Managing for Endowment Fund Portfolio Alpha

Understanding Non-Systematic Return on Investment

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DEM 2013

[By Dr. David Edward Marcinko MBA]

According to Wayne Firebaugh CPA, CFP®, CMP™ alpha measures non-systematic return on investment [ROI], or the return that cannot be attributed to the market.

It shows the difference between a fund’s actual return and its expected performance given the level of systematic (or market) risk (as measured by beta).


For example, a fund with a beta of 1.2 in a market that returns 10% would be expected to earn 12%. If, in fact, the fund earns a return of 14%, it then has an alpha of 2 which would suggest that the manager has added value. Conversely, a return below that expected given the fund’s beta would suggest that the manager diminished value.

In a truly efficient market, no manager should be able to consistently generate positive alpha. In such a market, the endowment manager would likely employ a passive strategy that seeks to replicate index returns. Although there is substantial evidence of efficient domestic markets, there is also evidence to suggest that certain managers do repeat their positive alpha performance.

In fact, a 2002 study by Roger Ibbotson and Amita Patel found that “the phenomenon of persistence does exist in domestic equity funds.” The same study suggested that 65% of mutual funds with the highest style-adjusted alpha repeated with positive alpha performances in the following year.

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Additional research suggests that active management can add value and achieve positive alpha in concentrated portfolios.

A pre 2008 crash study of actively managed mutual funds found that “on average, higher industry concentration improves the performance of the funds. The most concentrated funds generate, after adjusting for risk … the highest performance. They yield an average abnormal return [alpha] of 2.56% per year before deducting expenses and 1.12% per year after deducting expenses.”


FutureMetrics, a pension plan consulting firm, calculated that in 2006 the median pension fund achieved record alpha of 3.7% compared to a 60/40 benchmark portfolio, the best since the firm began calculating return data in 1988. Over longer periods of time, an endowment manager’s ability to achieve positive alpha for their entire portfolio is more hotly debated.  Dimensional Fund Advisors, a mutual fund firm specializing in a unique form of passive management, compiled FutureMetrics data on 192 pension funds for the period of 1988 through 2005.

Their research showed that over this period of time approximately 75% of the pension funds underperformed the 60/40 benchmark. The end result is that many endowments will use a combination of active and passive management approaches with respect to some portion of the domestic equity segment of their allocation.


One approach is known as the “core and satellite” method in which a “core” investment into a passive index is used to capture the broader market’s performance while concentrated satellite positions are taken in an attempt to “capture” alpha. Since other asset classes such as private equity, foreign equity, and real assets are often viewed to be less efficient, the endowment manager will typically use active management to obtain positive alpha from these segments.


  • Ibbotson, R.G. and Patel, A.K. Do Winners Repeat with Style? Summary of Findings – Ibbotson & Associates, Chicago (February 2002).
  • Kacperczyk, M.T., Sialm, C., and Lu Zheng. On Industry Concentration of Actively Managed Equity Mutual Funds. University of Michigan Business School. (November 2002).
  • 2007 Annual US Corporate Pension Plan Best and Worst Investment Performance Report.  FutureMetrics, April 20, 2007.


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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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PODCAST: Health Tech Faves & Investment Trends from Entrepreneurs


Health tech investment raced ahead in 2020. Join innovation insiders for a discussion on new health technologies, health-care’s digital transformation timeline, and what to expect for mid- to long-term health tech investment.

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By Staff Reporters


Healthcare Partnerships – 5 Takeaways

 •  This year had the largest percentage of announced “mega merger” transactions in the last six years at 16.3% and, in more than one out of every 10 transactions, the smaller partner had a credit rating of A- or higher in 2021.
 •  Since 2011, average smaller partner size by annual revenue has increased at a compound annual growth rate (CAGR) of approximately 8.0%.
 •  Transactions involving a not-for-profit partner represented 87% of announced transactions.
 •  Transactions involving rural or urban/rural sellers increased to 31% of announced transactions.

