How University Endowments Invest in Capital Markets

Higher education institutions have a long history of mobilizing financial donations to support chairs, research and increase operational revenue. The first recorded endowment has its origins in ancient Rome when the Stoic philosopher Marcus Aurelius created academic chairs for the study of philosophy through Athens in 176 AD.

Today, however, university endowments work a little differently. While their financial executives still budget university operations, considerable funds are managed by teams of financial professionals and invested in the stock market through private equity portfolios. Most of these returns are kept in perpetuity to ensure the autonomy and survival of the institution.

In 2021, university endowments in the United States made up the majority of these high-yielding funds, maintained at some of the wealthiest institutions. The top five Ivy League colleges posted a combined value of approximately $213 billionaccording to NACUBO-TIAA 2021 Endowment Study.

But what is an academic endowment and how has its meaning and significance changed over time? Here we will take a closer look at the history of these funds, their investment frameworks, and how the equity generated from their portfolios serves universities.

What is a university endowment?

A university endowment is formed when one or more donors donate a large sum of money or other economic asset to generate financial support for a nonprofit institution. Monetary donations are added to a diversified fund portfolio and invested in various asset classes, such as fixed income, bonds, hedge funds, real estate and more.

Alongside pension funds, sovereign wealth funds, and insurance companies, university endowments are classified as institutional investors that manage large-scale assets with long-term investment horizons.

A brief history of endowments

Following the creation of chairs in Athens, the concept of endowing chairs officially took hold in 1502. In that year, the universities of Cambridge and Oxford created their first academic chairs conferred by the Countess of Richmond, who subsidized the study of philosophy, economics, Latin, and other academics. disciplines.

In the United States, however, the endowment concept only rose to prominence in the late 19th century, as a handful of private universities recognized that their autonomy and survival depended on adequate financial capital. Universities that expanded their financial safety net during this time, supported by the philanthropy of Leland Stanford, Andrew Carnegie, John D. Rockefeller and other millionaires, now manage some of the richest endowments in the United States.

Types of academic endowments

Restricted endowments
Restricted endowments are created by a donor to exist in perpetuity. The principal amount is never used, while the gains from the invested assets are exploited according to the stipulations of the donors. These grants are intended to finance specific areas, such as teachers’ salaries.

Unlimited prizes
Unrestricted endowment funds can be spent or saved at the discretion of the recipient and are not time-limited or subject to the wishes of the donor. They are usually initiated by institutions that benefit from the use of unrestricted endowments.

Term allocations
Term endowments stipulate that the principal can be spent after a particular occasion or period.

Quasi-endowments
A quasi-endowment is used to finance a specific objective. The principal is retained while the income is spent according to the wishes of the donor.

How do endowments support universities?

The principal of the endowment or “corpus” is not spent – rather, a percentage of annual returns, based on the donor contract or financial agreement, is budgeted for operations, such as tuition, l financial aid, scholarships, research, campus programs and charitable donations.

What is the staffing model?

The late David Swenson, CIO of Yale’s endowment from 1985 to 2020, and Dean Takahashi, senior principal at Yale University, pioneered the “Yale model” of modern endowment investing.

By managing Yale’s endowment, Swenson invested 75% of the university’s $1 billion portfolio in stocks, bonds and cash. Today, the $30 billion endowment is one of the largest in the country, second only to Harvard’s endowment.

This methodology has revolutionized investing, which has increased exposure to alternative assets such as private equity, hedge funds and real estate. Although not always successful, many endowments and foundations that adhere to the David Swenson model have boosted returns through alternative asset allocationswith private equity and hedge fund bets playing a primary role in the portfolio.

Who manages academic endowments?

Academic endowments of $1 billion or more are managed by academic investment offices and led by a Chief Investment Officer (CIO) who manages the assets, day-to-day operations, and liaises with the Board of Trustees on the risk mitigation and investment strategy. The CIO engages a team of external investment fund managers who oversee parts of the endowment and advise on how and where to invest. These managers, who are individuals or represent a company, buy and sell market shares in various asset classes while monitoring fund performance.

How have prize pools evolved in 2021?

The stock market boom inaugurated huge returns for fiscal 2020 and 2021, which made the richest university endowments prosper. According to an annual survey conducted by TIAA and the National Association of College and University Business Officers (NACUBO), the average college endowment returned 30.6% in fiscal year 2021. And the largest endowments posted an average return of 50% during this period for their private equity investments and in venture capital.

Quick Facts About University Endowment

A college endowment is the aggregation of multiple donations into a single investment fund – in this way, college endowments work similarly to mutual funds

Except in specific cases, “invading” an endowment or breaking its terms for a narrow purpose, such as paying off a debt, is rare.

The US tax code requires endowments to spend up to 5% of their annual principal on operating income

An Investment Policy Statement (IPS) outlines donor constraints and policies on how the university may invest and use the donation and codifies the objectives of the institutional investor

The “payout” is the quarterly distribution of endowments for operating income, with a percentage decided by the board of directors in accordance with state regulations.