An Examination of the Characteristics of College Endowment Funds

Abstract

College and university endowments have grown rapidly during the past 20 years. Today these funds total more than $267 billion and are a significant funding source for many universities. However, little is known regarding the characteristics, policies and procedures of these funds, thus prompting the current investigation. To facilitate this effort, 200 college endowment funds were surveyed regarding their investment and portfolio practices. Usable responses were received from 112 respondents. Survey data were obtained on seventeen portfolio components relating to equity, fixed-income and cash equivalents. Respondents answered a series of questions regarding the equity portfolio characteristics of their portfolios such as the manager's investment style, the market indices used for investment evaluation purposes, etc. They also answered a parallel series of questions dealing with the fixed-income portion of the portfolio such as the types of securities permitted in the portfolio, the return objectives, etc. Finally, respondents answered a series of questions regarding cash equivalent investments such as the purpose for maintaining a portion of the portfolio with these investments, what types of securities are included, etc. The study's results reveal that in general college endowment funds have investment policy statements that are properly focused and thus facilitate quality management of the various investment portfolio components However, there are two surprising results. First, while the vast majority of respondents (93 percent) specify return objectives in their investment policy statement, 39 percent do not have specified risk objectives with respect to their equity portfolios. Thus, while there is a focus on return, there is not a corresponding confirmation of the importance of the risk component. Second, while 75% of respondents specify a minimum requirement of investment grade (BBB or above) for purchasing fixed-income securities in the investment policy statement, 75% do not have a provision that deals with the issue of handling (hold/sell) fixed-income securities when the credit rating falls below the minimum investment criteria. Both of these results indicate that investment committee members and managers should re-examine the investment policy statement as it relates to these two items.