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DISCUSSION PAPER PI-1007

ASSET ALLOCATION AND PORTFOLIO PERFORMANCE: EVIDENCE FROM UNIVERSITY
ENDOWNMENT FUNDS

Keith C. Brown, Lorenzo Garlappi and Cristian Tiu

We use a unique data set for university endowment funds to study the relationship between asset
allocation decisions and the performance of multiple asset class portfolios. Our analysis shows that
although endowments differ substantially in their capital commitments to various asset classes,
the volatility and the associated policy portfolio returns are remarkably similar across the sample.
Moreover, while the risk-adjusted performance of the average endowment is not reliably different
from zero, more actively managed funds generate statistically and economically significant annual
alphas that are three to eight percent greater than those for more passive endowments. This find-
ing is consistent with endowment managers attempting to exploit their security selection abilities
by over-weighting asset classes in which they appear to have superior active management skills.
Contrary to both e±cient market theory and prevailing industry beliefs, we find that asset alloca-
tion is not related to portfolio returns in the cross section but does appear to indirectly influence
risk-adjusted performance.

JEL Classification Codes: G11; G23

Keywords: Endowment funds; Asset allocation; Investment performance