Asset Allocation and Portfolio Performance:
Evidence From University Endowment Funds
Keith C. Brown
Lorenzo Garlappi
Cristian Tiu
Abstract
We
use a unique data set for university endowment funds to study the relationship
between asset allocation decisions and the performance of multiple asset class
portfolios. Our analysis shows that although endowments differ substantially in
their capital commitments to various asset classes, the volatility and the
associated policy portfolio returns are remarkably similar across the sample.
Moreover, while the risk-adjusted performance of the average endowment is not
reliably different from zero, more actively managed funds generate
statistically and economically significant annual alphas that are three to
eight percent greater than those for more passive endowments. This finding is
consistent with endowment managers attempting to exploit their security
selection abilities by over-weighting asset classes in which they appear to
have superior active management skills. Contrary to both efficient market
theory and prevailing industry beliefs, we find that asset allocation is not related to portfolio returns in the
cross section but does appear to indirectly influence risk-adjusted
performance.
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