Poor endowment investment performance costing America's charities billions

Dunster House clock tower at Harvard University. Harvard's $50 billion endowment is among many American charitable institutions that consistently underperform simple, low-cost index fund strategies despite access to sophisticated investment resources.

A comprehensive study of nearly 375,000 American charities reveals that endowment investment performance systematically destroys billions in donor funds through excessive fees, poor asset allocation, and governance failures.

The research exposes how even sophisticated institutions with professional management consistently underperform simple benchmark portfolios — offering crucial lessons for charity trustees worldwide who must maximise every dollar for their missions, and individual investors seeking to avoid the same wealth-destroying mistakes.

The Metropolitan Museum of Art manages a $1.5 billion endowment. Harvard University oversees $50 billion. These institutions employ teams of investment professionals, pay millions in advisory fees, and have access to the most exclusive investment opportunities on the planet.

Yet new research reveals that most of these sophisticated investors are systematically destroying wealth through basic mistakes that mirror the errors plaguing individual portfolios and charitable endowments worldwide.

A comprehensive analysis of 374,351 American nonprofit organisations spanning 13 years has uncovered a $20 billion underperformance disaster hiding in plain sight. The findings expose how even institutions with unlimited resources consistently make the same wealth-destroying decisions that individual investors struggle with daily: overpaying for advice, chasing individual securities, and allowing poor governance to undermine returns.

The implications extend far beyond American charitable organisations. These institutional failures provide a stark warning for charity trustees and endowment managers globally about what happens when investing becomes needlessly complex and offer a blueprint for avoiding similar wealth destruction across all types of portfolios.

The $20 billion endowment investment performance crisis

The scale of endowment investment performance failures across America's nonprofit sector is breathtaking. Endowment funds collectively underperformed a straightforward portfolio allocation — 40% US equities, 20% international equities, 20% investment-grade bonds, 10% real estate, and 10% cash — by approximately 20 percentage points cumulatively over the 2008-2020 period (Lo, Matveyev, & Zeume, 2025).

This wasn't a marginal disappointment. The average endowment delivered net annual returns of just 4.3%, whilst the simple benchmark earned 6.7%. Over a typical investment horizon, this gap compounds into wealth destruction measured in billions.

The underperformance becomes more severe as fund size decreases. Analysis reveals that 82% of smaller endowments hold excessive allocations to cash and fixed income despite having long investment horizons that should favour growth assets. The smallest funds (those managing less than $1 million) allocated 20.2% to cash and 11.3% to bonds, compared to just 1.8% and 2.2% respectively for the largest institutions.

The systematic nature of this size-performance relationship becomes clear when examining the data across fund categories. As shown in the chart below, both absolute returns and risk-adjusted performance decline monotonically as endowment size decreases. The largest funds achieved net annual returns of 4.73% with a Relative Sharpe Ratio of 0.943, whilst the smallest managed just 3.75% returns with a ratio of 0.491.

This pattern isn't isolated to American charities. The same behavioural and structural forces that drive institutional underperformance operate with even greater intensity in charitable endowments worldwide and individual portfolios alike. When professional investors with dedicated teams and unlimited resources struggle to beat simple benchmark allocations, it raises uncomfortable questions about the complexity that many endowment trustees and individual investors introduce into their decision-making.

The data reveals a harsh truth for charity trustees and investment committees worldwide: sophistication often destroys rather than creates value. Every dollar matters to charitable organisations, yet endowments with access to private equity, hedge funds, and alternative investments frequently underperformed basic index fund portfolios. Even more troubling, the institutions spending the most on investment management often achieved the worst net returns. For charities where donors expect maximum impact from every contribution, such waste represents a fundamental breach of fiduciary duty.

The individual security selection trap

Perhaps the most damaging mistake documented in the research involves the pursuit of individual security selection — a strategy that systematically destroys wealth across the nonprofit sector and mirrors one of the most costly errors individual investors make.

Endowments that invested in individual stocks rather than diversified vehicles such as mutual funds or exchange-traded funds underperformed by 0.8 percentage points annually. Those selecting individual bonds fared even worse, lagging by 0.9 percentage points per year.

These endowment investment performance penalties compound ruthlessly over time. A $100,000 portfolio suffering a 0.8% annual drag would lose approximately $18,000 over two decades compared to a diversified alternative. This money could have funded years of additional retirement income.

The individual security selection trap proves particularly costly because it combines multiple wealth-destroying forces. Fund managers engaging in stock-picking typically hold more concentrated portfolios, increasing volatility without improving returns. They also generate higher transaction costs and tax inefficiencies whilst demanding more time and attention from decision-makers who often lack the expertise to evaluate complex securities effectively.

