Here’s a common exchange we’ve all seen online recently.
Critic: How dare [Wealthy University X] cut staff or plead poverty? How about they use some of that billion-dollar endowment to help?
Realist: You just don’t understand. That’s not how endowments work. The money is restricted and it’s not some kind of savings account.
Does that debate miss something more fundamental, though?
Sure, the realists have a point. A good portion of the endowment is restricted. These aren’t rainy day funds, we know. Then again, maybe we should be shifting strategies and policies before the next cataclysm. For what exactly is an endowment for if not, at least in part, to weather a world-wide crisis?
“You’ve got to spend it,” he told us this week. “Otherwise, what is it? Just a coffer? It’s just going to get bigger and bigger and we keep it forever? The goal is not to make the endowment as big as possible. The goal is for Princeton to be the best university in the world. Win more Nobel prizes, cure more cancers. It’s not about my endowment is bigger than yours so I’m a better university.”
So what have colleges learned since the last recession, when their endowments tanked and even wealthy places had to make substantial cuts?
Not very much, says Gilbert. The fact that places like Stanford are already announcing cuts and hiring freezes, he says, means that the paper losses they’re seeing within the endowment must be “ginormous.”
To Gilbert, the revealed preferences of wealthy universities are clear.
“They care more about the size of the endowment than they care about the productive nature of the university.” If they felt the opposite, he maintains, they’d make different choices: “We have this buffer. Let’s use it. Let’s increase the payouts. Now we don’t want to spend 20 percent of the endowment, I get that, but we can increase the pay out. And yes, the endowment size is going to go down, but what we care about is the productive nature of research and teaching at the university.”
Gilbert argues that none of this is the money managers’ fault — they’re just maximizing the returns given the goals laid out. It’s the trustees and regents who set the investment policy and the pay-out decisions.
So what would Gilbert tell trustees at this moment? Not exactly about how to address the current crisis — the die on that is already cast. But how should they change their endowment strategy in 2021 and 2022 to be ready for the world-wide emergency in 2030?
First, think hard about the mission of the university. “It’s not an endowment with a university. It’s a university with an endowment.”
Second, set up an asset allocation that’s consistent with this mission. You can’t look at the endowment separately from all the other revenue and spending streams.
Third, the spending rate is not an independent decision from everything else going on at the university.
“You need to invest in a way consistent with how you want to consume. If we want to make sure we can consume in bad times because we want the endowments to buffer the next shock that will come in 10 years, then the investment allocation needs to be consistent with our future ability to eat more in bad times.“
Gilbert said he hoped this new crisis might awaken people but instead he expects we’ll hear a predictable marketing message in the years ahead: “We lost a bunch of the money in the crisis. We stopped spending. Please give us more.”
+ More reading:
A decade-old but still relevant piece by Burton A. Weisbrod & Evelyn D. Asch from Northwestern University in the Stanford Social Innovation Review “Endowment for a Rainy Day”