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

Keith Brown, Cristian Tiu

NBER Working Paper No. 19517
Issued in October 2013
NBER Program(s):Asset Pricing, Economics of Education, Public Economics

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 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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Document Object Identifier (DOI): 10.3386/w19517

Published: The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds, Keith C. Brown, Cristian Ioan Tiu. in How the Financial Crisis and Great Recession Affected Higher Education, Brown and Hoxby. 2015

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