Study: Active Management Leads To Higher Endowment Returns

April 23, 2014       Zach Halper      

Active management of endowments is positively related to greater returns in U.S. equities over time. “An active manager is trying to beat the index by making decisions to try and deviate from the index,” said David Belmont, CFA, chief risk officer at Commonfund Institute, Wilton, Conn.

In a new report, “Does Active Management Benefit Endowment Returns?,” Belmont and Irakli Odisharia, Ph.D., Market risk director at Commonfund, made the case for the active management of endowments using data from the NACUBO-Commonfund Study of Endowments (NCSE). This means that the organization receiving the endowment would play a large role in managing the money rather than handing it off to an outside party.

More than 75 percent of respondents in the NCSE survey – which in 2013 included 835 institutions – reported that 50 percent or more of their endowments’ U.S. equity was actively managed, according to the authors. Over time, it was shown that these endowments had a greater return. Specifically, over seven-year period these same endowments had average return rates of more than 8 percent, while passively managed endowments return rates were 6 percent or less.

Another critical area in the active management of endowments is whether the organization in question has a chief investment officer (CIO). Given that the role of the CIO requires significant investment expertise, as well as day-to-day management skills, Belmont and Odisharia hypothesized that endowments with CIOs would perform better than those without one. The results of the study showed that during the seven years covered by the NCSE survey, endowments with CIOs earned an average return of 7.4 percent while those without earned 4.1 percent annually over the observation period.

While Belmont did not find these numbers particularly surprising, one aspect of the study did catch him off guard. While actively managed large endowments – those more than $500 million – were able to earn much more than smaller ones, they did not significantly outperform mid-sized endowments – those between $100 million and $500 million. Specifically, actively managed large endowments saw an average return of 9.93 percent while the return for medium-sized endowments was 6.10 percent; small endowments had an average return of 3.29 percent.

“It was surprising that the largest endowments did not significantly outperform the mid-sized ones,” said Belmont. “There seemed to be a limit to how much value you could get.” Belmont hypothesized that the reason behind this disparity was because once you have a critical mass of investment, “it doesn’t necessarily scale up at the billion dollar range.”

The Commonfund study showed that actively managing endowments can lead to what the authors called “excess returns” over time. Though they acknowledged this is slightly harder for smaller endowments, where the overhead cost of an in-house CIO might outweigh the benefit. They wrote that this can be mitigated through the use of consulting services.

You can read the full version of “Does Active Management Benefit Endowment Returns?,” for free by visiting