Secrets of the Academy: The Drivers of University Endowment Success

Abstract

In this paper, we have sought to understand what has been the performance of university endowments, and what drives the observed pattern of performance. Our key observations are as follows: (a) the endowments of elite universities have grown dramatically faster than endowments overall; (b) initial endowment size, size of student population, student SAT scores, and membership in the Ivy Plus group are significantly correlated with endowment growth and endowment returns, but endowment returns for public and private schools are very similar; (c) there is considerable persistence of returns across the endowments, particularly among underperforming schools; and (d) alternative investments appear to play an important part in the success of the highest-return endowments, but this strategy cannot be emulated with ease. We also identify a number of unanswered questions. Three gaps in our understanding seem particularly interesting from an academic perspective, as well as practically relevant for those who run or oversee university endowments and other investment pools: the ways in which endowment offices are organized, and how these choices contribute to their success or failure; the viability of the strategies pursued by endowments going forward; and the challenges of imitation.