NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds

Keith C. Brown, Cristian Ioan Tiu


This chapter is a preliminary draft unless otherwise noted. It may not have been subjected to the formal review process of the NBER. This page will be updated as the chapter is revised.

Chapter in forthcoming NBER book How the Financial Crisis and Great Recession Affected Higher Education, Jeffrey Brown and Caroline Hoxby, editors
Conference held September 27-28, 2012
Forthcoming from University of Chicago Press

Using 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 nd 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 di erence in benchmark-adjusted performance between institutions that either did or did not change their spending rules.

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This paper was revised on October 11, 2013

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This chapter first appeared as NBER working paper w19517, The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds, Keith Brown, Cristian Tiu
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