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]]>This paper frames a decision-making process to enable an institution to achieve something that feels untenable—a roadmap for action (or not). The result may feel unsatisfactory, perhaps for all stakeholders on some level, but a divisive climate demands a clear perspective and an explicable institutional response. Fiduciaries have a responsibility to determine a course of action that considers the future of the institution given its mission and mandate.
A return to first principles and an orderly decision-making process can enable an institution to move forward and feel confident about how and why the outcome was achieved. The resulting position and/or action around divestment is an outcome of the process.
In summary, our experience suggests a decision-making process as follows:
What set of investments should be excluded from the investment portfolio? Divestment proposals usually start with a sentiment or concern. Recommendations for divestment may be as broad as a demand to avoid affiliation with perceived unacceptable behavior or more specific recommendations for exclusion of economic sectors, regions, nations, or companies associated with or involved in conflict, human rights violations, and other harms. To implement a divestment effort, the investment management team needs clarity about the investments that should be excluded from the investment portfolio. This is often quite difficult, as investments that fail an aspect of the exclusion criteria may have other qualities that are additive to the portfolio in other ways.
Closely related to the recommendation of what should be excluded is the answer to why should it be excluded. Is the reason for the divestment decisions a moral statement or an effort to influence policy through economic impact? Some divestment policies require an economic reason if endowment resources are going to be redeployed because the endowment is an asset with economic value. Would the institution divest to avoid economic risk and stranded assets, or is the intention to influence geopolitical strife—such as compelling a company to stop supplying equipment to an aggressor nation—through withholding capital? If change is the goal, investor engagement as a shareholder may provide a more direct path to influence a company’s decisions.
Many calls for divestment ask an institution to express its values or exercise power to change the course of a conflict or to support a specific movement. Organizational values can be more specific for a private foundation, but shared values are harder to define for a university. By their very nature, universities are designed to explore and cultivate different perspectives. For example, students may weigh values differently or may have different values entirely, especially in today’s divisive political and cultural environment. Faculty and alumni stakeholders bring their values and expectations as well. As a result, it is difficult to eliminate a particular type of investment based on shared institutional values. It is up to those with fiduciary responsibilities to determine whether these divestment requests reflect the mission and commitments of the entire institution.
What will be the outcome of eliminating a sector or set of companies? How will the impact of the divestment decision be measured over time? Before embarking on a divestment journey, it is important to understand the destination. What is the ultimate goal of the call to action? Are outcomes measurable within the institution or beyond?
Decision makers must determine if the goal is achievable and aligns with institutional and investment principles and policies. This includes weighing fiduciary responsibility, investment implications, and institutional and societal implications.
Stakeholder concerns are a form of engagement, and each endowment program needs effective governance to acknowledge and respond to inquiries and requests clearly and effectively. Endowment governance shapes the structure, policies, and processes that direct endowment investments. Good governance is the framework for engagement and communication.
The first step is to develop a governance structure to consider requests, so that a group is prepared to do the work on behalf of the institution if a divestment issue is presented. Who is eligible to make a divestment recommendation? Who decides whether to implement the request? A decision that involves an interpretation or amendment to existing policy is the responsibility of the Board of Trustees. However, an institutional governance structure can identify the group of people that will receive the divestment proposal. That body may be the Board, the investment committee, a sub-committee of the Board, or a separate group designated to evaluate resources in light of institutional policies. 2 Policies and guidelines provide a framework for the group to assess the considerations of the proposal and to determine the best course of action. While one viewpoint may be expressed in the divestment proposal, it is important for the group to consider different sides of the issue within the institutional community.
What is the review and evaluation process? Process establishes the criteria for consideration and the steps for how a proposal may flow from consideration to potential adoption. Criteria for consideration will provide guidelines on specificity of the divestment request, rationale, and goals. Some institutions specifically ask that a proposal include how divestment will help achieve the desired goal. Criteria should also determine the financial and broader considerations for the institution, such as reputation and social or moral implications. Providing the basis and expectations for the divestment request will enable the governing groups to assess the institutional merit and determine how the proposal fits into the broader policy framework.
The investment policy ultimately must reflect all of the guidance for how endowment assets will be invested. Institutional leadership must base their decision in policy and have a firm understanding of both the short-term and long-term financial implications of divestment. How does the justification for divestment align with institutional bylaws and investment policy? Does the current investment policy outline ethical investment guidelines or environmental, social, and governance (ESG) guidelines? If current policies are insufficient, the Board may need to revise or augment them. Some institutions also have a specific divestment policy to manage proposals.
There are further considerations that fiduciaries need to weigh before making a divestment decision because endowment assets are part of a vast institutional ecosystem and must comply with laws and regulations. When responding to calls to divest, we believe institutions should assess financial and regulatory implications, and if the endowment is the appropriate mechanism to affect the issue at hand.
Divestment narrows the investment opportunity set and introduces new trade-offs. In addition to the elimination of certain direct investments, the divestment decision may steer the portfolio away from asset managers that do not screen for the excluded investments. The divested assets may ultimately become less favorable holdings because of growing pressure to move away from the goods and services involved in the conflict. Or they may be profitable endeavors, and, as a result of divestment, the institution chooses not to participate in financial gains. For example, firms with sales generated in aerospace and defense outperformed the broader index of stocks over the past five years.
Is the institution willing to trade off real, long-term dollars that could be used to provide impact in a different way? Higher endowment returns educate more students, hire more faculty, and invest in teaching and research that can influence policy through writing, legal work, and media. How should the institution balance current causes and views with future views, obligations, and priorities? The endowment is composed of long-term capital intended to support the institution in perpetuity. A change in investment policy can alter the long-term return potential of the portfolio.
Very specific, short-term changes to investment policy are contrary to the long-term nature of a diversified investment strategy and the time horizon of the perpetual assets. It takes time to divest, especially if ownership is through external investment managers and private investments that involve longer-term lock-ups for limited partners. Does the timing of the cause inspiring divestment align with the long-term nature of an endowment? Are there other more immediate forms of expression that could affect change sooner?
Another element of timing is how often fiduciaries will review the divestment. How long will the institution withhold capital? If the offending company or industry changes its ways will positive change call for restored investment? At what frequency will circumstances be reviewed to evaluate outcomes? Are those responsibilities defined in the governance process? Questions of timing are connected to the desired outcomes and the nature of the concern.
The endowment functions within the bylaws of the institution, as well as regional and national laws. It is important to understand whether the exclusionary action of divestment is permitted under those laws. The action may also be counter to government policy, so it is important to understand the potential impact on government contracts and oversight. Does the opposition impel the institution to extend its boycott to its own government?
