2025 Endowment Radar: Stories from the edges

At the outer edge ¹ of the Endowment Radar map, we show results for the most well-endowed institutions where the endowment plays a significant and sustainable role. Endowment distributions cover nearly 30% of the operating budget and exceed the tuition discounts awarded for financial aid and scholarships (Figure 1). A 6x endowment-to-debt ratio provides balance sheet ballast and capacity for strategic uses of endowment and long-term debt. For those with top-quartile net flow rates, the significant role of the endowment is sustainable, or may even expand, because the combined rates of spending and fundraising enable the endowment to grow with the enterprise.

There is a very different story at the inner edge of the Endowment Radar map. At the 5th percentile, institutions have limited endowment support and net flow is stressed, compromising the endowment’s future role (Figure 2). Endowment spending supports less than 3% of the operating budget and replaces less than 10% of financial aid and scholarships. The endowment market value only slightly exceeds long-term debt at a ratio of 1.4x, limiting balance sheet capacity to absorb strategic initiatives. The -6.9% net flow rate reflects unsustainable spending levels and limited fundraising, which threaten long-term endowment purchasing power.

Median Endowment Radar metrics represent the midpoint, where the endowment plays an important and sustainable role. But this cohort does not enjoy the same level of flexibility and financial strength as the more well-endowed institutions in 75th percentile (Figure 3). Endowment spending funds 17% of operating expenses and offsets more than half of the tuition discounts. An endowment-to-debt ratio of 4.4x coverage indicates balance sheet health. The net flow rate of -3.2% indicates this role should be sustainable in the near term.

Notable shifts in 2025: The growing gap between revenue and expenses

Endowment Radar results in our study were relatively unchanged from 2024 to 2025, with two notable exceptions that highlight the growing wealth gap:

• An increase in median endowment dependence showed a growing reliance on endowment support for the operating budget.
• For the highest spending institutions, the rate of higher spending exceeded historic levels and threatened to erode endowment purchasing power.

Median endowment dependence grew from 16.3% to 17.0%. There are different individual reasons for higher reliance on the endowment. For some institutions, the growth may be explained by endowment growth generating higher levels of funding for the operating budget. For institutions with operating challenges, the growth in dependence may be due to higher spending rates that are needed to fund more of the budget.

These varying results are shown when we review operating margins before and after endowment spending (Figure 4). While there is a wide range of margins across institutions, the pattern is consistent: endowment distributions provide a meaningful cushion that shifts operating results from deficit to modest surplus for many colleges and universities. When 2025 margins are compared to the prior fiscal year:

• The average margin before endowment fell from -15.3% in 2024 to -16.6% in 2025, suggesting the higher education business model is increasingly reliant on endowment spending to buffer operations.
• The average overall margin declined from 4.4% in 2024 to 3.9% in 2025, providing some cushion, but less than in 2024.
• The majority (72%) of institutions had a positive overall margin in 2025, while 28% broke even or had a negative overall margin.

Some institutions relied on higher spending from the endowment to respond to operating challenges (Figure 5). Spending pressures became more pronounced at the highest spending quartile, where effective rates ranged from 5.7% to 9.0%. Spending at the 5th percentile jumped from 7.4% last year to nearly double digits this year. The upward shift in spending suggests continued operating headwinds, placing increased pressure on endowment assets as a source of liquidity and budgetary support.

Spending directly impacts the purchasing power of existing endowment funds. Over time, high spending can erode this purchasing power if withdrawals outpace investment returns, while disciplined spending can help preserve and grow the endowment. However, spending is only part of the equation. The net flow rate (Figure 6) is an important component of the Endowment Radar because it captures the combined effect of both outflows (i.e., spending) and inflows (i.e., new gifts or contributions). By considering net flow, we gain a more complete picture of the endowment’s future role and sustainability. Positive inflows strengthen the endowment’s purchasing power and expand its capacity to support institutional priorities, making net flow a key indicator of the long-term role of the endowment.

