Universities need to closely examine how increased endowment spending could reduce their overall returns, warned Watson Wyatt Worldwide in an analysis it released today.
Harvard and Yale universities recently announced that they would increase their endowment spending to improve student financial aid, with other universities expected to follow suit because of increased competition for students. Furthermore, some members of Congress have suggested that universities be required to spend more of their endowments to keep their tax-exempt status.
Whether by mandate or natural competitive forces, the prospect of increased annual spending raises significant investment strategy issues for endowments, said Carl Hess, director of Watson Wyatts investment consulting in North America.
This is because increased spending would lead to less flexible investing policies, Mr. Hess said.
Endowments have traditionally performed better than pension funds because they typically dont have to spend as much as pension funds. They can offset investment losses with lower spending, while pension funds have to be able to provide predictable annual benefits for retirees, Mr. Hess said.
The price of this predictability is lower returns, Mark Ruloff, director of asset allocation at Watson Wyatt, said in the release. And higher endowment spending would necessitate more predictability.