Moreover, the bigger the fund, the worse the returns.
That underperformance by the bigger funds is at odds with their perceived advantage in securing lower trading fees and better access to information than their smaller peers. It could be down to the higher costs associated with buying and selling illiquid securities, which tiddlers are less likely to dabble in, the report says.
But the authors go on to suggest a much more interesting cause – the proximity of a big endowment’s head office to one of the four major US financial centres for asset management.
Their research found “a striking pattern.” For the largest funds analysed, investment performance deteriorated the closer the fund was to New York, Boston, Chicago or San Francisco. The opposite was found for smaller endowments.
For the latter, the authors suggest that proximity to a money centre helps the smaller funds recruit “better-informed board members.” But for the biggest endowments, being closer to finance experts leaves them “susceptible to professional money managers’ sales pitches that lead to over-investment in exotic products with high fee structures.”
So the message is clear. Endowment fund trustees should close their ears to the siren song of the investment professionals. Wall Street really can damage your financial health.