Endowment Radar in action: Addressing strategic questions

Endowment Radar is designed to inform decisions about immediate needs and long-term priorities. The annual results provide a framework for discussions about financial sustainability and the role of the endowment in the future. We consider key questions raised by Endowment Radar case studies.

1. Do we have capacity on our balance sheet?

The endowment-to-debt ratio is an indicator of balance sheet strength and borrowing capacity. The ratio can inform discussions about the strategic use of debt in the near term and long term, as well as the role of the endowment required to support financing plans. Many institutions increased their long-term debt obligations in 2025 (Figure 7). Some borrowed more and continued to maintain a healthy endowment-to-debt ratio, whereas increased borrowing by others resulted in a less healthy ratio.

It is important for fiduciaries to understand the connections between the endowment and debt obligations, including future capital needs, debt repayment schedules, refinancing expectations, and key ratios and covenants that may involve endowment market values and/or liquidity.

2. Is our increased commitment to financial aid sustainable?

A well-endowed institution is in an enviable position, as the endowment plays a significant role in supporting the operating budget, financial aid strategy, and the balance sheet. Figure 8 shows the results for a university that increased its commitment to financial aid in 2025.

The institution maintained strong Endowment Radar metrics, but the growing role of the endowment required a 6% spending rate. With minimal inflows of 1.0%, the net flow rate was -5.0%. The results on the Endowment Radar map are designed to spur a discussion about the endowment’s capacity going forward. For example, will the endowment be part of an ongoing strategy to increase financial aid or will other funding contribute? Endowment Radar can be a communication tool with donors, who may be motivated to sustain this commitment with new endowment gifts or annual gifts.

3. Do we have a healthy reliance on the endowment?

Endowment support is an important source of operating funding, but overreliance on the endowment can jeopardize that support in future years. The Endowment Radar map in Figure 9 shows an institution under stress.

Endowment reliance of 15% comes with a weak endowment-to-debt ratio and unsustainable -8.0% net flow rate (10% spending offset by 2% inflows). Endowment support-to-financial aid also indicates that the endowment is not keeping pace with the university’s discount rate. This institution is under-endowed. A more sustainable financial equation will require greater reliance on other revenue sources, an infusion of endowment funds and/or cuts to expenses.

Conclusion

The 2025 Endowment Radar Study underscores the increasingly strategic role of the endowment as colleges and universities face persistent financial, political, and operational challenges. Endowment wealth has become a defining factor in institutional resilience and competitiveness. The Endowment Radar provides a snapshot of endowment health and impact. The map is designed to inform discussions about immediate funding needs and long-term priorities. Ultimately, it provides a framework for navigating a dynamic higher education environment and considering how endowment resources will empower institutions to fulfill their missions for generations to come.

Explore our Endowment Radar tool and request your free, customized endowment radar chart to discover how to maximize the success of your endowment here.

Geoffrey Bollier and Raul Najera Bahena also contributed to this publication.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.

The post Endowment Radar Study 2025: A Widening Divide appeared first on Cambridge Associates.

Some institutions expect to spend more than policy

The institutions that expect to draw more from endowments (14%) cite that federal funding cuts and operating stress are driving most spending increases. Colleges and universities are spending more in response to financial stress that requires endowment funding to balance the operating budget. Several universities are taking additional endowment draws to fund capital projects or to pay debt service. Foundations are spending more than typical policy to replace some of the federal funding cuts. While a few hospitals are spending more because of operating stress and interruptions in government funding, more reported spending draws from their long-term investment portfolios (LTIP) to fund growth initiatives and investments in strategic plans.

Other themes also emerged in the survey responses.

• The seven colleges and universities that spent more in 2025 are private institutions. Six of the higher spending institutions expect to continue to spend beyond policy in 2026.
• There is only one public university among the eight schools that anticipate spending more in 2026. It is a public research university that is increasing spending in response to federal cuts to research and other funding.
• Five of eight hospitals distribute spending from their long-term portfolio at least once a year. Four of the hospitals (50%) have a formal spending policy for their long-term investment portfolio LTIP.
• More than a quarter of foundations surveyed spent more in 2025 and nearly one-third (30%) intend to spend beyond policy in 2026.

