The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds

Nonprofit organizations sit at the center of American civic life. They employ more than 20 million people, deliver essential services across every sector, and support activities that range from scientific research to disaster relief. While endowments are often associated with elite universities, they are in fact used widely across the sector. They provide long-term financial stability for human service agencies, conservation groups, religious organizations, hospitals, museums, and thousands of smaller nonprofits that rely on steady income to sustain their missions.

Despite their importance, little is known about how nonprofit endowments are distributed, how they are invested, or how well they perform. Prior research has focused almost entirely on university endowments, which account for less than 2% of all nonprofit endowment funds. The much larger universe of smaller and more diverse endowments has rarely been examined in a systematic way.

In our paper, “The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds,” we compile the first comprehensive dataset covering the full universe of U.S. nonprofit endowments. Using IRS Form 990 filings from 2008 to 2020, we study nearly 375,000 nonprofit organizations, including about 40,000 that maintain endowment assets. We combine detailed investment disclosures on Schedule D with governance, compensation, and financial information on the main form to examine how endowment strategy and performance relate to organizational structures and oversight practices.

The results present a mixed picture. Endowments support mission scale and stability, but investment performance varies widely. Many funds underperform simple passive benchmarks, and governance practices are closely linked to these outcomes. For boards, senior executives, donors, and regulators, the findings highlight both the value of endowments and the challenges of overseeing them effectively.

Endowments Are Unevenly Distributed and Closely Linked to Organizational Scale

Only 10.6% of nonprofits report having an endowment, and prevalence varies sharply across sectors. About 70.4% of higher education institutions maintain endowments, compared with 7.5% of religious organizations. The share of assets held in endowments also differs widely. Hospitals hold only 6.3% of their assets in endowments, while mutual benefit organizations approach 50%.

Nonprofits with endowments are typically older, larger, and more professionally organized. Their average assets are $64.6 million, compared with $9.5 million for those without endowments. Even after controlling for size, nonprofits with endowments exhibit faster growth in revenues, contributions, and program spending. They also devote a higher share of their budgets to mission activities rather than overhead.

These patterns suggest that endowments play a central role in nonprofit capacity building. For boards and executives, the presence of an endowment is not just a financial feature. It reflects broader differences in organizational maturity, planning horizons, and expectations of financial stewardship.

Investment Returns Drive Endowment Growth, Not New Gifts

Endowments grew an average of 9.4% annually over the sample period, although the median fund grew only 3.4%. The average is skewed by a small number of younger endowments receiving large gifts. For the median fund, 94.2% of inflows come from investment returns rather than contributions.

This pattern places investment oversight squarely at the center of endowment governance. Most nonprofits are not growing their endowments through continuing fundraising. They grow them through market performance. For organizations without dedicated investment staff, this creates substantial responsibility for boards and volunteer committees.

Most Endowments Underperform Passive Benchmarks

The average net return across all endowments is 4.3% per year. When compared with a conservative multi-asset benchmark that mirrors typical nonprofit portfolio allocations, equal-weighted endowment performance falls short by roughly 20 percentage points cumulatively during the sample period. Value-weighted results are stronger but mask the fact that large endowments drive most of the outperformance.

Risk-adjusted performance tells the same story. The average relative Sharpe ratio is 0.759, which means that endowments, on average, deliver about 24% lower risk-adjusted performance than the benchmark.

The consistent underperformance raises core governance questions. Boards that oversee endowments have fiduciary-like responsibilities, even though nonprofits do not operate under formal fiduciary law in the same way as ERISA plans or trust law. Weak oversight, limited access to professional management, and structural constraints appear to explain much of the performance gap.

Size and Capacity Are Strong Predictors of Performance

The largest endowments, with over $100 million in assets, outperform the smallest endowments (under $1 million) by almost 2 percentage points in benchmark-adjusted returns. The relative Sharpe ratio is almost twice as high for large funds. These relationships are monotonic and hold across sectors and fiscal reporting periods.

