For those schools who think they have enough endowment: they probably don't. "But we have $50 million in our endowment," a school might counter. Schools with that kind of endowment, especially day schools, tend to have complex programs and services that have become normal, i.e. expected by families. If, however, the school does not follow a conservative spending policy coupled with a consistent inflow of cash to the endowment, it will not be able to sustain those programs and services in the future. And the future is not as far away as some would believe.
Case in point. Last week, I attended a demo for a software product that allows the user to project endowment corpus based on a number of variables. One variable is the school's spending policy, which is a piece often overlooked by too many schools. Their answer to the downturn in the economy is a simple reduction is spending percentage. This tactic, while arguably effective in the immediate term, is not a silver bullet. Why? Too many of these schools are not pursuing endowment growth as a matter of practice, and that is what will come back to haunt them.
During the demo, we looked at a university endowment valued at $350 million. The size of the corpus is not important for what I'm about to state, so please keep that in mind. When we looked at a 20-year projection of that endowment, we used the following assumptions:
- an annual draw of 4.75%
- an average annual return of 8.5%
- an average annual inflation rate of 3.5%
- an average management fee of 0.5%
With those variables, the endowment began to LOSE its purchasing power, more or less immediately. Each variable led to a loss in endowment, albeit a minimal one (-0.25%). If the variables change slightly (i.e., inflation is higher, or average annual return is lower), it is easy to see how precarious things become.
Variables aside, though, in simple terms, future dollars do not (will not) hold the value of current dollars. The aforementioned scenario highlights the fact that programs and services supported by the endowment will have to be cut in the not-too-distant future, if schools are not actively stewarding their endowment. Stewardship involves not only investment and risk management, it involves regular injections of dollars into the endowment.
This trend calls for independent schools to pay serious attention to their endowments. Schools with no endowments or small endowments must employ strategies to increase them sooner rather than later; schools that wait will suffer, perhaps dramatically. Schools with larger endowments will need to increase theirs as well, if they count on keeping the same level of programs and services down the road.
This is not a ploy to hire more planned giving officers; that's merely one part of the strategy. It calls for a new, aggressive way of thinking about how to sustain endowments.
Are you still trying to grow your Annual Fund while leaving your endowment on the back burner?