Governance matters

The full board of trustees is responsible for determining the level of spending at more than half of the endowments and foundations surveyed and the finance committee decides at nearly one-third. The investment committee controls the spending decision at only 12% of the organizations, which means that strong communication is needed among stakeholders to make sure that endowment spending and investment policy decisions are closely linked.

The political environment has disrupted nonprofit funding sources and operations in 2025, and this is expected to continue in 2026. Given the dynamic funding and operating environment, liquidity needs and risk tolerance can change if higher endowment spending is needed to balance budgets, fund capital, and seed growth.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.

The post Higher Endowment Spending Needed for Some in Challenging Environment appeared first on Cambridge Associates.

Yet, portfolio management for families presents distinct complexities. Family portfolios often exist within a broader ecosystem of wealth, which has a meaningful impact on investment strategy and can inform critical inputs such as spending needs and tolerance for risk. Furthermore, family portfolios are often influenced by individual preferences, such as a desire to align investments with values, which can impact investment objectives and priorities. Taxes, a major factor for many families, also can affect asset allocation strategy, as well as implementation. In addition, family portfolios are inextricably linked to life cycles, which highlights the need for effective governance, and for regular review of the assumptions underpinning the investment strategy as generations transition and objectives change.

To build a portfolio that is best positioned to meet a family’s long-term goals, a deep understanding of the influencing factors unique to each family is required. Without this, a family risks establishing a strategy that miscalibrates key elements such as risk tolerance or liquidity needs, or that ultimately has low buy-in and support among family members—this can be detrimental, especially during times of market stress. Investing the time to set up a strong foundation grounded in the unique needs and preferences of the family is critical to driving better portfolio outcomes over the long term.

This paper explores the influencing factors and special considerations that are key to successful portfolio construction for private investors and wealthy families, and that are fundamental to the work that we undertake for our clients. We discuss the elements of a Family Enterprise Review and how it informs the establishment of a Policy Portfolio. We then describe how customized implementation and ongoing oversight support success. By following the blueprint we lay out, families are best positioned to establish an investment strategy that is suited to their unique circumstances and built for long-term success.

The Foundation: Investment Principles for Long-Term Investors

Before describing the factors that most significantly influence investment strategy and implementation for families, it is worth revisiting the core principles of Cambridge Associates’ overarching investment philosophy. This philosophy espouses these fundamental elements:

• A long-term investment horizon;
• Diversification, not only to reduce variability of returns, but also to protect against permanent loss;
• Limited use of tactical deviations from long-term asset allocation targets, primarily informed by extreme valuations;
• Use of active managers where we expect they will add long-term value, after fees and expenses; and
• A focus on risk-adjusted returns and active oversight of portfolio risk factors.

Family portfolios of sufficient size and scale can leverage this foundation of institutional investment management principles. ² However, a number of issues can make family portfolios significantly more complex than those held by institutions, and these influencing factors must be considered as part of a holistic portfolio construction process.

Influencing Factors for Families

It is often the case that the diversified investment portfolio is simply one part of the total wealth of a family. In addition, many factors that are unique to family and individual wealth can impact both portfolio objectives and strategy. (Figure 1 illustrates, by way of example, the predominance of some of these issues among Cambridge Associates’ private clients.) For these reasons, a holistic approach to portfolio construction—one that considers a family’s entire ecosystem inclusive of its distinguishing factors and holdings—sets the foundation for success.

Concentrated Holdings

Cambridge Associates works with many families to invest their liquid assets after the sale of a business or some other liquidity event. However, in many cases, families maintain significant exposure to a concentrated holding after such an event. For example, at least 50% of the firm’s private clients own one or more operating companies. In addition, more than 40% invest in direct real estate, and a significant percentage hold concentrated stock positions—often from the original source of wealth—within their total portfolio.

