As pressure mounts for universities toincrease endowment spending, experts at Watson Wyatt Worldwide, a leadingglobal consulting firm, warn investment returns could suffer asuniversities look for more predictable annual returns.
WASHINGTON, D.C., February 8, 2008 – As pressure mounts for universities to
increase endowment spending, experts at Watson Wyatt Worldwide, a leading
global consulting firm, warn investment returns could suffer as
universities look for more predictable annual returns.
Recent decisions by Harvard and Yale to increase endowment spending will
likely compel other universities to boost spending in order to compete for
students. At the same time, some observers suggest spending levels should
be increased or even mandated in light of the growing size of endowments.
“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 Wyatt’s investment
consulting in North America.
One reason endowments have performed so well in past years is that they are
able to take on greater investment risk than other institutional investors,
such as pension funds, according to Hess.
Endowments can do this because they typically have conservative spending
policies and more flexibility in setting annual outlays. As a result, they
can offset investment losses with lower spending. By comparison, pension
funds need to structure their investments to provide predictable annual
benefits for retirees.
“The price of this predictability is lower returns,” said Mark Ruloff,
director of asset allocation at Watson Wyatt. “And higher endowment
spending would necessitate more predictability.”
According to a report released by the National Association of College and
University Business Officers, a nonprofit group, and TIAA-CREF, an asset
management firm, university endowments with assets of more than $500
million paid out 4.4 percent of their assets last year, down from 4.6
percent the prior year. Some critics have called for a floor of 5 percent
on annual spending.
“This is a delicate balancing act,” said Lisa Laird, the investment
consulting office practice leader at Watson Wyatt in Los Angeles. “The
advantages of higher spending today need to be weighed against the
possibility of smaller asset pools — and thus smaller payouts — ten years
from now. Of course, increased spending can be offset by increased
fund-raising, but development can be difficult in a bear market when there
are fewer opportunities to donate appreciated assets.”
In any case, the pressure to increase endowment spending means universities
will have to pay more attention to the spending side of the equation in
setting investment strategies.
“One way or another, it’s time for most universities to review investment
strategies, spending policies and related governance issues,” said Hess.
About Watson Wyatt Worldwide
Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the
world’s leading organizations on people and financial issues. The firm’s
global services include: managing the cost and effectiveness of employee
benefit programs; developing attraction, retention and reward strategies;
advising pension plan sponsors and other institutions on optimal investment
strategies; providing strategic and financial advice to insurance and
financial services companies; and delivering related technology,
outsourcing and data services. Watson Wyatt has 7,000 associates in 32
countries and is located on the Web at www.watsonwyatt.com.
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