Endowment Transparency Would Be a Win for the Industry

The hands-off regulatory approach of endowment management has generally been a win for the industry, but additional scrutiny might be in its best interest, a research paper claims.

(February 5, 2013) — Endowment funds are granted a generous amount of freedom when it comes to regulatory oversight and corporate governance, which has led to innovation and superior returns for many prestigious universities, according to one research report.

“As far as corporate governance is concerned, there have been hundreds of studies on what constitutes good governance for corporations, but that hasn’t been done for endowments,” says co-author Neal Stoughton of WU Vienna University of Economics and Business.

Regulations are lax when it comes to endowments partly because such institutions are worried about sharing too much data, the research paper notes. “They operate in a highly competitive environment,” Stoughton says. While he explains regulatory scrutiny will increase in the future, he believes such scrutiny will be minimal and resigned largely to self-regulatory organizations, such as the National Association of College and University Business Officers (NACUBO).

Stoughton tells aiCIO: “But it seems to me that more data would be a good thing. There has to be a way to still protect the proprietary nature of new investment strategies, while still documenting investment performance and behavior over shorter intervals than one year. And it would also be a good idea to include some form of auditing of the data. Right now, all endowments self-report everything and there is no checking.”

The paper–titled “A Survey of University Endowment Management Research”–delves into four areas of endowment management research, including:

1) organization, which pertains to governance structure and the investment policy statement;

(2) asset allocation;

(3) performance, in which (risk-adjusted) performance is discussed and distinguished by type and size of endowment;

(4) spending, in which the authors discuss the disparity between theoretical approaches to endowment asset management and what is actually done in practice.

“In some sense, more and better data ought to lead in the future to better endowment performance as scientific evidence of what actually constitutes best practices can be translated into results,” Stoughton concludes. “This, however, is better performance at an aggregate level. Individual endowments will exhibit strong heterogeneity.”

Read the full paper here.