College and university endowments are absolute marvels. Yes, you play an essential role in the long-term health and sustainability of your institution as its financial backbone, providing a stable source of income through donations and investments. Through your work you fund faculty salaries, research initiatives, scholarships, and so much more.
However, although you are charged in your day-to-day with key decision-making around the financial responsibilities of the present, your purpose extends far beyond this moment in time.
You are tasked with improving the lives and academic opportunities of your current students. At the same time, 100 years from now, the story of your endowment’s legacy will still be unfolding — and the investment choices you make today have the potential to radically alter the college-going experiences of generations to come.
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You must begin your journey with the critical step of establishing sound investing governance (i.e., authority structures, policies, and processes) for your institution’s endowment, no matter how “small” you consider your endowment to be.
Why is this step so important? Think about your investing governance documents like an operating agreement in a business. The operating agreement is the official decision-making process. It governs how good decisions are made. And a good decision-making process is vital. Because in the world of investing, you cannot control your investing outcomes, but you can control your investing processes.
Investing governance for college endowments defines the authority structure, as well as decision-making policies and procedures for the endowment’s investment strategy. When I say “authority structure,” what I mean by that is we are bestowing proper authority and responsibility by outlining who is accountable within the college's leadership members for fulfilling the fiduciary duties for the endowment funds.
In addition to making the roles and responsibilities clear, your investing governance framework will empower your endowment's managers with clear guidance and authority to carry out their duties. Moreover, it will help you better align your investing strategies with your college or university’s overall mission, as well as your financial objectives.
As an individual, the financial goals you set for yourself are in service of greater goals — financial freedom, the ability to travel the world in retirement, college tuition for your children, the home your family has always dreamed of, and so forth. Meaning money is not the goal itself, but a tool to help you achieve your true goals in life.
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The same holds true for your college or university’s endowment. There is a purpose for your endowment beyond achieving a particular percentage of profit. Therefore, as an initial step in establishing your investing governance framework, you must answer what is the greater purpose for your endowment?
The only difference between answering this question as an individual investor and a college endowment is that you can look ahead to greater timespans, decades and generations into the future. You want to be broad enough with your purpose to be looking beyond the horizon, but specific enough to give a tangible purpose that helps others catch the vision of what you are trying to achieve.
This is so important, because folks will not connect the decisions you need to make today with what’s to come in the future if they cannot easily connect to the “why” behind the work you will be doing.
Again, it’s this long-term impact that makes this work so fulfilling. For example, we recently worked with a college on their endowment’s investing governance. As an institution that is on the precipice of turning 200 years old, their goal was to achieve $200 million in assets under management. Why? For the institution to possess the strength to find department chairs, fund scholarships, and future growth for the university.
More often than not, the oversight and management responsibilities of a college endowment will fall to your board of trustees or the formation of a dedicated investment committee, which often includes board members, administration leaders, and faculty members with investing expertise. The members of your investment governing body must possess a wide range of skills across key areas, including financial expertise, risk management, as well as a deep understanding of your institution’s mission and core values.
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When considering your board of trustees for this responsibility, it’s important to note that while your board undoubtedly has a reputation for highly skilled members in various fields, it’s rare to find a member who is an institutional portfolio manager. It’s even more of a rarity for that individual to want sole fiduciary responsibility. (If you do, however, that’s fantastic! Or scary ...)
Your board may still provide oversight as a whole, so clear governing documents covering your policies and guidelines will be essential to your success.
Your college endowment’s investment policies and guidelines should define the risk tolerance, asset allocation, and investment strategies that are in alignment with your institutional goals. You may need to establish ethical and socially responsible investing guidelines, so as to guarantee all decisions made will properly reflect the values of your institution, as well as the concerns of relevant stakeholders.
This documentation, commonly referred to as an “investment committee charter,” should encompass the following:
Your investment policy statement (IPS) will outline the objectives, guidelines, and procedures for the management and investment of your institution’s endowment assets. Or, more simply, the IPS is a document that outlines the processes by which you make investment decisions.
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Your goal within your IPS is to offer a framework that guarantees (to the best of your ability) investment practices that are ethical, prudent, and in alignment with the mission and values of your institution. Commonly, this document will set your target allocation, benchmarks, and acceptable risk tolerance.
Your investment portfolio construction will begin with asset allocation, before moving onto securities selection. This is how every investment process begins, commonly driven by answering the following questions:
Once you’ve made these decisions based on the goals you are trying to reach, you will measure the risk parameters of each. For example, what is our maximum allowable drawdown? You do this while knowing that you are reviewing historical results, not future predictions.
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From there, you will have a benchmark assigned to each asset class. You can now decide how you will manage these asset classes. Will you do so on your own, or will you hire an investment manager?
For context, here is an example of a target model portfolio with percentage breakdowns across equities, absolute returns, real estate, and fixed income — with policy parameter ranges of 5% in either direction:
Equities: 50%
Absolute return strategies: 20%
Real estate: 20%
Fixed income, cash equivalents: 10%
Again, this is only an example, but one thing you must remember when it comes to establishing your own portfolio is the importance of diversification.
When you possess a well-diversified portfolio, you can help mitigate risks from market volatility, ensuring the preservation of capital. Given how market trends can change over time (in both large and small ways) , we strongly encourage you to conduct regular reviews of your portfolio, as well as stress tests, so your investment committee can make any necessary adjustments.
Your endowment spending policy will define guidelines and procedures for determining how much you spend annually from your institution’s endowment. Your goal with this documentation is to strike a balance between providing a reliable stream of income in the present, while also preserving and growing the real value of the endowment over time.
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Commonly, a spending formula and rate are set based upon the current known financial needs, market conditions, inflation and long-term sustainability and university goals. Of course, you must build some flexibility into your formula.
Is this complex work? Yes. But it is critical to the success of your college endowment’s investing strategy. None of us can predict the future, even those of us who have been doing this type of work for decades.
The only thing any of us can control are our decision-making processes. That’s why this work of questioning and documenting your policies and procedures is paramount. When you take the time to establish a sound investing governance framework, you are putting your college endowment in the best position possible to achieve the outcomes you desire — today, tomorrow, and well into the future.
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