Endowment policy fits into broader institutional strategy and actions. If the divestment issue is an institutional priority, are other elements of the institution also being employed or deployed to address the issue? How does the endowment’s divestment fit into a broader strategy? Is the endowment one piece of an activist strategy? Would the divestment action be amplified by other forms of activism and collective change? For example, if the endowment is divesting from a popular food chain that is operating in a contentious region, but members of the university community continue to eat at the local franchise, the endowment would be held to a different standard than the community and would be divesting in an isolated vacuum.
Divestment is a complex decision. The endowment portfolio is composed of a group of gifts entrusted to the institution in perpetuity. Endowment funds are invested with a shared mandate to withstand geopolitical and economic tumult and to equitably distribute funding to multiple generations of stakeholders. The endowment assets serve the entire institution, forever. Fiduciaries have a responsibility to determine a course of action that considers the future of the institution, given its mission and mandate.
This paper offers considerations for how to manage calls for divestment and raises questions that need to be answered to respond clearly and effectively to divestment requests. To navigate tumultuous times and passionate entreaties, we believe institutions need to lean into good governance. It is important that the decision-making process provides clarity, and by extension an opportunity for learning, listening, and engagement, especially when the outcome of the process will not satisfy all stakeholders. An orderly process and response can enable an institution to move forward and feel confident about how and why the outcome was achieved.
Tracy Abedon Filosa, Head of CA Institute
Margaret Chen, Global Head, Endowment and Foundation Practice
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]]>This year we saw endowment strength in three of the four metrics.
Levels of endowment dependence vary across the 80 colleges and universities in the 2023 Endowment Radar Study. Endowment support ranges from a small fraction of the university budget to supporting more than half (Figure 2).
The median level of endowment dependence was 16.3% in 2023, which was similar to 2021 and higher than 2022 (14.1%). This year’s growth in endowment dependence is notable, given the significant growth in operating budgets that the endowments are supporting. For the median institution, the growing level of endowment support was driven by a 10.5% increase in endowment distribution, which outpaced the significant 8.3% growth rate of expenses. For the colleges and universities in our study, expense growth outpaced broader inflation 4 in 2023, but kept pace with recent trends, as higher education costs caught up with broader inflation growth over the past three years (Figure 3).
Revenues also increased in 2023, but the 6.3% median revenue increase did not keep pace with the 8.3% growth in expenses. This dynamic is demonstrated in slightly narrower operating margins (Figure 4). On average, core operating margins before endowment and gift subsidies were more negative (-21.8% in 2023 versus -18.6% in 2022). The median overall margin finished positive but had less cushion (2.1% in 2023 versus 4.2% in 2022). The number of institutions completing the fiscal year with a negative margin more than doubled in 2023, indicating the challenging financial environment for many.
Putting all of these financial pieces together, we can see that the endowment is taking on a growing role in supporting growing costs that are outpacing other revenue sources for most colleges and universities in the Endowment Radar study.
One of the pressure points for the operating margin is the growing “cost” of forgone revenue in the form of discounted tuition provided to students as financial aid and scholarships. Financial aid commitments have increased for the colleges and universities in our study every year. This trend continued in 2023 when the average growth rate in financial aid was 5.2%, keeping pace with the growth in tuition charges, which increased 5.1%. 5 The average tuition discount was 44%, meaning, on average, institutions collected 56% of the tuition charged to students. Net tuition revenue growth has been limited, as schools have increased financial and merit aid to respond to growing student needs and the competitive enrollment landscape.
The endowment distribution directly supports financial aid and scholarships via endowments restricted for those purposes and indirectly by subsidizing total costs, which increases the availability of other funds that can be used to support financial aid. Endowment support-to-financial aid is a coverage ratio that considers the direct and indirect roles the endowment plays in pricing strategy. 6 It measures the relationship between endowment distribution and tuition discounts to compare the endowment subsidy to the budget to the forgone revenue discounted to students. The coverage ratio of endowment distribution-to-financial aid ranged from 0.1x to 4.6x and the median was 0.7x (Figure 5).
The institutions that have endowment “coverage” for financial aid can offset forgone tuition revenue with endowment spending (Figure 6). This enables them to deliver their discounted price to students from a position of strength as shown in light blue shading in the upper-right quadrant. The colleges and universities in yellow shading on the lower-right side are offering high discount rates, but from a weaker financial position. Without a higher subsidy from the endowment to offset this forgone revenue, they will need to employ other financial levers—such as auxiliary revenue, annual fund gifts, and careful expense management—to fund these commitments and balance the budget.
Balance sheets were strengthened for many institutions in 2023 as the median endowment market value grew (2.1%) and the median debt burden decreased (-1.5%). Growth in assets relative to liabilities resulted in the median endowment-to-debt ratio of 4.4x, an uptick from the 4.0x median in 2022. At the institutional level, we see a range of experiences (Figure 7). More than 75% of the institutions saw an increase in 2023 market value, and approximately 60% reduced their debt obligations. Nearly 40% of the institutions saw greater balance sheet strength with a combination of increased endowment market value and decreased outstanding debt obligations.
In addition to long-term performance, net flow—the ratio that calculates the net rate of spending and inflows—is an indicator of whether the endowment will keep pace with the enterprise, lose purchasing power, or take on a greater role in the future. Most colleges and universities have negative net flow rates, but the degree that inflows offset spending from the endowment determine the liquidity profile and purchasing power of the portfolio.
Net flow is a metric that tends to vary considerably by institution, and from year to year for some institutions, because it is sensitive to cash flow timing and the unanticipated event, such as the gift of a large bequest (Figure 8). The calculated rate is also sensitive to the beginning endowment market value, which is the ratio’s denominator. In 2023, there were more negative net flow rates, driven by higher rates of spending.
The 1.5% median inflow rate was the same as the prior year, but the median effective spending rate increased from -3.8% to -4.4%, resulting in a shift in the median net flow rate from -2.1% to -3.0%. This was a result of lower beginning endowment market values for many institutions, as well as higher spending volume. As noted in the endowment dependence discussion, distributions increased more than 10%, as more dollars were spent from the endowment in 2023.
Higher spending coincides with higher costs this year and puts more reliance on strong investment performance to maintain purchasing power of existing endowment funds. Purchasing power should be monitored over longer cycles that are in line with the long-term nature of endowment capital and policy goals.
Endowments provided an important ballast to the private college and university business model in 2023. For many the institutions, higher costs and financial aid commitments were accompanied by growing endowment market values. Greater endowment dependence was fueled by higher rates of spending. Balance sheet health improved for the majority of institutions.
