The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds
AbstractUsing data for more than 800 college and university endowment funds over 2003-2011, we provide a comprehensive analysis of the spending policies used in practice as well as how frequently and why those mandates are revised over time. Given the long-term and relatively static nature of the investment problem faced by the typical educational institution, existing theoretical models of endowment management predict that the permanent portion of the stated spending policy should be highly stable. However, we find that half of the endowments revised their rules at least once and, on average, about a quarter of the sample changed their spending policies each year, implying a retention rate far lower than expected. We show that larger endowments with lower historical portfolio returns and lower past payout levels are more likely to alter their future spending formulas, but that institutions having the ability to invoke special appropriations on a temporary basis are less likely to make adjustments to their permanent rules. Further, we document that both spending rule changes and asset allocation adjustments persist over time and that, consistent with hypothesized behavior, the former tends to lead the latter. Finally, while there is some evidence that endowment funds as a group produce superior returns relative to their policy benchmarks, we show that there is no difference in benchmark-adjusted performance between institutions that either did or did not change their spending rules.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19517.
Date of creation: Oct 2013
Date of revision:
Publication status: published as Keith C. Brown, Cristian Ioan Tiu. "The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds," in Jeffrey Brown and Caroline M. Hoxby, editors, "How the Financial Crisis and Great Recession Affected Higher Education" University of Chicago Press (2013)
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Find related papers by JEL classification:
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
- I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
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