Despite posting a 9.6% return in fiscal 2024, large US college and university endowments once again fell short of market benchmarks — by a staggering 9.1 percentage points. The culprit? A combination of return smoothing and persistent structural underperformance. As the data shows, over the long term, endowments heavily invested in alternatives are falling well behind low-cost indexed portfolios. This post breaks down why and what the numbers really reveal about endowment strategy since the global financial crisis (GFC).
The Data Is in
The National Association of College and University Business Officers (NACUBO) recently released its annual survey of endowment performance. Funds with greater than $1 billion in assets had a return of 9.6% for the fiscal year ended June 30, 2024. A Market Index, the construction of which is based on US endowment funds’ typical market exposures and risk (standard deviation of return), returned 18.7%. That endowments underperformed their market index by a whopping 9.1 percentage points is a result that needs interpretation.
Vexing Valuations
Fiscal 2024 was the third consecutive year in which endowment returns were visibly distorted by return smoothing. Return smoothing occurs when the accounting value of assets is out of sync with the market. Exhibit 1 illustrates the effect. The endowment returns for fiscal years 2022, 2023, and 2024 were greatly attenuated relative to the Market Index.
The US stock and bond markets declined sharply in the final quarter of fiscal year 2022. Private asset net asset values (NAVs) used in valuing institutional funds at year-end 2022 did not reflect the decline in equity values. This was caused by the practice of using NAVs that lag by one or more quarters in portfolio valuations. The equity market rose sharply the following year, and once again marks for private assets lagged as NAVs began to reflect the earlier downturn. This pattern repeated itself in 2024. The overall effect was to dampen the reported loss for 2022 and tamp down gains in 2023 and 2024. (See shaded area of Exhibit 1.) The pattern of distortion appears to have largely run its course in 2024.
Exhibit 1: Performance of Endowments with Greater than $1 Billion in Assets.
Dismal Long-Term Results
Notably, the long-term performance of large endowments is unaffected by recent valuation issues. The annualized excess return of the endowment composite is -2.4% per year, in line with past reporting by yours truly. Exhibit 2 shows the cumulative effect of underperforming by that margin over the 16 years since the GFC. It compares the cumulative value of the composite to that of the Market Index.
The typical endowment is now worth 70% of what it would have been worth had it been invested in a comparable index fund. At this rate of underperformance, in 12 to 15 years the endowments will be worth half what they would have been worth had they indexed.
Exhibit 2 also illustrates the impact that return smoothing had on results for the final three years — an apparent sharp performance gain in 2022 resulting from return smoothing, followed by two years of reckoning.
Exhibit 2: Cumulative Endowment Wealth Relative to Market Index.
Parsing Returns
I examine the performance of five NACUBO endowment-asset-size cohorts (Figure 3). These are fund groupings that range from less than $50 million in assets to more than $1 billion.
Stock-bond mix explains a lot. Exhibit 3 shows that large funds invest more heavily in equities and earn higher total returns, accordingly. Ninety to 99% of the variation in total return is associated with the effective stock-bond allocation. There is nothing new here. (See, for example, Brinson et al., 1986). Excess return is the difference between total return and a market index based on the respective stock-bond allocations, as illustrated in Exhibit 1. All the excess returns are negative.
Exhibit 3: Parsing Returns (fiscal years 2009 to 2024).
| Cohort | Effective Stock-Bond Allocation | Annualized Total Return | Percent of Total Return Variance Explained by Asset Allocation (R2) | Excess Return |
| 1 <$50 million | 68-32% | 6.0% | 99% | -1.2% |
| 2 $51 – 100 | 71-29 | 5.8 | 99 | -1.4 |
| 3 $101 – 500 | 76-24 | 6.0 | 97 | -1.9 |
| 4 $501 – 1000 | 80-20 | 6.5 | 94 | -2.3 |
| 5 >$1000 million | 83-17 | 6.9 | 90 | -2.4 |
Alts Explain the Rest
Exhibit 4 shows the relationship of excess returns and the average (over time) allocation to alts for the five NACUBO endowment-asset-size cohorts. The relationship between them is inverse. For each percentage point increase in alts exposure, there is a corresponding decrease of 28 basis points in excess return. The intercept is -0.9%. Ninety-two percent of the variation in excess return (R2) is associated with the alts exposure. This tells us that, of the small percentage of return variation that goes unexplained by traditional asset allocation, 92% is explained by exposure to alts.
Exhibit 4: Relationship of Excess Returns and Exposure to Alts.
Why have alts had such a perverse influence on performance? The answer is high cost. I estimate the annual cost incurred by Cohort #5 funds has averaged 2.0% to 2.5% of asset value, the vast majority of which is attributable to alts.
A Simple Story
If you can tolerate the risk, allocating to equities pays off over time. Allocating to alts, however, has been a losing proposition since the GFC. And the more you own, the worse you do.
It is a pretty simple story, really.
