How Colleges Should Consider Asset Allocation, Endowment Spending, and Development in Light of COVID and Other Crises (Opinion)


Although the fall semester looks much better than the worst-case scenarios envisaged at the start of the summer, American higher education continues to face the enormous challenges that the COVID-19 pandemic has posed. In fact, many people believe that the pandemic has helped accelerate some of the problems that have plagued higher education for years, including unsustainable cost structures, declining enrollment, negative demographic trends, and real questions about the campus-based learning delivery model. .

Against this backdrop, boards and investment committees must respond to the current crisis while simultaneously addressing huge strategic questions about the future of the industry and their institution. We’ve developed a simple three-by-three framework to help them address these challenges and consider the role of staffing in helping to solve them. The framework considers asset allocation, staffing expenditures and development programs – both short and long term – and some of the key questions to ask about each of them.

Asset allocation

Short term. With a strong rally in financial markets, investment portfolios and endowment stocks are in much better shape than they were in the spring. Due to the strength of stock markets, you are likely overweight risky assets if you haven’t rebalanced yet. A natural question is therefore what to do now.

While the way forward is always unknowable, it is certainly important to understand and be intentional about your tactical positioning, risk profile, and liquidity positioning rather than just passively letting them depend on market behavior. This is all the more important as we continue to deal with the economic impacts of the COVID-19 pandemic and experience what could be one of the most uncertain and turbulent presidential election cycles in recent memory. .

Long term. Without a doubt, the higher education institutions that our endowments support are in a different financial situation than they were just a few months ago. Understanding the long-term strategic role of staffing is more important than ever. Ask yourself the following questions:

  • Does your strategic policy, which the board and committee likely adopted pre-COVID, still reflect the needs, constraints, risks, goals, etc. of your institution now that we understand that the world has changed longer than expected?
  • What has changed and do these changes justify a review of the long-term investment strategy?
  • Have you become more or less dependent on the endowment?
  • Have your cash needs increased or decreased, and how has your operating environment changed?

Asking, if not answering, these questions now, before the next inevitable market downturn, will lead to better decisions.

Staffing expenses

Short term. If there was ever a current need, or a current generation of voters who would benefit from increased endowment spending, it could be said to be the current generation. Private foundations have considered the idea of ​​“responding to the present moment,” that is, increasing spending to address current challenges, whether related to health, social justice or development. other pressing issues. In fact, several large and prominent foundations have pledged to spend 10%, double the usual 5%, and many other nonprofits are considering special credits or emergency draws.

The short-term need in higher education is undoubtedly significant, although in all honesty it always seemed that way – long before COVID. Your institution may choose to increase spending in the short term for defensive purposes, such as filling a budget shortfall. Or you can go on the offensive and spend more to, for example, invest in a marketing campaign. Either way, and however it is described, an increase in current spending comes at a cost…which leads to long-term considerations.

Long term. The operating environment in which most colleges and universities operate may, if not likely, be challenged for the foreseeable future. The need for support from long-term resources, such as staffing expenses, is more likely to increase than decrease. Whatever the reason your institution may make additional withdrawals in the short term, it will often be difficult to reverse these withdrawals. And having fewer dollars in the endowment to accumulate over time will be costly in the long run and lead to lower levels of future spending.

We’ve built models that allow our clients to understand these trade-offs, the costs, and the benefits of spending more or less today. These templates help committees grapple with difficult questions such as:

  • How much more could we reasonably get in the short term?
  • What are the liquidity implications of increased short-term spending?
  • How do you quantify the long-term cost of increased spending today?
  • How much more could we have in future expenses if we reduced the drawdown today?

There is no “right” answer, but the concept of intergenerational equity is based on balancing the infinite needs of today and the unknowable demands of tomorrow given a finite set of resources at your disposition. All decisions on the table must be made considering both.

Development programs

Short term. With recent strong stock market performance and growing personal wealth, high net worth donors have likely seen their personal portfolios recover more than colleges and universities have seen their financial outlook. In fact, the gap between the financial constraints facing higher education and the wealth of wealthy donors is perhaps the largest in recent memory. Simply put, the financial health of many nonprofits may be at rock bottom, while the wealth of many of their donors may be at all-time highs.

Given this gap and the dynamic with which donors have historically responded to “crises” with increased giving, your institution likely has a great opportunity to engage with donors now. Although development does not fall under the typical investment committee, collaboration between the two efforts – investment and fundraising – is essential to meet short-term needs. For example, when assessing any additional short-term potential gained from the endowment, consider which challenges can and should be addressed through fundraising efforts and which ones should be addressed with endowment assets.

Long term. As stated above, colleges can most likely rely more on resources that have been earmarked for the long term in order to thrive or even survive in the short term. This situation makes it necessary to think about development in a long-term strategic perspective. The baby boomer generation is the wealthiest in the history of our planet, and as it shifts from wealth accumulation mode to wealth transfer mode, there will likely be the greatest wealth transfer that we have ever seen. It is not known if this transfer goes to the next generation, to taxes or to charity. But nonprofits would do well to increase their likelihood of capturing their share of this wealth transfer.

For an investment committee, this means understanding strategic priorities for institutional fundraising and determining whether the endowment has a role—for example, a special credit for investing in development—in achieving those priorities. It also means understanding the importance of contributions to endowment growth and ensuring that the broader community appreciates that future transformational endowment growth, and therefore the institution’s future endowment support, comes from more likely contributions than returns on investment.

As we come to the end of one of the most unusual semesters in the history of higher education, we must first take the time to applaud our institutions, our administrators, our administrative teams, our staff, our faculty and our students and parents to make the best of a difficult situation. The uncertainty of the future of higher education, both short and long term, demands that we quickly return to the essential work of navigating our beloved colleges and universities through the challenges we can see and to prepare ourselves for those who have yet to emerge.


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