Changes in the Portfolio Allocation of Private Colleges' Endowments: Recent Trends and Implications for Relative Investment Performance

Over the past fifteen years, many U.S. colleges have engaged in a substantial reallocation of their endowment investment portfolios, reducing the share allocated to U.S. stocks and bonds and raising the share allocated to alternatives investments including hedge funds, venture capital, private equity, natural resources, and real estate. The present study, while affirming the presence of an overall reallocation trend, emphasizes the variation that exists among colleges in the extent of reallocation and its impact on investment performance. As has been widely reported, more highly-endowed private colleges have tended to move earlier and more extensively to an alternatives allocation. That pattern has persisted from 1995 to 2007 with some evidence of an increasing divergence among colleges of different endowment sizes in their alternatives allocation. Also as has been widely reported, more highly-endowed private colleges have tended to earn higher cumulative investment returns than less highly-endowed private colleges from 1995 to 2007. Dividing the overall time period into three four-year periods, this tendency is more apparent from 2000 to 2003 and from 2004 to 2007 and less apparent (though still present to a more limited degree) from 1996 to 1999. Some of the impact of endowment size is realized through more highly-endowed colleges' tendency to invest more extensively in alternative assets. Investing more highly in alternatives has a positive effect from 2000 to 2003 and from 2004 to 2007 but actually tends to suppress investment returns from 1996 to 1999. Thus, any analysis of the impact of endowment size and alternatives allocation on investment returns must be sensitive to variation across different years.