed income represented by the Bloomberg Barclays U.S. Aggregate Bond Index before 12/31/2009 and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index since.  The volatility of the 60/40 benchmark is materially different from that of the NACUBO institutions’ portfolios.  NACUBO institutions’ may have had during the time periods noted above, and may currently have, investment objectives that are not consistent with the 60/40 benchmark.

² Stated allocations of the 812 endowments in the NACUBO-Commonfund Study of Endowments were 35% equity; 13% fixed income and cash; 52% alternatives. Without access to individual portfolios, of the 52% in alternatives, we assume equal allocations across private equity, marketable strategies, venture capital, private equity real estate, energy/natural resources, commodities/managed futures, and distressed debt. Using the reported returns of participating endowments, we calculated the average volatilities of each asset class. Based on these calculations we found that private equity, venture capital, real estate, and commodities/managed futures each were as volatile as equities over the last eight years while energy/natural resources and distressed debt were more similar to an 80/20 portfolio and marketable securities averaged about as much volatility as a 60/40 portfolio. Using these allocations as proxies we found that the volatility weighted asset allocation for the average endowment was 79% equities and 21% fixed income/cash.

³ Empirical Research Partners showed domestic equities and venture capital returned just under 8%. Private equity returned under 7%, hedge funds under 3%, energy and natural resources under 1% and commodities and managed futures under negative 5%.


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  • The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.  A portfolio of actual index funds would be subject to fees and expenses that do not apply to indexes.  Past performance is no guarantee of future results.
  • Advice services offered through Vanguard Institutional Advisory Services® are provided by Vanguard Advisers, Inc., a registered investment advisor.
  • NACUBO stands for the National Association of College and University Business Officers. The 2017 NACUBO-Commonfund Study of Endowments® (NCSE) shows data gathered from 809 U.S. colleges and universities.
  • The NACUBO institutions’ portfolios performance was reported to NACUBO voluntarily by NACUBO member institutions and the performance reported may have been affected by changes in conditions, objectives, or investment strategies during the time period of performance displayed. Seventy-nine percent of study participants reported rebalancing at least once in 2017.
  • NACUBO portfolios performance is net of fees. The fees deducted from NACUBO portfolios include: (i) management fees paid to direct asset managers for investment and management services excluding performance fees which can vary widely and may not be indicative of expected rates for a given period; (ii) fund-of-fund fees, which represent aggregate blended management fee rates paid directly to fund-of-fund providers; (iii) advisory fees, which may include consulting fees in addition to fees for investment advisor services; (iv) fund operating expenses; and (v) custody fees. The NACUBO Report notes that individual institutions may pay more or less in fees than is represented by the performance figures set forth above and that NACUBO’s fee deduction method is intended to provide a representation of average fee levels rather than what any individual institution pays.