Endowment Radar brings together analysis of several financial metrics that can and often do change from year to year. Reviewing these results helps to manage with an eye toward future risks that may impact investment markets and university operations, including inflation, interest rates, and demographics. Evaluating these metrics and the role of the endowment in supporting colleges and universities during these tumultuous times helps to support near-term and long-term decisions and strategies.
Tracy Abedon Filosa, Head of CA Institute
Cameryn Dera and Shreya Vajram also contributed to this publication.
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]]>This paper explores the strategic and expanding role of the endowment in the public university business model. We analyze the components of endowment spending and endowment growth, and how spending can drive growth. We demonstrate how transparency about endowment net flows can deepen understanding of the current and future role of the endowment and strengthen communication with donors about the impact of their gifts.
Public university endowments support the university through three types of spending:
These three categories of spending add up to the total amount of withdrawals from the endowment. To maintain purchasing power, endowment return must equal the rate of total spending plus inflation over time.
Over the past ten years, the median experience of public university endowments has met that goal (Figure 1). After adjusting for inflation, investment returns, and spending, an endowment starting at $100 in 2013 grew to an adjusted value of $108 in 2023. The median real (adjusted for inflation) average annual compound return (AACR) of 5.3% slightly exceeded spending, and the median growth rate net of spending was 0.8%. This growth indicates that the endowment maintained purchasing power and delivered to donors and stakeholders who have consistently benefited from endowment spending.
To move beyond maintenance of current spending levels and expand the role of endowment assets, a university needs to raise new endowment funds. New inflows increase the purchasing power of the endowment, and the endowment spending that funds the mission. Inflows represent new commitments to funding more of the mission. A growing endowment relieves reliance on student revenues, state appropriations, and annual fundraising dollars. Inflows also provide an investment advantage, as they replenish endowment liquidity needed to fund spending. They offer more flexibility for the investment strategy to incorporate illiquidity that comes with long-term investment commitments in venture capital and private equity.
The combination of spending and fundraising is net flow. Inflows from successful fundraising efforts have been a significant driver of public university endowment growth over the past ten years. When we analyze endowment performance and factor in all elements of net flow (shown as the real return after net flow in Figure 2), we see that the median growth rate of public university endowments has grown 5.7% annually since 2013. Inflows augmented strong performance and provided a 67% bump to overall growth after spending over this ten-year period.
There is a delicate balance between spending, sustainability, and growth, especially when sourcing revenue enhancing funding from an administrative fee assessed on endowment assets. The implementation and disbursement of the administrative fee is a balancing act, with a goal to fund strategic investments and growth without eroding the purchasing power of existing endowment funds. For those that strike the right balance, the admin fee can support sustainability and growth. But if the admin fee is too high, it will erode purchasing power and ultimately divert resources away from the mission. It is the responsibility of the board, with direction from the investment committee and the finance committee, to strike this balance. The calibration of endowment uses and sources will affect investment performance, liquidity, spending, and sustainable growth. When applied strategically, the admin fee can be an investment in endowment growth (Figure 3). In 2023, we saw a correlation between levels of admin fees and endowment fundraising achievement; those with admin fees of 1% or higher experience gift flow rates of 3% and above.
In the following case study, we consider the correlation between net flow and specifically how a higher administrative fee that yields higher gift flow can expand the endowment support delivered to the university. We model two public university endowments over the past ten years that both earn the average investment returns for their peer group (7.9% nominal AACR) and have the same spending policy rate (3.5% effective spending). University A assesses a lower admin fee of 0.8% and has a gift flow of 2.0%, while University B has a higher admin fee of 1.25% and a higher gift flow of 4.0% (Figure 4).
Net flow matters. University B’s net flow of -0.75% versus University A’s -2.3% results in higher market value, endowment spending, and administrative fee revenue (Figure 5). Both endowments grow over the ten-year period from 2013 to 2023, but stronger net flow contributed to an expanded role for the University B endowment. The University B endowment ends with $32.7 million more in endowment value and delivers $1 million more in annual budget funding by Year 10 and $1.2 million more in administrative fee revenue.
In 2023 we saw a range of net flow results for public colleges, universities, and affiliated foundations (Figure 6). The net flow rate is time-sensitive, and we expect it to fluctuate year to year because the ratio is a function of fiscal year spending and fundraising achievement (dollars in the door) and market values.
Institutions on the left side of Figure 6 had strong net flow that contributed to endowment growth in 2023. Institutions on the right side had limited fundraising and higher spending, which may have eroded purchasing power. The net flow metric measures the combination of inflows and outflows and communicates important information about the role of the endowment and the plan for the future role of the endowment. What-if analysis about net flows and the power of new endowment gifts can help donors understand the direct link to endowment assets and a sustainable financial model for important programs and purposes. Given that net flow tells us a great deal about portfolio liquidity and the current and future role of the endowment in the university financial model, it makes sense for the Board, leadership team, advancement team, investment management team, and the investment committee to communicate about this metric every year.
The public university endowment can be much more than a static funding source. A strong investment program that is augmented by successful fundraising and disciplined spending can propel endowment growth. Moving beyond a balanced budget, forward-thinking public universities are considering how endowment growth can transform the revenue model and expand resources available to students and faculty. Net flow analysis can provide transparency about the current and future role of the endowment and strengthen communication with donors about the long-term impact of their endowment gifts. Endowment strategy that factors in net flow patterns and plans can achieve an investment edge and inspire fundraising.
Tracy Abedon Filosa, Head of CA Institute
Cameryn Dera also contributed to this publication.
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]]>For nearly four decades, inflation has been consistent and low. This pattern continued for the first eight years of the past decade, as the Consumer Price Index – All Urban Consumers (CPI-U) averaged 1.5% and never exceeded 3% (Figure 1).
From 2013 to 2019, operating costs of nonprofit organizations also followed a consistent growth pattern; annual increases ranged from 3.7% to 4.7%. Operating cost growth consistently outpaced consumer inflation until 2021, when they diverged. Inflation jumped to 5.4%, and operating expenses decreased for many nonprofits because of scaled back operations during the COVID-19 pandemic. In 2022, the pattern shifted again when CPI-U marked a torrid growth rate of 9.1%, and expenses came roaring back with an even higher 11.1% growth rate. The higher operating costs were boosted by two coinciding factors: higher, inflation-driven costs of delivering the mission and the higher volume of expenses institutions incurred as they resumed activities post-pandemic.
In 2022, endowment support of the budget did not keep pace with the growing costs. The median growth rate of endowment spending was 4.8%, failing to keep up with expense growth of 11.1%. But endowments are composed of long-term capital. Annual statistics are indicators, but not accurate measurements, of long-term results. That is why an endowment policy outlines goals and long-term performance metrics:
Using a longer-term lens, we see that endowment spending has met this goal, keeping pace with the costs of delivering the mission and inflation over the last decade (Figure 2).
