Can University Endowment Investment Policies Threaten Your Job?

Posted by Jeffrey Brown on Apr 21, 2010

Filed Under (Finance, Other Topics)

Earlier this year, I made  a post (click here) in which I suggested that universities might wish to increase their spending out of endowments to help maintain, during an economic downturn, their investment in high-value projects (such as recruiting and retaining top faculty and staff).  Such an approach would be consistent with one possible view of endowments – that they are to serve as a buffer stock or an insurance policy against bad economic times.  Some of the comments I received – as well as a post (click here) by my colleague David Ikenberry – were less enamored of this idea. 

Now, I have research to indicate that most universities, in fact, do NOT behave this way.  Rather, it appears that when universities suffer negative shocks to their endowments, they actually reduce the rate of spending from their endowment beyond what would be implied by their own spending rules.  In essence, they do not use endowments to protect their universities from larger spending cuts.  Instead, they appear to act in a manner consistent with trying to preserve the value of the endowment for its own sake.

Our research goes on to show that following endowment shocks, universities respond by cutting staff – including maintenance workers and secretaries.  Less prestigious schools tend to reduce tenured and tenure track faculty (most likely by not replacing those who retire or leave), whereas more selective institutions tend to do more to  protect their tenure-system faculty.  The only group that is unaffected by the shock is “administrators.”

We also find that when an endowment invests more of its resources in alternative asset classes – things like private equity, hedge funds, timber, commodities, and the like – universities make even larger cuts following a negative endowment shock.  This could be for one of two possible reasons.  First, these alternative asset classes are more illiquid, and thus not easy to access during down markets.  Second, it may be that the reported value of these assets – which are much harder to value than, say, publicly traded stocks – are overstated, and the endowment knows it (or at least suspects it).

These results suggest that university faculty and staff have a clear stake in decisions about how endowments are invested and in the payout policies. 

If you would like to read more about this, I can refer you to the paper itself (click here) or to a write-up about the paper that appeared in “Inside Higher Ed” (click here).