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The Sustainability of Endowment Spending Levels: A Wake-up Call for University Endowments

Ho, Mozes, and Greenfield provide an analysis of the interplay between endowment spending policy and the volatility of investments. A key feature of their analysis is a formula that gives an upper bound for volatility, given the endowment’s spending policy, expected rate of return on investment, and risk parameters. Their analysis shows that the investment performance necessary to support spending rates of 4% to 5%, and to maintain reasonable risk guidelines, is considerably greater than the performance that individual markets and common blends of those markets have generated over the past 20 years. Thus, the authors conclude that, in the absence of a unique ability to significantly outperform the financial markets over long periods of time, endowments with high spending rates must either reduce those rates or accept a higher probability of suffering a significant loss.