Smaller endowments proved especially susceptible to this mistake, allocating nearly one-sixth of their equity and fixed income holdings to individual securities rather than pooled investment vehicles. This behaviour concentrated among less sophisticated fund managers who believed they could identify mispriced opportunities — the same overconfidence bias that leads individual investors to trade actively despite mountains of evidence showing such strategies destroy wealth.

The research demolishes the notion that individual security selection represents a reasonable strategy for charity trustees or individual investors without institutional resources. If nonprofit organisations with professional staff, research budgets, and access to expert advice consistently lose money through stock-picking, trustees of smaller charities and individual investors attempting the same strategies face even steeper odds.

The fee trap that destroys wealth

The relationship between investment fees and performance across America's endowment sector reveals one of the most important lessons for individual investors: higher fees rarely translate into better outcomes, and often signal worse results ahead.

Endowments paid an average of 65 basis points annually for investment management services, with the highest-paying funds surrendering 1.13% of their assets each year to advisers. The research documents a troubling pattern: whilst external advisers sometimes helped achieve marginally higher gross returns, fees showed "a strong negative correlation with net returns".

This fee-performance disconnect destroys wealth through mathematical inevitability. Even a modest performance advantage disappears when advisory fees exceed the value added. The research found that organisations paying higher fees earned lower net investment returns on average, suggesting that many endowments overpaid for investment services that failed to justify their cost.

The implications for charity trustees and individual investors are profound. If institutional investors with negotiating power and due diligence resources struggle to identify advisers who add value after fees, charity trustees managing smaller endowments face an even more challenging environment. The typical financial adviser charges between 0.75% and 1.5% annually, yet the endowment evidence suggests such fees create a substantial hurdle for generating superior net returns. For charitable organisations where donors expect every dollar to support the mission rather than enrich fund managers, excessive fees represent a misallocation of precious resources.

Paradoxically, the research revealed that the outsourced chief investment officer (OCIO) model (where organisations hired external firms to manage their investment function) delivered better outcomes than expensive internal teams. Endowments managed internally underperformed by 40 basis points annually compared to those using external advisers. However, this advantage disappeared when advisory fees became excessive.

The lesson for charity trustees and individual investors is clear: if you choose to pay for investment advice, the fee level matters more than the sophistication of the strategy. Simple, low-cost approaches often deliver better long-term outcomes than expensive, complex alternatives that promise superior performance but rarely deliver it after costs.

When governance failures compound investment mistakes

The research uncovered a direct link between organisational governance quality and endowment investment performance, a relationship that offers crucial insights for how individuals should structure their own investment decision-making processes.

Endowments affiliated with organisations that spent excessively on administrative expenses achieved lower investment returns. Similarly, nonprofits with a higher proportion of highly compensated employees suffered weaker endowment performance. These governance failures reflected deeper organisational problems that contaminated investment decisions.

Board structure also influenced investment outcomes. Organisations with larger boards and a higher fraction of independent directors generated higher investment returns. This finding contrasts with corporate governance research, which often shows negative effects from board size, but aligns with evidence that nonprofit organisations benefit from diverse oversight and reduced conflicts of interest.

Most surprisingly, nonprofits where the chief executive captured a larger share of total officer and director compensation achieved better endowment returns. This pattern suggests that concentrated decision-making authority, when properly structured, can improve investment outcomes by reducing committee-driven compromises and enabling faster responses to market opportunities.

For charity trustees and individual investors, these governance lessons translate into practical decision-making frameworks. Investment committees (whether formal charity boards or informal family discussions) should prioritise independence over personal relationships when evaluating investment options. The research suggests that emotional distance and objective analysis produce better outcomes than decisions driven by familiarity or comfort.

The governance findings also highlight the danger of expense drift in investment management. Organisations that allowed administrative costs to creep upward consistently achieved worse investment performance, suggesting that financial discipline in one area reinforces good habits across all aspects of portfolio management.

The simple solution hiding in plain sight

The most striking revelation from America's endowment sector is how rarely sophisticated strategies improve endowment investment performance enough to justify their complexity. Even the largest, most well-resourced funds (those managing over $100 million with dedicated professional staff) barely matched a simple benchmark portfolio that any individual investor could replicate.

The largest endowments achieved a Relative Sharpe Ratio of 0.943, meaning they delivered 94% of the risk-adjusted returns available from a basic 40/20/20/10/10 allocation across US equities, international equities, bonds, real estate, and cash. The smallest funds managed just 49% of benchmark performance.

