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.