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

58 Pages Posted: 23 Apr 2007 Last revised: 14 Jul 2008

Keith C. Brown

University of Texas at Austin - Department of Finance

Cristian Ioan Tiu

University at Buffalo; TIAA Institute

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Date Written: August 8, 2007

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 "passive" 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.

Keywords: Endowment funds, Asset allocation, Return attribution, Investment performance

JEL Classification: G11, G23

Suggested Citation

Brown, Keith C. and Tiu, Cristian Ioan and Garlappi, Lorenzo, The Troves of Academe: Asset Allocation, Risk Budgeting, and the Investment Performance of University Endowment Funds (August 8, 2007). McCombs Research Paper Series No. FIN-03-07. Available at SSRN: https://ssrn.com/abstract=981436 or http://dx.doi.org/10.2139/ssrn.981436

Keith C. Brown (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6520 (Phone)
512-471-5073 (Fax)

Cristian Ioan Tiu

University at Buffalo ( email )

238 Jacobs Management Center
Jacobs Hall, North Campus
Buffalo, NY NY 14260
United States
7166453299 (Phone)

TIAA Institute ( email )

8500 Andrew Carnegie Blvd
E3/S8
Charlotte, NC 28262
United States

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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