There are several reasons why small funds fare poorly.

• Small endowments hold conservative portfolios. They maintain more than 30% of assets in cash and fixed income, compared with only 4% for the largest funds.
• They rely more on trusts and cooperatives, which generated low returns over the sample period.
• They engage in individual security selection far more often than large funds. On average, this reduces returns by about 1 percentage point annually.

These patterns point to capacity constraints, not simply preferences. Many small nonprofits lack the staff, expertise, or scale to implement sophisticated investment strategies. For boards, this reality makes the question of whether to outsource investment management a core governance decision rather than an operational detail.

Funding Models Shape Portfolio Risk and Strategic Choices

Donation-dependent nonprofits are especially vulnerable to market downturns. A 1% decline in market returns corresponds to an approximately 3% decline in donation growth. Using a measure of funding volatility, we find that organizations with unstable revenue models respond by shifting toward safer portfolios. A one-standard-deviation increase in funding volatility is associated with an 11-percentage-point reduction in public-equity allocations and a 10-percentage-point increase in cash and fixed income.

These results highlight a fundamental governance tension. Boards must balance the long-term growth needed to sustain missions with the downside protection needed to ensure operational continuity. Endowment policy is not merely an investment issue. It is a strategic risk-management issue tightly intertwined with each nonprofit’s business model.

Sectoral Differences Reveal Distinct Governance Environments

Performance varies significantly across sectors. Arts, environmental, and human services organizations outperform higher education endowments once differences in fund size are accounted for. Hospitals, despite their scale and risk-seeking allocations, exhibit the lowest returns of any major category.

These differences cannot be explained solely by asset allocation. They suggest that governance structures, oversight practices, and investment cultures within sectors play a meaningful role. In fields like healthcare, where boards focus heavily on operations and regulatory compliance, investment oversight may receive comparatively less attention.

Investment Management Structure Is a Key Governance Choice

Roughly 60% of endowments manage investments internally. These funds underperform those using external advisors by about 40 basis points per year. Internal management is prevalent among smaller nonprofits that may lack resources to hire professional managers.

Interestingly, having a chief investment officer does not lead to higher returns. CIO compensation shows no positive relationship with performance, and among nonprofits that use external managers, higher CIO pay is associated with slightly lower returns.

Investment fees vary widely. The average reported fee is 65 basis points, and fees are negatively related to net returns even though they correlate positively with gross returns. These results indicate that nonprofits may be overpaying for strategies that do not add value after costs, pointing to a need for stronger procurement and monitoring processes.

For boards, investment fee scrutiny is a straightforward area where governance discipline can produce immediate improvements.

Governance Quality Is Strongly Linked to Investment Outcomes

Three patterns stand out.

1. Excessive non-core spending is associated with lower returns. This aligns with broader research showing that organizational slack reduces discipline and performance.
2. A higher CEO share of total executive compensation correlates with higher returns. This contrasts with findings in corporate settings and may reflect the role of strong executives in shaping financial oversight and attracting qualified advisors.
3. Boards with fewer independent directors oversee weaker endowment performance. Independence appears to matter for investment decisions just as it does in corporate governance.

Together, these results show that endowments are embedded within broader governance systems. Investment outcomes reflect organizational discipline, leadership strength, and board structure as much as they reflect portfolio choices.

Conclusion

Endowment funds are among the most important financial instruments available to nonprofits. They allow organizations to pursue long-term missions, withstand economic shocks, and provide essential public services. Yet the majority of endowments underperform passive benchmarks. The weakest results are concentrated among smaller, self-managed funds where governance capacity is most limited.

At the same time, the data make clear that strong governance can produce better outcomes. Large endowments, organizations with disciplined oversight practices, and nonprofits that scrutinize fees and professionalize investment management tend to achieve stronger performance.

For boards, donors, regulators, and policymakers, these findings underscore a simple point. Effective endowment management is not a technical issue delegated to finance staff. It is a core governance responsibility with direct implications for mission continuity and public trust.