Abstract
University endowments with broad portfolio diversification have been correlated with performance, but committees’ decision-making process has received relatively little attention. This study is unique in postulating that the committee’s learning commitment and open-mindedness are significant contributors to a decision process that is based on the principles of Modern Portfolio Theory (or, simply, Portfolio Theory). The use of Portfolio Theory as a decision-making framework leads to greater portfolio diversification, which, in turn, leads to higher risk-adjusted returns. This study also demonstrates that greater committee expertise across multiple asset classes contributes to more diversified portfolios.
Highlights
Starting with Harry Markowitz in the early 1950s, studies in finance have demonstrated how diversified investment portfolios contribute to risk-adjusted performance (Markowitz 1952, 1959; Rubenstein 2006; Fabozzi et al 2007; Elton et al 2010)
Studies in behavioral finance have explored investor characteristics and behaviors that affect their personal portfolios (Kahneman and Tversky 2000; Thaler 2005; Barber and Odean 2008; Goetzmann and Kumar 2008; Statman 2010), relatively little is known about group behaviors or norms that affect portfolio allocations and performance for institutional investment portfolios
The current study, while recognizing the value of factors mentioned above, differs from other university endowment research in its focus on the inner-workings of the committee, and with regards to group norms that affect how members value the importance of continual learning and how they use open-minded dialogue and Portfolio Theory principles to help make asset allocation decisions
Summary
Starting with Harry Markowitz in the early 1950s, studies in finance have demonstrated how diversified investment portfolios contribute to risk-adjusted performance (Markowitz 1952, 1959; Rubenstein 2006; Fabozzi et al 2007; Elton et al 2010). This study examines how the diversity of investment expertise among committee members, in conjunction with norms of a learning commitment and open-mindedness, contribute to a decision-making process that influences portfolio diversification and performance. Annual studies of college and university endowments by the National Association of College and University Business Officers (NACUBO 1990–2008) demonstrate a positive correlation between size and performance Large endowments, it is argued, have greater resources to hire talented investment professionals and greater access to top managers, in alternative asset classes (Lerner et al 2008). The current study, while recognizing the value of factors mentioned above, differs from other university endowment research in its focus on the inner-workings of the committee, and with regards to group norms that affect how members value the importance of continual learning and how they use open-minded dialogue and Portfolio Theory principles to help make asset allocation decisions.
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