Since 2015, the median increase in endowment spending has outpaced the growth rate of inflation and operating costs. We see that endowment spending maintained a steady trajectory in 2021 when expenses dipped, and continued that trajectory in 2022 when costs increased sharply. This ten-year analysis shows that the median endowment spending growth has achieved the goal of keeping pace with—and, in this case, exceeding—the costs of delivering the programs, people, and place associated with the mission. But the lines are drawing closer, as operating costs grow faster than endowment spending. The slopes of these lines will be important to watch going forward. Persistent inflation creates an even higher hurdle for endowment growth. Strong returns and net flows (the combination of endowment fundraising and spending) will be needed now, more than ever, to contribute to growth to help keep pace with the escalating costs of delivering the mission.
Endowment spending policies are designed to balance the endowment’s near-term funding needs and the long-term purchasing power. The majority (72%) of institutions in the Cambridge Associates 2022 Spending Policies and Practices Study employ a market value–based spending policy to achieve this goal. A market value–based rule calculates annual spending as a percent of a recent market value, or an average of multiple market values, known as a trailing average. Spending generated by a market value rule tends to fluctuate with investment performance. Volatility in spending linked to the market value can be moderated by employing an average of trailing market values. For example, when the market value of a representative portfolio increased 21.6% in 2021, spending based on the same portfolio’s 12-quarter average market value moderately increased 4.8%. The opposite is also true in down markets. In 2022, when endowments weathered negative investment performance, the portfolio market value declined 17.6% after spending, and the spending based on a 12-quarter average value increased 5.5% because the negative return year was moderated by prior years with positive returns (Figure 3).
Approximately 25% of endowed institutions rely on a policy that incorporates inflation factors to keep pace with funding needs. A constant growth spending policy calculates a spending amount by increasing the prior year spending amount by a prespecified percentage or an amount linked to inflation. Constant growth rules are employed by 17 institutions (7%) in our annual study. More than half of those institutions rely on a prespecified percentage growth factor for the constant growth component of the calculation, and approximately 40% link growth to CPI. As such, high inflation can supercharge the spending policy calculation for a spending rule linked to an inflation index and erode the purchasing power of the endowment if inflation is not short lived.
Hybrid rules blend elements of both market value and constant growth policies, usually with a higher weighting to constant growth. In 2022, 17% of endowments (42 institutions) employed a hybrid policy. Nearly 90% of those institutions build up annual spending growth by an inflation index and 60% (21 institutions) link the spending growth to CPI. Hybrid rules incorporating high inflation and the market values that resulted from the record-high 2021 investment returns may be supercharged by both components. This confluence of high returns and high inflation have not been a consideration for hybrid rules in recent decades (Figure 4).
Fiscal year 2022 was the first year where spending policies incorporated the extraordinary performance of 2021, and thus higher market values. It also captured the initial spike in inflation from 2021. That confluence led to a 10.3% increase in the annual spending calculated by a typical hybrid spending policy in 2022, when the market value component of the hybrid rule applies the spending rate to the prior year ending market value (Figure 5). The constant growth spending policy linked to CPI-U grew at 5.4% (the rate of CPI-U from the prior year) in 2022. In 2023, we expect an inflation-linked hybrid rule and constant growth rule will both spend similar amounts. The constant growth rule growing at the inflation rate will catch up to the hybrid rule, which will have more subdued growth in 2022 due to dampened investment performance. In this recent environment, we see that a market value rule that smooths values over 12 quarters will deliver much lower spending than rules linked to inflation.
There are many details of rule mechanics to keep in mind when thinking about the spending calculation. Some rules lag in market value or inflation measurement dates, which can impact the amount and timing of spending calculations. Smoothing periods can also have a significant impact. In our modeling, the single measurement date in the hybrid rule drives higher spending, but the smoothing component of the market value rule calculates more modest increases in endowment spending. Other relevant details may include the weighting of hybrid components, “collars” (caps and floors on spending) linked to market value, and which inflationary indexes are employed.
An institution that has had an inflation-linked rule in place will have been spending less in low-inflationary years and will have more purchasing power to work with in a high inflationary period. This is the power of implementing a spending policy over the long term, rather than shifting policy to time a market cycle. The inflation-linked rule will be ready for high inflation if it has been in place during the prior low-inflationary period. The market value rule will deliver more spending in higher performance cycles and less in a low-return period.
When thinking through spending policy and perhaps changes or overrides to policy, it is important for all institutions to keep long-term goals in mind. Similar to investment policy, spending policy should not change with market conditions, but rather, be consistently applied to shifting market conditions as they occur. It can be helpful to build in belts and suspenders, such as market value “collars” on constant growth rules. More general flexibility can also be helpful, to allow decision makers to prudently override a spending calculation if more (or less) spending is needed, in times of market value and inflation volatility.
We expect that inflation will come down from its recent peak, but we doubt it will quickly settle at the low levels we have enjoyed in recent history. This means that in the near term, institutions can expect persistent inflation will elevate operating costs. Spending policies linked to inflation indexes will, by design, calculate higher spending to keep up with those costs. While this may erode purchasing power in the short term, the inflation link has tempered endowment spending in low-inflation periods from the previous era, so the endowment may be poised to spend more to meet this inflationary moment. It will be important to keep a close watch on effective spending and performance. Spending more now will result in less available in the future, but this may be the moment inflation-linked rules have been preparing for—spending more prudently during low-inflation periods to be ready when inflation ultimately returned.
Tracy Abedon Filosa, Head of CA Institute
Other contributors to this publication include Cameryn Dera and Billy Prout.
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]]>Our 2022 Endowment Radar Study reflects the important role of the endowment in the dynamic private college and university business model (Figure 1). The endowment played a relatively smaller role in supporting growing operating budgets and financial aid commitments compared to 2021. At the median points of our data set, the endowment supported 14.1% of operating expenses and represented 0.6x coverage of tuition discounts. Flat or depleted endowment market values in 2022 also led to a diminished, but still substantial role on the balance sheet, measured by 4.0x median Endowment-to-Debt ratio. The net flow improved to -2.0%, as spending from the endowment was partially offset by new gifts, providing an additional source of endowment growth.
The endowments in this study range from supporting a small fraction of the university budget to supporting more than half (Figure 2).
The median level of endowment dependence was 14.1% in 2022, which was similar to the level in 2020, and down from the uptick to 16% in 2021. The ups and downs of endowment dependence over the past three years have been driven by the major shifts in expenses; endowment support has grown consistently at more than 4% per year during that period (Figure 3).
