| Abstract: | Private foundations control a sizable pool of investment capital. This paper examines the endowment returns of private foundations. Over the 10‐year period, 2006–2015, the top 56 of these organizations fully embraced the “Yale model” of portfolio construction. As a group, they substantially cut allocations to publicly traded stocks and bonds in favor of illiquid alternatives that supposedly offered higher returns and lower volatility. Despite pursuing risky investments in illiquid alternative assets, our study concludes that the foundations were not “paid” for illiquidity in terms of a meaningfully return premium (vs. public markets). Moreover, their annual return volatility, or risk, was similar to either a 60–40 composite index portfolio or a typical public pension plan, both of which had lower equity‐type exposure and greater liquidity. The implication is that foundations can achieve the same returns with better liquidity and/or lower risk with passive investments in broad index mutual funds or similar vehicles. In addition, we estimate the third‐party money management fees of the top foundations to equal 1.43% of the assets for the fiscal year 2016. This 1.43% is a sizable number when compared to the 5% of assets (including overhead expenses) that the federal government requires that foundations distribute each year in furtherance of their charitable missions. |
