The Effects of Spending Rules and Asset Allocation on Non-Profit Endowments

Abstract

We examine the long-run impact and implications of an endowment’s spending policy and asset allocation decisions. Using a dynamic model, we explore how different endowment spending rules influence the dynamics of an endowment’s size and future spending. We find that different parameters within each spending rule have significant long-term impact on wealth accumulation and spending capacity. Using Merton's (1993) endowment model and compiled asset allocation data, we estimate the intertemporal preferences and risk aversion of several major endowments. We find significant variation across endowments in their propensity to increase portfolio risk in response to increased spending needs.

Pre-print is available at: https://dspace.mit.edu/handle/1721.1/143562

Keywords: Endowment Funds, Long-term Asset Management, Spending Rules