Effective Spending Rates versus Percentage of Operating Budget This might help explain why larger institutions, which tend to fund more of their operating budgets from their endowments than smaller institutions, average a higher overall effective spending rate than the smaller cohorts.Ĭhart 3. In Chart 3, we show average annual effective spending rates by size cohort relative to the average percentage of the operating budget funded by the endowment. Not surprisingly, effective spending rates are positively correlated with endowment size: the largest endowments generally have the largest spending rates. Most of the endowment size cohorts posted a moderate increase in their average spending rate of 0.1-0.2% one notable exception was the smallest cohort posting a moderate decrease of 0.2% year over year in its average effective spending rate. The average annual effective spending rate remained steady at 4.5%, largely in line with the 10-year average of 4.40%. Fund FlowsĮndowment spending rates moderated year over year, perhaps in response to the low-return environment. Chart 2 shows the deficit spread between target and realized returns averaging 1.4% over this time period.Ĭhart 2: Average Return versus Long-Term Return Objectives Because the average 10-year investment return has consistently fallen short of the long-term objective, there is an increased focus on generating inflows of gifts to maintain purchasing power, which is not a sustainable strategy in our opinion. In fact, fiscal 2019 marked the first year in over a decade that the 10-year annualized return exceeded long-term return objectives (orange line in Chart 2). While the objectives of these investment programs have remained high, the last decade has not been kind to the average institution, with many struggling to meet their goals. Perhaps most surprising is the large portion of the respondents (27.4%) who did not have a return objective, which we believe is contrary to investment program best practices.Ĭhart 1: Investment Return Objective by Size Cohort Chart 1 shows the distribution of these return objectives by size. In the fiscal 2019 report, the average and median return objective for all responding institutions was 7.0% and 7.2%, respectively. This process, in turn, helps to determine an investment objective that accounts for the distribution, inflation, and overhead costs without impairing the principal of the assets. The investment policy statement or other policies governing the investment program will typically describe the methodology for determining the spending rate/amount in a given year. Survey respondents cited student financial aid as the greatest purpose of these distributions (49%), with academic programs (17%), endowment faculty positions (11%), operation and maintenance of campus facilities (7%), and “all other purposes” (16%) as the other choices. The purpose of an endowment is typically to support a distribution for a specific purpose, such as academic institutions. the rise of social restrictions for investing.relatively high long-term investment objectives.New information available from the full report in this section includes: The complete 2019 NTSE study revealed several ongoing trends among the endowments of higher education institutions. This commentary will cover some of the same information while adding further insights gleaned from the complete NTSE study. Here we expand the analysis we provided in the March 2020 report, Endowments and Foundations: 2019 in Review, which was based on preliminary information from the executive summary of the 2019 NTSE. The latest data cover the 2019 fiscal year, which ran from Jthrough June 30, 2019. One of the benefits of the study is that repeat participation is high, allowing for better and more informative year-over-year comparisons. The 2019 study included 774 institutions, representing $630.5 billion in endowment assets. We base our analysis on the NACUBO-TIAA Study of Endowments® (NTSE), a joint research project of the National Association of College and University Business Officers (NACUBO) and TIAA. We will discuss the implications of this on portfolio returns and share our outlook for alternative investments later in this paper. Indeed, a deeper dive into the data suggests that many of the more sophisticated (and costly) strategies have struggled in recent years. Since then, many endowments have found stellar outperformance to be elusive. Prior to the global financial crisis, endowments had a reputation for being consistent outperformers with unparalleled investment prowess. The investment objective of an endowment may vary depending on the overall mission of the organization, but the underlying goal is typically the same: to grow the endowment at least fast enough to maintain or increase distributions while keeping up with inflation.
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