In 2021, nearly half of institutions that saw growth in endowment dependence also experienced a contracting operating budget—a very unusual financial outcome for the modern-day university. That trend reversed emphatically in 2022, as operating expenses increased at every institution in our study. For more than 75% of private colleges and universities, growing costs coincided with a reduction in endowment dependence in 2022, as shown in the lower right-hand corner of Figure 4.
One of the pressure points for the operating margin is the growing “cost” of forgone revenue in the form of discounted tuition provided to students as financial aid and scholarships. Financial aid commitments have increased for the colleges and universities in our study every year. This trend continued in 2022, when the median growth rate in financial aid was 12.0%. 8 The average tuition discount was 44%, meaning on average, institutions collected 57% of the tuition charged to students. Net tuition revenue growth has been limited in 2022, as schools have increased financial and merit aid to respond to growing student needs and the competitive enrollment landscape. 9
The endowment distribution supports financial aid and scholarships directly via endowments restricted for those purposes and indirectly by subsidizing total costs, which increases the availability of other funds that can be used to support financial aid. Endowment Support-to-Financial Aid is a coverage ratio that considers the direct and indirect roles the endowment plays in pricing strategy. 10 It measures the relationship between endowment distribution and tuition discounts to compare the endowment subsidy to the budget to the forgone revenue discounted to students. The coverage ratio of endowment distribution to financial aid ranged from 0.1x to 4.6x and the median was 0.6x.
Coverage Ratios
A coverage ratio of 1.0x, means the endowment subsidy (a revenue line) and the student subsidy (a contra-revenue) are evenly matched.
When this relationship is greater than 0.5x and closer to 1.0x, we believe institutions are discounting from a position of financial strength.
The institutions that have endowment “coverage” for financial aid can offset forgone tuition revenue with endowment spending (Figure 5). This enables them to deliver their discounted price to students from a position of strength, as shown in light blue shading in the upper-right quadrant. The colleges and universities in green shading on the lower-right side are offering high discount rates, but from a weaker financial position. Without a higher subsidy from the endowment to offset this forgone revenue, they will need to employ other financial levers—such as auxiliary revenue, annual fund gifts, and careful expense management—to fund these commitments and balance the budget.
The median change in endowment market value in 2022 was -7.5%, a reversal of the 39% increase in 2021 (Figure 6). Nearly every institution saw a drop in endowment market value in 2022, while debt experiences varied. On average, debt loads in our study increased 9%, but the median declined 0.7%. More than half (56%) of the colleges and universities reduced their outstanding debt balance in 2022. For those that increased borrowing, increases ranged as high as 66%, skewing the average.
In addition to long-term performance, net flow—the ratio that calculates the net rate of spending and inflows—is an indicator of whether the endowment will keep pace with the enterprise, lose purchasing power, or take on a greater role in the future.
Net flow is a metric that tends to vary considerably by institution, and from year to year for some institutions, because it is sensitive to cash flow timing and unanticipated events, such as the gift of a large bequest. The calculated rate is also sensitive to the beginning endowment market value, which is the ratio’s denominator. Inflow rates and outflow (spending) rates were lower in 2022 because the beginning market value denominator was elevated due to strong 2021 investment performance (Figure 7).
The median net flow rate was -2.0%, meaning that nearly half of the -3.6% spending rate was offset by 1.6% inflow rate. While effective spending rates were lower in 2022, most colleges and universities continue to draw a steady level of spending and adhere to the long-term discipline built into most endowment spending policies. 11
Positive net flow rates were driven by strong inflows, and, in some cases, more muted spending rates (Figure 8). Net flow is a source of endowment growth when inflows outpace outflows. At the lower end of the net flow range (right-hand side), high spending significantly overshadowed inflows. To grow their endowment, those institutions must rely on performance outpacing a low net flow rate. In the middle of Figure 8, we see a variety of experiences. In some cases, high spending is partially offset by successful fundraising; in others, we see lower spending accompanied by low inflows.
An annual review of Endowment Radar results provides context for discussions about investment policy and endowment management, as well as an institution’s financial sustainability. It can help institutional leaders and investment committees understand key links to the enterprise as they consider or underwrite the liquidity and risk profile of the endowment.
In our case studies, we anticipate the conversations about two different Radar charts, one example where the endowment plays a significant role and another where the endowment has a more limited role (Figure 9). Each institution can use this information to discuss the current and future role of the endowment.
The private college and university business model experienced more change in 2022. For many institutions, higher costs and financial aid commitments were accompanied by a reduction in endowment market value, but net flows provided hope that the endowment can keep pace with the growing enterprise. While the endowment’s role was slightly diminished this year, it continued to play an important role in funding the enterprise and providing ballast to the balance sheet and the sustainable financial model. Endowment Radar brings together analyses of several financial metrics that can and often do change from year to year. Reviewing these results helps us manage with an eye toward future risks that may impact investment markets and university operations, including inflation, interest rates, and demographics. We evaluate these metrics and the role of the endowment in supporting colleges and universities during these tumultuous times to support near-term and long-term decisions and strategies.
Shreya Vajram also contributed to this publication.
Notes on the Data
This report includes data on 89 private college and university clients of Cambridge Associates, with endowment market values as of June 30, 2022, ranging from $78 million to $55 billion, with a median of $1.3 billion. Most of the data used in this report were provided to Cambridge Associates LLC through our annual survey of colleges and universities. We have accessed additional data through publicly available audited financial statements, specifically on tuition discounting and to fill gaps in reported data. “Endowment” is used throughout to refer to the entire long-term investment portfolio (LTIP); the vast majority of college and university LTIPs are composed of endowment, though operating funds and other capital are often invested alongside.
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]]>There are valid arguments for—and against—using spend-down funds to achieve philanthropic and investment goals. This paper provides historical context for spend-down funds, considers nuances for achieving good governance, and suggests an approach for dynamic asset allocation strategy, with case studies as illustrations. For spend-down investment strategy, we suggest a three-phase, adaptive approach, including:
While spend-down portfolios may seem radical to some investors, effectively turning the perpetual endowment model upside down, this approach—if executed well—can help institutions and individuals achieve the work of a lifetime.
The term “spend-down fund” refers to a time-limited investment pool, designed to spend capital faster than it generates capital through returns. In other words, spend-down funds are pools of assets that are designed to “spend down” to zero. Some have a specific end date (e.g., 2050), whereas others are variable (e.g., an estimated date based on the lifetime of the trustees or beneficiaries). Spend-down funds allow for a higher level of annual spending versus annual spending from a perpetual endowment pool; annual giving from a spend-down fund can be 10% or more, whereas perpetual endowment spending is generally in the 4% to 5% range, to maintain or grow purchasing power after spending and inflation.
