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(07-31-2020 12:16 PM)BearcatMan Wrote:  

(07-31-2020 12:00 PM)Nabeel Wrote:  

(07-30-2020 01:28 PM)Captain Bearcat Wrote:  

(07-30-2020 12:46 PM)Cataclysmo Wrote:  So I have a dumb question. The idea of an endowment is to provide long-term stability and a resovoir for future commitments and the prolonged success of a University, correct? And we also hear about how endowments help stabilize universities through economic fluctuations and thereby provide a relative stability in the short term. As far as I understand it (I don't, at all), endowments are somewhat of an abstract concept that ensures Universities utilize and maintain commitments from donors.

So my dumb question is--how much does UC's recent push for the billion-dollar endowment (now up to 1.5b) factor in to the current Covid predicament? BearcatMan has talked about how schools with larger endowments are, of course, better positioned to absorb the financial blows that will follow, but how, specifically, does the endowment that we have help?

I ask because there's growing concern amongst students about UC's handling of tuition and cost of attendance fees for this upcoming semester, as we talked about. I wouldn't expect UC to just drop tuition unilaterally and then cover the difference with their endowment (which would be tremendously expensive in it's own regard), but I'm confused as to what the point of an endowment is if not to help 1. Faculty maintain their salaries/positions and 2. Help students receive a fair and equitable education relative to costs.

Here's a simple example: Let's say that UC gets an average of $100 million in donations from alumni each year. What can they do with it?

Option 1: spend $100 million this year
Option 2: invest it and spend $4 million every year forever (average returns on endowments are 4%)

If you do option 2 for 25 years, you end up with $100 million every year in interest. Of course, in real life there's inflation and growth in donations, so it all ends up evening out in terms of real economic value.

There's two big advantages to choosing the endowment route:
1) Long-term budgetary certainty. Donations have big year-to-year swings. But investments in faculty (which is by far any university's biggest expense) are long-term and can't be reversed if donations are too low (like 2009 or 2020). If you spend donations as they come in, then during a recession you have to lower scholarship funds (the 2nd biggest expense) or lay off most of your secretaries and academic advisors (the 3rd biggest expense) and/or cut research to the bone and endanger long-term research projects.
2) Short-term budgetary discipline. If you have a big donation year, the administrators who are "up or out" types might waste it. I've seen this happen even with professors - a professor/center director at my last school took over the center's account which had several hundred thousand dollars in it that had been donated, and in just a few years he spent half of it on data he probably didn't need and the other half on lunches and conference travel, then he took another job.

The point of an endowment is to never touch the principle. If you're allowed to draw down the endowment for need-based scholarships during a depression, then you're also allowed to use it for pretty much anything the dean/president in charge of that particular endowment wants. That defeats the whole point of using the endowment to enforce budgetary discipline.

I've never actually worked at an endowment, but that's my understanding of it. Anyone else want to chip in?

Been lurking on this board for years - first time posting. Random question - is the 4% number you used based on UC's actual average return the past few years or just a guestimate?

If UC is really only doing 4%, that's terrible, especially given the size of the endowment. Over the past 10 years, colleges with large endowments (over $1bn) have returned 9.0% on average (target return is 7.2%). You want to fix the athletics budget (or many other things) - that's the easiest way to do it!

Improving from 4% to the average return of a billion dollar endowment would be nearly $75mm in extra returns annually.

https://www.nacubo.org/Press-Releases/20...rn-in-FY19

4% is an "expected value return" for an endowment fund, and the general industry standard, at least in Ohio. It leaves quite a bit of wiggle room to ensure budgets can be covered while also allowing for extra distributed income should the fund perform better (and it normally does). I'm not sure about UC's actual returns, but I'd assume they're closer to 7-7.5%...you've got to remember, endowed funds are normally placed in EXTREMELY conservative investments, as they absolutely cannot lose money based on their purpose. If you see a low year, the positive return from expected at 4% any previous year can be floated to cover, but most endowments have a point of no return that money cannot be touched regardless of purpose to ensure the viability of the fund in perpetuity. This is due on large part to many misappropriation issues that occured in the 90's across the country by individuals (mainly faculty and administrators) who had no business handling money in an operational capacity and blew threw fad more than they should've.

I think I get what you're saying here, although I think we may be speaking past each other on one key point. From what I've always heard and seen, university endowments target 7-8% nominal rates of return (basically 5% real return + inflation). If you're saying that in Ohio, we're more conservative and are targeting a 4% real return (i.e. excluding inflation) which would imply a 6-7% nominal return, I'd think that's below par but reasonable. If you're saying Ohio based endowments are targeting a nominal return of 4%, my response would be to fire everyone with any responsibility for these funds.

Granted my familiarity is more with the expectations of large university funds (Ivys, Stanford, UT, etc.), but UC's endowment is now in the top 75 in the world. The largest funds have been getting outsized returns because they are able to tap into super high return illiquid investments that smaller funds can't access. If UC isn't taking full advantage here, we are doing the State and taxpayers a material disservice. While smaller endowments and pensions probably use some variation of the 60/40 (equity/bond) index model, the best performing large endowments have really embraced alternative investments (e.g. VC/PE) to supercharge returns over a long time horizon while still managing risk.

For comparison, if UC was averaging a 7% return over the past decade, we're talking about a loss of $200-300mm over just the past ten years compared to peer institutions. To put this in sports terms, that is literally the annual financial difference between being in the ACC vs being in the AAC. I get that this is Ohio and we're conservative, but it doesn't mean we need to be stupid just because that's tradition. If those data points are true, then the endowment needs to do much, much better.