Educational Endowments in Crises

Abstract

Whether measured by institutional failures, asset price declines, or shocks to the real economy, the financial crisis of 2008 is widely viewed as the worst since the Great Depression. The turmoil has been particularly acute for institutions that rely heavily on financial assets to fund operations. Consequently, some universities with large allocations to illiquid alternative asset classes have disclosed liquidity problems as a reason for basic changes in strategy and services. Goetzmann, Griswold, and Tseng explore whether these effects on institutions will be long lasting, particularly if the global economic recovery is slow to materialize. In this article, the authors review data from previous studies on educational endowments extending back into the 1920s, examining the allocation policies from the early 20th century, and exploring the policies’ effects on asset values and endowment spending. Although similarities are noted between the endowment environments then and now, differences exist as well. In the late 1970s and early 1980s, the modern endowment model, which employs broad diversification, invests for total return with a strong equity bias, maintains a low cash allocation, and spends a percentage of total return, began to be widely adopted. The modern endowment model has recently undergone a paradigm shift away from publicly traded securities toward alternative assets, and a similar change in thinking—the decision to embrace “new era” equity investing to achieve diversification—occurred in the period of the authors’ study. The authors consider whether the adoption of a new philosophy of investing benefited endowments during the Great Depression and if the adoption of a new philosophy of investing would provide a useful decision framework for managers today.

TOPICS: Financial crises and financial market history, analysis of individual factors/risk premia, factor-based models