Spend-down or “time-limited” charities are nearly as old as foundations in the United States. According to the Duke University’s Center for Strategic Philanthropy and Civil Society, there have been time-limited investment pools in the United States since 1890. Prominent examples include the Atlantic Philanthropies, the Bill & Melinda Gates Foundation, Conservation International, and the Diana, Princess of Wales Memorial Fund. There are also variations of spend-down funds, among the most notable of which is the Giving Pledge. Launched in 2010, its members—including Warren Buffett (Berkshire Hathaway)—have committed to giving away at least half of their wealth during their lifetimes. And spend-down funds are on the rise—a recent survey report from Rockefeller Philanthropy Advisors indicated that while perpetual models remain the most common, nearly a quarter of philanthropies established since 2000 have a time-limited model.
Beyond foundations and philanthropy, spend-down strategies are widely used for retirement planning, from target-date funds for individual retirement accounts to “glide paths” for institutional defined benefit portfolios, and for other institutional portfolios such as settlement trusts.
Ultimately, the decision of which philanthropic path to take—spend-down funds or investing for perpetuity—is up to the investor. Making an assessment about the appropriate path involves consideration of a range of variables.
While spend-down funds can be radically different from perpetual endowments and family trusts, one success factor is consistent: good results require good governance. This means setting clear policies and objectives, carefully curating who oversees investment and spending policies, separating governance and management of investment assets, and adhering to best practices for meetings and communications with constituents.
So, what is different about spend-down fund governance? A few things:
While spend-down funds may have a target date to get to zero, in practice the investment strategy should be dynamic and adaptive. An investor may start with a clear plan spanning 15 years, for example, but capital markets may not always cooperate with that vision. It is important to have flexibility to adjust spending both up and down and to adjust asset allocation plans.
Our framework starts with liquidity management, working backward from the target end date. The goal is to ensure sufficient liquid assets to support a pre-determined number of years’ spending (i.e., minimum coverage ratio), and a buffer for additional years through lower-risk diversifying assets. Taking this approach also helps determine how much the portfolio can afford to invest in growth assets: in the early years, when spending needs are relatively low, more growth-seeking investments can be appropriate—including private equity and venture capital. Over the middle years, a keen eye on liquidity and spending coverage helps develop a transition plan to a more defensive portfolio, especially as the end years approach.
$100 million initial value, no additional inflows, $11.1 million spending/year, total spend: $164 million.
Return assumptions: For simplicity, we assume consistent annual returns, of 10% for growth investments (e.g., public and private equities), 7% for diversifiers (e.g., hedge funds and private credit), and 3% for liquidity pool (e.g., cash and bonds).
Spending: We assume annual spending from the liquidity pool only, and annual rebalancing to have two years’ spending in the liquidity pool and an additional two years’ spending in diversifiers (if possible).
Results: What results is a steady decline in assets, but significant growth beyond merely spending down cash (total spending of $164 million, so 1.6+ times the initial $100 million pool value).
Observations: Notably, the asset allocation does not change in a straight line from growth to liquidity—rather, the aim is to seek the maximum possible growth allocation while maintaining sufficient liquidity to live through two to four years of market volatility.
Initial Funding and Cash Flows: $300 million of inflows over the first five years, $194 million in outflows (grants) in Years 1–7, $245 million in additional grants anticipated through Year 15 (total of $439 million or 1.5 times contributions).
Asset Allocation: Started at 47% growth (public and private equity), 37% diversifiers, and 16% liquidity (short duration bonds), and adjusted dynamically over time. As of Year 8, approximately 40% growth and 60% diversifiers and liquidity.
Returns and Spending: Same return assumptions as for Case Study 1—10% for growth, 7% for diversifiers, and 3% for liquidity. Annual spending of $30 million from Years 7–14, with final remainder spent in year 15 (projected at $5 million).
Private Investments: Growth-oriented private commitments during Years 2–5 only.
Governance: Monthly meetings and frequent rebalancing.
Key Insights: Actual outcomes will never follow a straight line or perfectly align with plans. In this case, the institution and Cambridge Associates team adjusted to cash inflows at multiple points in the initial years, along with dynamic market conditions. Throughout this time, good governance and clear communication were critical.
Case Study 1 is a stylized model, and Case Study 2 is a simplified version of a real institution’s experience. In practice, capital market returns will be variable and cash flows (in and out) may not be so steady. Spend-down funds require regular assessments to ask: Are we on track to meet our risk and return objectives and initial spending plans? Could we spend more, or should we spend less? Are any additional inflows expected? Could we afford a one-time large spend to support a pressing need? How do we best weather through a significant market downturn? Should we consider tactical deviations from our strategic plan given current opportunities and valuations? What are the range of possible outcomes from here forward? Lots to discuss—all in good time, at regular and well-structured meetings!
Also thinking beyond the spend-down portfolio, as with all investment pools, a total enterprise perspective is required. In many cases, spend-down funds are just one part of a larger whole—for example, the institution highlighted in Case Study 2 has a perpetual endowment alongside the spend-down portfolio. And some Giving Pledge signatories may have permanent family capital alongside the more than 50% they plan to give away.
While the focus of this paper is investment strategy and governance, there is much more to the picture—including fund-level implementation options and achieving goals beyond financial returns. For example, since the goal of spending down assets is to maximize positive impact over the life of the portfolio, it stands to reason that investors may seek to maximize the allocation to impact-oriented investments as well as philanthropy. Within the portfolio, investors could integrate environmental, social, and governance (ESG) factors as well as sustainable, diverse, and targeted market-rate impact investments. These could be combined with grants and investments with below-market risk-adjusted returns outside the portfolio, in order to both seek returns and achieve mission-related goals across the full spectrum of capital.
More investors are electing to spend down their assets rather than build perpetual portfolios. The spend-down approach comes with its own opportunities and challenges, but changing perceptions around philanthropy and a desire for more immediacy around potential impact is driving a new trend toward spend-down funds. Electing a spend-down fund approach, however, still requires a foundation of good governance. A structured but dynamic, multi-phased asset allocation strategy can help investors stay on the spend-down path, although stakeholders should expect and be able to adapt to twists and turns along the way. If executed well, spend-down portfolios may help investors effect greater change in the world.
Christoph O’Donnell, Managing Director, Endowments & Foundations
Margaret Chen, Global Head, Endowment & Foundation Practice
Sarah Edwards and Chris Parker also contributed to this publication.
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]]>An institution considering initiating or adding to a mission-aligned investing strategy must first define its objectives. Next, it should evaluate the available approaches and tools on portfolio structure, impact, and performance expectations. Any planned changes must be balanced with the need to continue support for ongoing operations and grantmaking activities.
