Investment Returns and Distribution Policies of Non-Profit Endowment Funds

Investment Returns and Distribution Policies of Non-Profit Endowment Funds

Sandeep Dahiya, David Yermack

Series number :

Serial Number: 
582/2018

Date posted :

November 27 2018

Last revised :

March 23 2019
SSRN Share

Keywords

  • non-profit endowments • 
  • institutional investors

We present the first estimates of investment returns and distribution rates for U.S. non-profit endowment funds, based on a comprehensive sample of 29,892 organizations drawn from Internal Revenue Service filings for 2009-2017, a period that saw a sharp drop followed by a lengthy appreciation in public equity values.

Nonprofit endowments badly underperform market benchmarks during our sample period. Holding a zero investment portfolio (long endowment and short 60-40 mix of U.S. equity and Treasury bond indexes) generates a mean negative 3.61 annual return. Regression estimates in four-factor models find statistically significant alphas of -1.12% per year. Smaller endowments have less negative alphas than larger endowments, but all size classes significantly underperform. Distribution ratios are conservative, well below the funds’ long-run returns. Donors increase contributions when endowment returns are strong, with an elasticity of about 0.18 between net-of-market investment returns and new donations.

 

Authors

Real name:
Sandeep Dahiya