The Interaction of Spending
Policies, Asset Allocation Strategies, and Investment Performance at University
Endowment Funds
Keith C. Brown
Cristian Tiu
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.
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