The Troves of Academe: Asset Allocation, Risk Budgeting, and the Investment Performance of University Endowment Funds

Abstract

In this paper we investigate the role of asset allocation in the performance of college and university endowment funds. Our analysis is based on a comprehensive dataset detailing the investment practice and performance of these institutional investors from 1984 to 2005. Despite their ability to implement relatively unrestricted investment strategies, and despite a wide heterogeneity in the asset allocation weights deployed, we find that the university endowments in our sample hold remarkably similar levels of asset allocation, or risk. We argue that this self-imposed passive risk budget is ultimately hurting the performance of funds that are less committed to active management. We test this hypothesis and find strong support in the data. After developing and calibrating a simple risk-budgeting model, we also document that the average endowment seems to have under-utilized its active management abilities in favor of a more passively oriented portfolio.