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

63 Pages Posted: 12 Oct 2013 Last revised: 1 May 2022

See all articles by Keith C. Brown

Keith C. Brown

University of Texas at Austin - Department of Finance

Cristian Ioan Tiu

University at Buffalo; TIAA Institute

Date Written: October 2013

Abstract

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.

Suggested Citation

Brown, Keith C. and Tiu, Cristian Ioan, The Interaction of Spending Policies, Asset Allocation Strategies, and Investment Performance at University Endowment Funds (October 2013). NBER Working Paper No. w19517, Available at SSRN: https://ssrn.com/abstract=2339411

Keith C. Brown (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6520 (Phone)
512-471-5073 (Fax)

Cristian Ioan Tiu

University at Buffalo ( email )

238 Jacobs Management Center
Jacobs Hall, North Campus
Buffalo, NY NY 14260
United States
7166453299 (Phone)

TIAA Institute ( email )

8500 Andrew Carnegie Blvd
E3/S8
Charlotte, NC 28262
United States

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