Asset Allocation and Portfolio
Performance: Evidence From University Endowment Funds
Keith C. Brown
Lorenzo Garlappi
Cristian Tiu
Abstract
We use university endowment funds to
study the relationship between asset allocation decisions and performance in
multiple asset class portfolios. Although endowments differ substantially in
asset class composition, policy portfolio returns and volatilities are remarkably
similar across the sample. The risk-adjusted performance of the average
endowment is negligible, but actively managed funds generate significantly
larger alphas than passive ones. This is consistent with endowment managers exploiting
their security selection abilities by over-weighting asset classes in which
they have superior skills. Contrary to both theory and prevailing beliefs,
asset allocation is not related to
portfolio returns in the cross-section but does indirectly influence
performance.
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