(January 8, 2013) — Endowments in the United States often suffer from a lack of communication with the academic side of the universities they are created to support, according to a newly released academic paper.
According to the paper–published by Caroline Hoxby, a labor and public economist at Stanford University, and titled “Endowment Management Based on a Positive Model of the University”–the objective of endowments continue to be “a puzzle in economics.”
“The objective of an endowment is to help the university. Should they invest in risky assets? How diversified should the portfolio be? What’s the investment horizon? Those are the typical questions endowment managers battle,” Hoxby tells aiCIO.
She continues: “The problem is that endowment managers often try to answer these questions without knowing much about the risks and opportunities that the university’s CEO faces in terms of academic investments. In fact, endowment managers often do a good job of explaining their portfolios to their universities’ CEOs, but the CEOs do not convey much concrete information about the cash flows and expenses they expect related to students, alumni gifts, philanthropic sources, and research.”
The question not asked frequently enough, Hoxby adds, is how the university’s endowment manager can help the university’s CEO achieve his or her academic goals, and vice versa. That void in communication became apparent during the financial crisis, says Hoxby.
Case study: Stanford University. “Stanford invests in human capital, and a lot of that investment goes into the computer-science related industry. That suggests that they already do a lot of investment in that type of human capital,” according to Hoxby. “The school invests in the students, many of whom go on to Silicon Valley firms.”
Since Stanford University by nature has a large stake in Silicon Valley through their alumni network, it doesn’t make much sense for the endowment to take money from the portfolio while also investing it in Silicon Valley, the paper argues. As noted by its author, “that would be doubling up the bet, creating a poorly diversified portfolio.”
The bottom line: Universities should actively attempt to compute the values in their intellectual capital portfolios. Additionally, universities should attempt to calculate their adjustment costs, since being aware of these costs is important for making every investment decision, whether on the intellectual or financial portfolio side, the paper asserts.
Finally, universities’ leaders (the president, provost, and so on) should also be in close communication with its endowment managers, with the specific goal of exchanging information on the value of existing intellectual capital investments.
“If highly-endowed universities manage both sides of their portfolios in a rigorous and coordinated manner, they should be more able to make contributions to world intellectual capital that arguably would not exist without them,” the paper concludes.