The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds

51 Pages Posted: 7 Aug 2020 Last revised: 11 Sep 2020

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Egor Matveyev

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Stefan Zeume

University of Illinois at Urbana-Champaign

Date Written: November 1, 2019

Abstract

We collect tax return data from all 311,222 public NPOs in the United States over the 2009-2017 period to study the asset allocation choices and investment returns of their endowment funds. One in nine public NPOs have endowment funds. The majority of funds allocate their assets conservatively to low-risk assets, and as a result, earn an average annual return of 5.3%. There is substantial heterogeneity in investment returns across funds. Large funds significantly outperform small funds across all return measures and nonprofit sectors. Endowments in NPO sectors devoted to public and societal benefit, the environment, and the arts are among the top performers. High returns among higher education endowments are explained by size, while hospital endowments significantly underperform. Higher investment returns are associated with better governance, more highly paid management, lower discretionary spending, and lower investment management fees. Lastly, when faced with volatile contributions, endowment funds hold more cash and invest more conservatively.

Keywords: Endowment Funds, Long-term Asset Management, Governance of Nonprofit Organizations

Suggested Citation

Lo, Andrew W. and Matveyev, Egor and Zeume, Stefan, The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds (November 1, 2019). MIT Sloan Research Paper No. 6163-20, Available at SSRN: https://ssrn.com/abstract=3560240 or http://dx.doi.org/10.2139/ssrn.3560240

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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Egor Matveyev (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
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Stefan Zeume

University of Illinois at Urbana-Champaign ( email )

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Champaign, IL 61820
United States

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