Should the Endowment Model be Emulated, Given Current Times for Universities?

By Andy Daly, Managing Director, SEI November 10, 2020 May 11th, 2021 Blog Post

Opinions expressed in AGB blogs are those of the authors and not necessarily those of the institutions that employ them or of AGB.

The largest endowments—the ones that are effectively implementing the endowment model—have had almost 3 percent greater annualized returns over the past 20 years when compared to their large and midsized counterparts.(1) As large and midsized university endowments attempt to replicate the long-standing “endowment model,” the same results are just not there. If you are curious as to why, read my recent research paper “Is the Endowment Model Right for Your University?”, which looks into the reasons why the results aren’t there and why those trying to imitate the model might want to reconsider, particularly in current times.

In short, when trying to emulate the endowment model smaller universities often lack the scale and investment team depth, causing them to fall short on incorporating all of the key three tenets, a critical part of this strategy’s success.

The Critical Tenets

Even though most believe they are emulating the endowment model strategy, they might be missing these critical components.

  1. Diversification: Build the investment portfolio with diversification, based on risk factors, through broad asset classes. Typically, larger endowments have the scale to support illiquid assets through the event of a market downturn. Instead, smaller endowments likely are making decisions on asset allocation based on past performance. Even though smaller endowments think they are diversified, larger endowments allocations are set up with highly diversified underlying investment managers. Each asset class is unique with various characteristics to help maintain lower risk and the ability to ensure the right fit in the portfolio. This is especially tricky in the current environment with equity risk.
  2. Use of Alternative Asset Classes: Allocate assets away from traditional asset classes and into alternative investment strategies such as private equity, real estate, and hedge funds (and other niche, typically less liquid, strategies). An example is Yale University’s endowment. It’s often considered the “poster child” for the endowment model approach because their CIO, David Swensen, is often credited with developing and being the first known implementer of this style. Many smaller universities have tried to implement asset allocations that are similar, but differing from large endowments they cannot hold such illiquid portfolios, which can withstand fairly large downturns. Many midsized universities cannot afford this same illiquidity and volatility. Therefore, they likely maintain smaller exposure to alternative strategies.
  3. Bottom Up Portfolio Construction: Larger universities benefit from this tenet particularly as they leverage their scale and size. They can structure the portfolio with hard to access investment managers that meet the long-term strategic goals of the portfolio instead of relying on past performance. They can also negotiate underlying manager fees with their large portfolio size.

Again, please feel free to download my recent research paper “Is the Endowment Model Right for Your University?” for a detailed examination and to learn more about this topic.

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Andy Daly
Managing Director, SEI Institutional Group


(1) Source: 2019 NACUBO-TIAA Study of Endowments (NTSE) (March 2020). Large is NACUBO’s reported performance of endowments over $1 billion. Mid-Sized performance is the average of NACUBO’s reported average peer groups ranging in size from $100 million to $1 billion in assets. Information provided by SEI Investments Management Corporation, a registered investment adviser and wholly owned subsidiary of SEI Investments Company. Investing involves risk including possible loss of principal. Diversification may not protect against market risk. There can be no guarantee objectives will be achieved nor that risk can be managed successfully. Alternative investments are subject to a complete loss of capital and are only appropriate for parties who can bear that risk and the illiquid nature of such investments. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only. Certain information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its subsidiaries assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI.


Andy Daly, CFA, is a managing director in SEI’s Institutional Group.

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