Drawing on research that Cambridge Associates has conducted with major grant-making foundations, this paper discusses the shifting mission-aligned investment landscape and the importance of governance in developing and overseeing a mission-aligned investment program. We lay out important steps in the mission-alignment process to define the scope of the commitment, structure, key milestones, and measures of success. These insights are based on collective lessons learned from organizations with a range of experiences and missions.
Traditionally a foundation’s endowment portfolio has had a simple—not easy—objective of maximizing risk-appropriate returns to support the mission via grantmaking. The formula was straightforward: seek a competitive investment return to fund grants and programs that focus on societal and environmental impacts. Growing the investment portfolio will increase grantmaking capacity, which in turn helps to support the foundation’s mission. The traditional investment policy typically reflected this goal and laid out a growth-oriented mandate for the investment team to manage risk and to generate a consistent, and hopefully growing, spending stream.
Over recent years a growing awareness of environmental, social, and governance (ESG) issues has added layers to the investment process. Some foundations and their stakeholders have reconsidered the relationship between assets, investment strategies, and the achievement of the mission. For some, this introspection has compelled them to implement new ways to deploy assets in program-related investment (PRI) plans and/or to incorporate mission-related investment strategies in their endowments.
Mission alignment is a blanket term that describes incorporating objectives from an institution’s mission into investment decision making. There are many tools investors can use to align investments with mission. The field of sustainable and impact investing has evolved over the years from values-based exclusions to holistic incorporation of financially material risks and opportunities, often associated ESG factors (Figure 1).
There are also degrees of adoption when it comes to implementation. Alignment can be integrated across the entire endowment, as a “carve-out” within the endowment, or as a carve-out outside the endowment (Figure 2).
Given all these tools and choices, there is wide disparity in how individual foundations define and implement mission alignment. The important work of governance is plotting a path that reflects the foundation’s priorities.
Throughout our conversations with major foundations that have initiated a mission-aligned investment program, we heard repeatedly about the importance of governance in planning, implementation, and oversight. We summarize the lessons learned and the steps followed in the development and articulation of a mission-aligned strategy.
The details of interpretation and implementation and even the initial exploration of a mission-aligned investment program may reside with the investment committee or another sub-committee of the board. However, we have learned that the initiative will be more robust when there is ample opportunity for the full board to engage in the deliberations and actively participate in the ultimate decision. The implications of these decisions will affect the entire organization: investments, programs, and stakeholders. It is important to clearly define priorities, because the proposed alignment may reflect either a temporary or permanent shift away from the prioritization of preservation and growth of endowment purchasing power to support grantmaking, or at least a short-term disruption to the funds available for philanthropy. While disruption is a possibility, an institution can align with its mission in such a way that still maintains purchasing power to support grantmaking in perpetuity.
It also is possible that the deliberations will result in a rejection of pursuing a mission-aligned investment strategy. Alternatively, a foundation may choose to commit to a separation between the investment portfolio and the mission-aligned initiative.
Once a foundation has identified the alignment priorities, it needs to develop a keen understanding of what is owned in the investment portfolio: that is, how alignment is defined (for example, exposure to certain products, ownership of specific companies, and/or industry specific definitions), where the portfolio is already aligned, and where investments undermine the goal. Given the dynamic nature of asset management and the fact that most investors delegate security selection to external managers and that some managers may be reluctant to share information on holdings, it is difficult, if not impossible, to know what the portfolio’s holdings are at every moment in time. However, an annual review can provide visibility into the degree to which the portfolio reflects an institution’s mission-alignment goals. This assessment identifies the changes that would need to be made to bring the entire endowment into alignment, how long it would take to make these changes, and the level of disruption that would result from implementation and therefore the resulting disruption to payout. This requires a review of both active and passive investment managers. While one can speculate about the tradeoffs that may exist in both risk and return in a mission-aligned portfolio by examining historical returns, it is difficult to predict the future. As with all investment decisions, careful oversight and evaluation is necessary.
The analysis conducted in Step 2 can help the foundation determine the best strategy for pursuing the four major implementation methods: exclusions, ESG integration, impact investments, and engagement in the entire portfolio. From there a working group would typically recommend the strategy or strategies that could be implemented to move the investment assets into alignment.
A multi-million-dollar question is “how much?” Should the foundation commit to aligning the entire endowment portfolio, a portion, or none? If the evaluation in Step 2 determines that total alignment would lead to a significant level of disruption to investment performance and programs, but the commitment to deploying investment assets to address mission is high, a compromise may result in a more modest initial recommendation to commit a portion (carve-out) of assets that are aligned with the goal. Over time, governance can reevaluate the impact on the portfolio’s risk/return profile and on funds available for grantmaking. The process may lead to additional commitments in the carveout or greater integration.
Our research shows that alignment efforts work best when governance and staffing follow a similar structure. For example, if the aligned portfolio is separate from the endowment portfolio, then the governance is the responsibility of a separate investment committee. If the alignment is conducted within the endowment portfolio, then the oversight is owned by the investment committee and the policy is reflected in the organization’s investment policy statement.
Step 3 determines the scope of the alignment effort and its structure: placement in the endowment or in a separate portfolio. Then a foundation needs to answer some key governance questions:
The two most important jobs of the governing group are 1) approving the investment policy, including benchmarks and incentives, and 2) hiring the management team to implement the mission-aligned program (either within or separate from the existing investment team) and clearly defining roles and responsibilities.
The staff and professional resources dedicated to the effort should reflect the level of commitment to the effort. A modest effort to engage with managers or incorporate ESG into the manager selection process in the portfolio may be implemented by existing staff. A new mission-aligned investment mandate within or outside of the portfolio will most likely involve hiring additional staff with the expertise and network to implement the strategy. In either case it will be important to enlist the current investment leadership team to identify staffing and resource needs.
Our lessons learned again point to the benefits of aligning strategy, governance, management, and policies that guide the program. The governing body and staff and advisors who are working on the aligned portfolio should determine the financial and impact metrics that will measure progress and the timeframe over which progress will be evaluated. An Investment Management Agreement or compensation plan for internal staff should align incentives with the metrics and goals.
For a foundation that is considering initiating and/or increasing its commitment to mission-aligned investing, a thoughtful process is essential to reaching goals and achieving long-term success. Determining the right approach for the foundation’s mission and the endowment starts with reflection and education to build a shared understanding. This is a team sport that will involve trustees, senior leaders, and foundation stakeholders. No one person or committee can shoulder this commitment alone. Together they will ask and answer:
Mission alignment will not happen overnight, and a foundation must balance any planned changes with the need to continue support for ongoing operations and grantmaking activities. It is important to lay out a patient, but disciplined timeline for implementation. Plan to implement ideas and evaluate progress. Learning and adapting as you go are keys to success in mission alignment.
