Is your Spending Policy Getting the Attention it Needs?

April 7, 2022 |
1 minute read
|

Spending policy is the most overlooked aspect of endowment management and many are likely not employing the optimal calculation for their institution.

Many investment committees review "strategic policy" for the endowments they oversee on an annual basis. Unfortunately, too often that means simply reviewing the asset allocation plan while neglecting another key aspect of strategic policy: the spending policy. As the only permanent link between the endowment and the institution it supports, the spending, or distribution, policy is a critical component of endowment management and should be revisited just as frequently as asset allocation.

More specifically, the investment committee should ensure that the endowment has adopted the optimal calculation for its institution by considering key aspects such as the operating budget’s reliance on the endowment and sensitivity to distribution volatility.

Often, we find that the spending policy does not fall under the purview of the investment committee and therefore the frequency and depth of that review is uncertain. We would argue that even if the review of spending policy lies with another board-designated committee—for example, a finance committee—the investment committee should at least take part in those discussions and ideally help to establish or reaffirm the policy.

Further, whether due to its simplicity in calculation and/or its ability to be easily explained to donors, most institutions have defaulted to using the rolling average spending method. In fact, according to the 2021 NACUBO-TIAA Study of Endowments ("NTSE"), 74 percent of the higher educational institutions that responded to the survey were using the moving average methodology, with 70 percent of those using the three-year or 12-quarter time frame for calculation.

As outlined in our 2017 publication, Spending Policy: Is Yours Ready for the Next Downturn?, when there is a confluence of strong investment returns, low inflation, high levels of giving and increasing demand for educational services, a smoothed average spending methodology is likely the ideal policy for many institutions.

Given the favorable capital markets and philanthropic conditions of the past decade, it is unsurprising that fiduciaries have not devoted significant time to the topic of spending policy—75 percent of educational institutions were using the moving average policy a decade ago according to the 2011 NACUBO-Commonfund Study of Endowments.

However, as we look ahead to the next 10 years and beyond, it is possible that conditions will not be as idyllic. Therefore, the time is now to explore whether your endowment is using the optimal spending calculation.

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Anthony Peretore

Author

Anthony Peretore

Managing Director

Anthony Peretore

Author

Rachel Stavola Clivaz

Associate Director

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.