This performance gap stems largely from allocation mistakes rather than security selection errors. Smaller endowments' excessive cash holdings — averaging 20.2% compared to 1.8% for large funds — directly undermined long-term returns. The research quantified the performance impact of different asset classes, showing that cash allocations contributed approximately -2.5% annually to returns whilst public equity exposure added +0.8%.

This benchmark portfolio that outperformed most endowments requires no special expertise to implement. It consists entirely of liquid, transparent investments available through low-cost index funds. No private equity access, no hedge fund minimums, no alternative investment complexity. Just a sensible balance between growth and defensive assets maintained through regular rebalancing.

This simplicity advantage extends beyond cost considerations. The benchmark portfolio avoids the behavioural traps that plague more complex strategies: no temptation to time markets, no pressure to justify high fees through frequent trading, no cognitive burden from monitoring multiple managers across different asset classes.

For charity trustees and individual investors, the endowment evidence provides compelling justification for embracing simplicity over sophistication. If institutions with unlimited resources, professional staff, and exclusive investment access struggle to beat basic benchmark portfolios, the case for complex strategies becomes difficult to defend whether you're managing a charity endowment or personal wealth.

The research suggests that investment success depends more on avoiding costly mistakes than on identifying superior opportunities. Excessive fees, poor asset allocation, and governance failures destroyed more wealth across the endowment sector than any potential gains from sophisticated security selection or alternative investments.

What this means for your portfolio and endowment management

The comprehensive analysis of America's nonprofit endowment sector offers five actionable lessons for charity trustees seeking to improve endowment investment performance and individual investors pursuing better long-term outcomes:

First, embrace allocation simplicity over security complexity. The research demonstrates that a straightforward 40/20/20/10/10 portfolio across major asset classes outperformed most sophisticated institutional strategies. This allocation provides adequate diversification without the costs and complications that typically accompany more elaborate approaches. For charity trustees, this simplicity also reduces governance burden and makes investment oversight more manageable.

Second, treat investment fees as performance headwinds rather than sophistication signals. Higher fees showed strong negative correlation with net returns across the endowment sector. Charity trustees should view any annual fee above 0.5% as requiring extraordinary justification, and fees above 1% as red flags indicating potential wealth destruction. Every dollar saved on excessive fees can be redirected to the charitable mission where donors intended their contributions to make an impact.

Third, avoid individual security selection unless you possess genuine institutional advantages. Endowments with professional research capabilities lost nearly one percentage point annually through stock-picking. Charity trustees and individual investors attempting similar strategies face even worse odds and should focus on broad market exposure through index funds.

Fourth, structure investment decisions to minimise emotional and social pressures. The governance research shows that independent oversight and financial discipline improve investment outcomes. Charity trustees should create investment policies that reduce the influence of personal relationships and well-meaning but costly advice from board members who lack investment expertise. Individual investors similarly benefit from systematic approaches that limit emotional decision-making.

Fifth, recognise that scale advantages cannot be replicated at smaller portfolio sizes. The largest endowments achieved marginally better performance through access to exclusive investments and negotiating power unavailable to smaller organisations. Rather than pursuing complex strategies that require institutional scale, charity trustees managing smaller endowments and individual investors should focus on areas where they maintain natural advantages: lower minimum investments, tax optimisation opportunities, and freedom from institutional constraints.

The endowment evidence reveals that investment sophistication often masks wealth destruction. Most institutional investors would have achieved better outcomes by embracing simpler, cheaper strategies and avoiding the psychological and financial costs of complexity.

For charity trustees, this research provides both warning and opportunity. The warning: even professional investors with unlimited resources consistently make costly mistakes that compound over time, diverting precious donor funds from charitable purposes to unnecessary fees and poor investment decisions. The opportunity: recognising these patterns enables trustees to avoid similar wealth-destroying behaviours whilst focusing on the allocation and cost decisions that actually determine long-term investment success. Every dollar saved from excessive investment costs represents additional funding for the charitable mission that donors intended to support.

For individual investors, the lessons are equally valuable. The path to better investment outcomes runs through simplicity, not sophistication. America's endowment sector has provided an expensive lesson in this fundamental truth, one that both charity trustees and individual investors can apply immediately to improve their financial stewardship and outcomes.

REFERENCES

Lo, A. W., Matveyev, E. V., & Zeume, S. (2025). The risk, reward, and asset allocation of nonprofit endowment funds. NBER Working Paper 34078.

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