Increased endowment spending among universities and the search for more predictable annual returns could cause investment returns to suffer, says Watson Wyatt Worldwide.
Recent spending increases by Harvard and Yale have put pressure on other universities to follow suit. Additional pressure is coming from some observers who believe that as endowments grow, so should spending levels. The mounting pressure means universities will have pay closer attention to spending when setting investment strategies.
“Whether by mandate or natural competitive forces, the prospect of increased annual spending raises significant investment strategy issues for endowments,” says Carl Hess, director of Watson Wyatt’s investment consulting in North America.
According to Hess, endowments have had success in past years because they are more flexible and can adopt higher investment risks than pension funds and other institutional investors. Endowments can compensate for investment losses by decreasing spending where as pension funds need to provide predictable annual retirement benefits through structured investments, which results in lower returns.
A report by the National Association of College and University Business Officers and TIAA-CREF stated that last year, universities with assets greater than $500 million paid out 4.4% of their assets, a decrease of 0.2 percentage points from the year before. Some critics believe universities should spend a minimum of 5% on annual spending.
“This is a delicate balancing act,” says Lisa Laird, the investment consulting office practice leader at Watson Wyatt in Los Angeles. “The advantages of higher spending today need to be weighed against the possibility of smaller asset pools—and thus smaller payouts—10 years from now. Of course, increased spending can be offset by increased fund-raising, but development can be difficult in a bear market when there are fewer opportunities to donate appreciated assets.”
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