Endowment Matters

Endowment Portfolio: Passive Versus Active

Schools with endowments in the small to medium range (say, $2 million to $50 million) should charge their investment committees with studying how their endowments might fare with more active investment oversight, rather than the passive investment policies that so many of these endowments follow.

It's safe to say that The Great Recession had an effect on those schools with passively-managed endowments. Witness the schools that found themselves facing temporarily frozen assets--the ones that were supposed to be liquid. Given the spectacular performance of the markets in the lead-up to Fall 2008, most passively-managed endowments had low liquidity ratios...a real danger for those schools that must have an endowment draw to make the operational budget work properly.

When a school with a $15 million operating budget, 12-15% of which stems from endowment draw, discovers that its endowment liquidity has been compromised, one can imagine the panic which ensues.

Lesson #1 -- increase liquidity levels in your endowment.

Lesson #2 -- encourage more active management of your endowment; be sure that your portfolio manager(s) will be able to sell, reallocate (and so forth) with relative ease, rather than locking you into strict rules about when assets can or can't be sold, etc. Ongoing reallocation is a strategy to be embraced, from here on out.

There is a place for passive portfolio management, but that place is not for independent schools, as we must go out of our way to maintain inter-generational equity for our students and families. Active portfolio management will help us ensure that, by always questioning market trends.

Not unlike our university counterparts, we will have to become much better at managing our endowments.

Planning for an Endowment Crisis

Niall Ferguson had a great article in today's Financial Times, addressing the sovereign debt crisis in Greece, which is affecting the European Union. He submits that it's only a matter of time until a similar crisis erupts in the US.

School leaders would do well to consider the potential implications, were such a crisis to occur in the US. The question is this: how can schools best hedge against this kind of crisis in terms of endowment management? If you haven't engaged your asset manager in a discussion of this sort, I would suggest that you do so sooner rather than later, as it may take time for him/her to 1) propose a new asset allocation and 2) execute the reallocation over a fixed period of time. As one example, George Washington University decided last year to reallocate their portfolio to allow 30% of funds to be invested in natural resources and commodities.

How active is your management?