The Effects of Spending Rules and Asset Allocation on Non-Profit Endowments
Author(s)Halem, Zachery M.; Lo, Andrew W; Matveyev, Egor; Quraishi, Sarah
The long-run impact and implications of an endowment’s spending policy and asset allocation decisions are examined. Using a dynamic model, the authors explore how different endowment spending rules influence the dynamics of an endowment’s size and future spending. They find that different parameters within each spending rule have significant long-term impact on wealth accumulation and spending capacity. Using Merton's (1993) endowment model and compiled asset allocation data, they estimate the intertemporal preferences and risk aversion of several major endowments and find significant variation across endowments in their propensity to increase portfolio risk in response to increased spending needs.
Research support from the MIT Laboratory for Financial Engineering is gratefully acknowledged. We thank the MIT Investment Management Company, particularly Seth Alexander and Tom Wieand, and the editor for helpful comments and discussion, and Jayna Cummings for editorial support. The views and opinions expressed in this paper are those of the authors only, and do not necessarily represent the views and opinions of any institution or agency, any of their affiliates or employees, or any of the individuals acknowledged above.
non-profit organizations, endowment spending, asset allocation