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.

Post - Spending Policy Whitepaper


Stay connected with the Insights Blog

Popular Blog Posts

Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

In Remembrance: Verne O. Sedlacek

A Gentle Giant The Commonfund community was shocked and saddened this week by the news of the sudden passing of our former President and CEO, Verne Sedlacek at the age of 67.
Investment Strategy | Insights Blog

What is an OCIO?

Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing...


Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. 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. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.