Invisible Hand

The NACUBO Study 2017 Update: $52 Billion Missing From Universities and Endowments

Invisible Hand

You may think that college endowments, with all their access to academic knowledge and brainpower, would outperform portfolios composed of index funds. Unfortunately, this is simply not the case.

Take a look at the chart below from the National Association of College and University Business Officers (NACUBO), which is an organization with membership totaling more than 2,500 U.S. colleges and universities. In part, NACUBO provides comprehensive annual data that reports on the financial status of university endowments, and is the industry standard for such information.  The specific IFA Index Portfolios were selected based on the average asset allocations of equities and fixed income/cash equivalents, as provided by NACUBO.

For all asset levels shown, the comparable IFA Index Portfolios outperformed the average endowment's return. This suggests that IFA has a better set of benchmarks than those probably used by these institutions. Additionally, the IFA Index Portfolios' returns were derived as a result of global diversification, asset class weighting, investment transparency, and no use of speculation or leverage.

The passive rebalancing of IFA Index Portfolios is a very low cost and low maintenance investment strategy that minimizes the need for in-house investment staff, board member involvement, consultant involvement and the time consuming, useless and costly process of manager selection and termination.

In terms of overall economic significance, the average endowment would have earned $0.11 more on every dollar invested utilizing an IFA Index Portfolio over the 10-year period ending 06/30/2016. With average asset size of an endowment hovering around $640 million, this would correspond to an additional $65 million in additional value over the 10-year period for each institution. With 805 institutions included in the most recent NACUBO study, this equates to an additional $52.3 billion in market value. Think about how much further each academic institution could carry its mission with that much money whether it is scholarships to students, research studies, or expansion of current and establishment of new departments. Once you frame the decision in this light, you can see the real societal impact of not pursuing an investment strategy rooted in the same academic acumen that these institutions are committed to expanding.