Source: KaufmanHall, January 10, 2022




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Professor VERSUS Entrepreneur

Teaching / Educating

Bill Hennessey, M.D.

Bill Hennessey, M.D.

As a teacher educating is your job. It’s what you enjoy. There’s a fairly lax time schedule and resources are already built in the equation. Little accountability because the ultimate burden and measure of success is placed on the student to pass a test. If they don’t do well, it’s the student not directly the teacher who pays the price.

Now, I work with first year students who don’t know what a red blood cell looks like (biconcave disc, you thought I forgot, didn’t you) all the way to a chief resident who can probably do some surgeries better than me. It’s my job to take that first year student and turn them into a chief resident.

As an entrepreneur with limited resources, time, and energy, you don’t have the luxury to continuously teach, develop, and convince. You need people who simply get it especially in strategic positions. You don’t have the luxury of time or resources. You also are directly accountable if they don’t understand because you have a burn rate that probably just got worse. So how much “oxygen” do you allocate when trying to build your team?

Different story for Apple, Boeing and others that can create academies and educational tracks to teach and develop internally.

ASSESSMENT: Your thoughts are appreciated.

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Employee Engagement for Startups and Entrepreneurs

3 Business Start-up Blunders

Jonathan Mase | Jonathan A. Mase's WordPress Blog

Operating as a startup company will present many challenges, but you should take heart in knowing that many of today’s biggest companies were once in your position. If you wish for your startup company to succeed, then employee engagement will be a crucial factor. Keep reading to learn more about the importance of employee engagement for startups. It should allow you to figure out the right path forward to find the success you desire.

It Makes Employees Loyal

When employees are engaged in the work they are doing, they will be more likely to be loyal to your company. Having loyal employees will benefit you in several different ways, but one of the most important ones is that they will work harder. When employees are engaged in the work that they’re doing, then that means that they truly care about it. They’re going to take things seriously, and you will…

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The Real Economic Business Cycle?


By Dr. David Edward Marcinko MBA


The business cycle is also known as the economic cycle and reflects the expansion or contraction in economic activity. Understanding the business cycle and the indicators used to determine its phases may influence investment or economic business decisions and financial or medical planning expectations. 

Although often depicted as the regular rising and falling of an episodic curve, the business cycle is very irregular in terms of amplitude and duration. Moreover, many elements move together during the cycle and individual elements seldom carry enough momentum to cause the cycle to move.  

However, elements may have a domino effect on one another, and this is ultimately drives the cycle, too.  We can also have a large positive cycle, coincident with a smaller but still negative cycle, as may be seen in the current healthcare climate of today. 

  1. First Phase: Trough to Recovery (service and production driven)

Scenario: A depressed GNP leads to declining industrial production and capacity utilization. Decreased workloads result in improved labor productivity and reduced labor (unit) costs until actual producer (wholesale) prices decline. 

  1. Second Phase: Recovery to Expansion (patient and consumer driven)

Scenario: CPI declines (due to reduced wholesale prices) and consumer real income rises, improving consumer sentiment and actual demand for consumer goods. 

  1. Third Phase: Expansion to Peak (service and production driven)

Scenario: GNP raises leading to increased industrial production and capacity utilization. But, labor productivity declines and unit labor costs and producer (wholesale) prices rise. 

  1. Fourth Phase: Peak to Contraction (patient and consumer driven)

Scenario: CPI rises making consumer real income and sentiment erode until consumer demand, and ultimately purchases, shrink dramatically.  Recessions may occur and economists have an alphabet used to describe them.  

For example, with a “V” graph shape, the drop and recovery is quick. For a “U” shaped graph, the economy moves up more sluggishly from the bottom. A “W” is what you would expect: repeated recoveries and declines. An “L” shaped recession describes a prolonged dry economic spell or even depression.

And now, the REAL Cycle?




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