theglobeandmail.com
Large Endowment Funds Underperform Benchmark, Alternative Investments Lag
Chartered financial analyst Richard Ennis's study shows that large US college endowment funds underperformed their benchmark index by an annualized 2.4% yearly from 2009 to 2024; higher exposure to alternative investments correlated with worse returns due to high management fees.
- What are the key findings of Richard Ennis's research on the performance of large US college endowment funds, and what are the immediate implications for investment strategies?
- A recent study by chartered financial analyst Richard Ennis reveals that large US college endowment funds underperformed their benchmark index by an annualized 2.4 percentage points over 16 years (2009-2024). This underperformance was particularly pronounced among funds with higher exposure to alternative investments. The findings suggest that even sophisticated investors with significant resources may not consistently benefit from alternative investment strategies.
- How does the level of exposure to alternative investments correlate with the performance of the endowment funds studied, and what are the underlying reasons for this correlation?
- Ennis's research, which analyzed over US \$1 billion endowment funds, demonstrates a negative correlation between exposure to alternative investments and excess returns. High management fees (2-2.5% of NAV) significantly reduce the net benefit to investors. This challenges the common assumption that alternative investments consistently outperform traditional equity markets.
- What are the potential long-term implications of this research for the asset allocation strategies employed by institutional investors and the future attractiveness of alternative investments?
- The study's findings imply that individual investors who lack access to alternative investments may have been better off. The persistent underperformance of these investments, coupled with high fees, suggests that a simple equity index fund strategy might have yielded superior returns for the large endowment funds analyzed over the past 16 years. This trend raises questions about the long-term viability and overall value proposition of alternative investments for institutional and individual investors.
Cognitive Concepts
Framing Bias
The headline and introduction frame the narrative to suggest individual investors are better off avoiding alternative investments because large endowment funds underperformed. This framing selectively emphasizes the negative performance of alternative investments while downplaying the fact that even large endowments invest in a variety of assets. The article's structure prioritizes evidence supporting the conclusion that alternative investments are unprofitable, potentially leading readers to overgeneralize from a specific data set.
Language Bias
The article uses language that subtly favors the conclusion that alternative investments are poor choices. Phrases like "dodged a bullet," "losing proposition," and "exotic opportunities" carry negative connotations. More neutral alternatives could include: Instead of "dodged a bullet," use "avoided potential losses." Instead of "losing proposition," use "underperformed." Instead of "exotic opportunities," use "alternative investments.
Bias by Omission
The article focuses heavily on the underperformance of large endowment funds, but omits discussion of potential benefits of alternative investments beyond the mentioned smoothing effect and high management fees. It does not explore if other strategies using alternative investments might yield better results, or if these funds had different investment goals beyond simple benchmark tracking. The omission of these perspectives might mislead readers into believing alternative investments are universally unprofitable.
False Dichotomy
The article presents a false dichotomy by implying that the only two choices are investing in equities or alternative investments. It overlooks other asset classes and diversified investment strategies that might offer better risk-adjusted returns. The framing ignores the complexities of portfolio management and the potential benefits of a balanced approach.
Sustainable Development Goals
The article highlights that large endowment funds, which often represent significant wealth concentration, underperformed a simple index fund strategy. This suggests that current investment strategies may not be effectively addressing wealth inequality, and a simpler, more equitable approach might yield better results for a broader range of investors.