Katherine Cavanagh, Madeline Clark, and Sandra Urie also contributed to this publication.
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]]>Our 2021 Endowment Radar Study reflects the growing role of the endowment in the private college and university business model (Figure 1). This year saw notable growth in the endowment’s support of the budget and its contribution to balance sheet health.
The endowments in this study range from supporting a small fraction of the university budget to supporting more than half (Figure 2). The average level of endowment dependence grew from 18.6% in 2020 to 20.3% in 2021.
In 2021, the shifts in the underlying components of the endowment dependence ratio were particularly notable. This year, nearly half of the institutions that saw growth in endowment dependence also experienced a contracting operating budget, as shown in the upper-left quadrant of Figure 3. For many, this very unusual financial outcome was driven by a contraction of activity imposed by the pandemic. Only 22% of the participating institutions saw a growth in endowment dependence because of greater endowment spending dollars supporting a growing operating budget.
One of the pressure points for the operating margin is the growing “cost” of forgone revenue in the form of discounted tuition provided to students as financial aid and scholarships. The average discount rate for the colleges and universities in our study has climbed every year, and this trend continued in 2021, when the average discount rate grew from 42% in 2020 to 43% in 2021. 14 This means that, on average, an institution collected 57% of the tuition charged to students. This line item has eroded net tuition revenue in 2021, as schools have increased financial and merit aid to respond to growing student needs and the competitive enrollment landscape. 15
The endowment distribution directly supports financial aid and scholarships via endowments restricted for those purposes and indirectly by subsidizing total costs, which increases the availability of other funds that can be used to support financial aid. Endowment support-to-financial aid is a coverage ratio that considers the direct and indirect roles the endowment plays in pricing strategy. 16 It measures the relationship between endowment distribution and tuition discounts to compare the endowment subsidy to the budget to the forgone revenue discounted to students. On average, the private colleges and universities in our study were in the enviable position of 1.1 times the coverage ratio of endowment distribution to financial aid and ranged from 0.1 to 5.2.
The institutions that have endowment “coverage” for financial aid can offset forgone tuition revenue with endowment spending (Figure 4). This enables them to deliver their discounted price to students from a position of strength as shown in light blue shading in the upper-right quadrant. The diamonds in yellow shading on the lower-right side are offering high discount rates, but from a weaker financial position. Without a higher subsidy from the endowment to offset this forgone revenue, they will need to employ other financial levers—such as auxiliary revenue, annual fund gifts, and careful expense management—to balance the budget.
In 2021, the endowments in our constant universe grew at a rate of 35% on average, far outpacing the growth of institutional debt, which grew 4% in the same period (Figure 5).
This dramatic increase in endowment market values far exceeded any recent increase and bolstered the ratio of endowment to debt, strengthening most institutional balance sheets. Debt has been a valuable and relatively cheap source of liquidity in recent years, but we see institutional appetites are slowing after significant debt increases in 2020. While, on average, debt loads in our study increased, more than half of the colleges and universities (54%) reduced their outstanding debt balance in 2021.
The effective endowment spending rate is the ratio that measures the dollars spent from the endowment as a percentage of the portfolio’s beginning market value. The amount spent is most often determined by a spending policy designed to distribute endowment wealth fairly across generations. 17 In 2021, we did see a slight increase in the rate of endowment spending. For some institutions this increase is the result of a higher spending rate from the endowment to offset disruptions in student revenues. Most colleges and universities, however, continue to draw a steady level of spending and adhere to the long-term discipline that is built into most endowment spending policies.
In addition to long-term performance, net flow—the ratio that calculates the net rate of spending and inflows—is an indicator of whether the endowment will keep pace with the enterprise, lose purchasing power, or take on a greater role in the future.
Net flow is a metric that tends to vary considerably by institution, and from year-to-year for some institutions, because it is sensitive to cash flow timing and the unanticipated event, such as the gift of a large bequest. The net flow rate for the median institution was -2.6%, meaning that nearly half of the 5.0% spending rate was offset by 2.3% inflow rate.
Institutions with positive net flow were driven by strong inflows, and in some cases, more muted spending rates (Figure 6).
Net flow is a source of endowment growth when inflows outpace outflows. At the lower end of the net flow range (the right side of Figure 6), high spending significantly overshadowed inflows. To grow their endowment, those institutions must rely on performance outpacing a low net flow rate. In the middle of the net flow chart, we see a variety of experiences. In some cases, high spending is partially offset by successful fundraising; in others, we see lower spending accompanied by low inflows.
An annual review of endowment radar results provides important context for the investment policy and endowment management. It can help institutional leaders and investment committees understand key links to the enterprise as they consider or underwrite the liquidity and risk profile of the endowment.
In an example we consider the Endowment Radar of Case Study University (CSU), shown below in Figure 7. On the left side, we see the 2020 Endowment Radar chart plotted against peer experiences, and on the right side, we have the updated 2021 chart.
The comparisons provide some helpful context, but also some interesting observations of the drivers of these changes:
With a contraction in the financial aid and operating costs, 2021 was an unusual year for CSU, but these reductions may be short-lived as 2022 brings some return to more traditional conditions. Fiscal year 2021 also delivered outsized performance, a tailwind that bolsters the balance sheet and increases the potential role of the endowment. These returns are the upside of investment risk and illiquidity, but expectations and spending reliance will need to be managed going forward to preserve intergenerational equity and the long-term role of the endowment.
The college and university business model experienced more change in 2021. For many institutions, it was a financially strong year, as outsized endowment returns buoyed balance sheets and provided greater levels of budget support. Comparing two years of endowment radar metrics, we saw unprecedented growth that needs to be balanced across generations of stakeholders. Higher endowment values will translate to higher spending, especially for institutions with endowment spending policies that are linked to endowment market values. This good news must always be managed with an eye toward future risks that may impact investment markets and university operations, including inflation, interest rates, pandemic conditions, and demographics.
As geopolitical and economic conditions continue to threaten finances in fiscal year 2022, we will watch these metrics and the role of the endowment in supporting colleges and universities during these tumultuous times.
Shreya Vajram also contributed to this publication.
Notes on Data
This report includes data on 85 private college and university clients of Cambridge Associates, with endowment market values as of June 30, 2021, ranging from $83 million to $58 billion, with a median of $1.2 billion. Most of the data used in this report were provided to Cambridge Associates LLC through our annual survey of colleges and universities. We have accessed additional data through publicly available audited financial statements, specifically on tuition discounting and to fill gaps in reported data. “Endowment” is used throughout to refer to the entire LTIP; the vast majority of college and university LTIPs are composed of endowment, though operating funds and other capital are often invested alongside.
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