HBS Study Shows University Endowments Weather Market Turmoil

Despite the market turmoil of the past year, university endowments have tended to perform well, an unusual point explored in a new Harvard Business School study.

“Secrets of the Academy: The Drivers of University Endowment Success”—a study written by Business School professor Josh Lerner, MIT professor Antoinette Schoar, and MIT doctoral student Jialan Wang—found an “increasing skewness of endowment sizes,” as rich universities continue to outperform less wealthy academic institutions.

“Previous work that Antoinette, [Kellogg School of Management Professor] Wan Wong, and myself had done had highlighted the fact that endowments were much savvier private equity investors than other institutions,” Lerner said in an interview.

“This suggested the desirability of understanding what was the ‘secret sauce’ that endowments have.”

The study proposes that one explanation for the discrepancy might be the caliber of students—and therefore alumni—that wealthier schools attract.

“High-quality alumni may end up in more influential positions after graduation, which may lead to more effective investment committee members or to more access to funds,” Lerner said.

“In addition, many endowments have found their alumni to be a source of recruits. Once again, having a stronger pool of students to recruit from could be a real advantage.”

Lerner also pointed out that some richer university endowments have partnered with outside financial institutions to increase returns.

“Many university endowments do not do direct investments in alternatives, but instead invest in venture, buyout, real estate, and hedge fund partners,” Lerner said.

“There are many examples of great partnerships where university endowments have invested, such as Sequoia Capital, a venture firm, and Bain Capital, a buyout firm.”

But Lerner said the reason some universities perform better than other non-university institutional investors remains unclear.

“We don’t have the definitive answer,” Lerner said.

“At the end of the paper, we suggest several possible explanations—longer time frames, lower staff turnover, more rigorous self-examination, and more effective investment committees.”

As for next steps, the researchers are analyzing the asset allocation and subsequent performance of sovereign wealth funds, which Lerner noted are basically as “endowments for entire countries.”

—Staff writer Prateek Kumar can be reached at