Concentrated wealth in its myriad forms must be considered when developing an asset allocation for the diversified investment portfolio. In many cases, such concentrations can result in a lack of sufficient diversification, which can present significant risks. Some concentrations, such as real estate or exposure to a specific industry, may be obvious; however, “hidden” concentrations, such as country- or region-specific overweights, might not be fully recognized. When developing a portfolio for families, an awareness of these concentrations and an intentional approach to managing them—or around them—is an important element of risk management.

Spending Needs

Families often have different needs from their investment portfolios, which can result in a much wider range of investment objectives and spending requirements than is the case for their institutional counterparts. For instance, endowments and foundations’ annual spending is typically tied to grantmaking activities or the level of required operational support—for example, the required 5% that private foundations must distribute each year, or the typical target spending range of 4% to 5.5% for colleges and universities. Because more varied objectives and needs often exist within a single family, a customized approach to managing each family member’s wealth is called for.

When developing an asset allocation for families, it is essential to understand the level of spending the diversified investment portfolio (or each portfolio, if there are multiple family members) must support. Typically, this draw may be for annual personal spending and taxes and to meet capital calls when building an allocation to private investments.

Beyond these typical needs, other events also can increase a family’s reliance on the diversified investment portfolio. The portfolio might be called upon to support a family’s operating business or a real estate investment in need of cash. Or, it could be tapped as a source of capital for a compelling direct investment in a sector where the family has deep expertise. Alternatively, a family whose annual spending needs are funded by a family business or leased property might need to increase the draw from the diversified portfolio if these cash flow sources were to dry up unexpectedly.

Families that carefully plan for a range of spending scenarios and manage portfolio liquidity with spending in mind are better prepared to navigate unexpected events and better positioned to act when compelling opportunities arise. Well-prepared families can also reduce the risk of permanent loss of capital by avoiding unplanned spending that must be met during a market decline.

Investment Objective and Risk Tolerance

Many families behave similarly to institutions—they have a multi-generational mindset and a similar desire to grow the portfolio net of any spending, inflation, and taxes (a big influencer, discussed below). These families must be comfortable taking risk to meet their long-term objective.

But some families take a more conservative approach, with an eye toward balancing growth and preservation of capital. For these families, the value of “sleep at night” liquidity and preservation on the downside in volatile markets is more important than participating in the final uptick of a market rally.

The role the diversified portfolio plays in the total family ecosystem is an important determinant of investment objective and risk. For example, a family that takes significant risk outside the portfolio with higher-risk real estate development projects or a substantial investment in an early-stage business may desire a more conservative posture for the diversified investment portfolio.

Aligning the portfolio with a family’s investment objective and tolerance for risk is essential to managing through inevitable periods of market volatility and avoiding decisions born out of fear and uncertainty, which can result in permanent destruction of value.

Taxes and Estate Planning

The only constant for most families is that taxes matter. However, the extent to which they matter and exactly how specific tax rates and tax considerations affect each investor and portfolio strategy will vary greatly. In the United States, for example, the fact that families are generally subject to taxes has widespread implications on portfolio construction. Our general experience is that taxes can cost the portfolio somewhere around 1% to 2% each year; minimizing this drag is an important element of meeting a family’s long-term wealth preservation and growth goals.

All else equal, the consideration of taxes should impact both asset allocation and implementation decisions. For instance, families that can tolerate the illiquidity can be well served by allocations to private equity and venture capital. These investments, in addition to offering significant return potential over time, can offer the dual tax benefits of deferred returns and long-term capital gain treatment. In addition, taxable portfolios will often use managers that exhibit lower portfolio turnover and will generally have lower exposure to most quantitative strategies that trade positions more frequently, or to strategies that derive a large portion of their return from yield (versus more tax-efficient capital appreciation). Of course, the use of municipal bonds in lieu of taxable fixed income is a major differentiator between endowment and family portfolios. Families in many other countries outside the United States, such as those in Canada, can also be subject to income taxes. Even for families and entities in jurisdictions with no income tax, taxes are still an important factor in vehicle selection, as potential withholding and other investment-level taxes must be taken into account.

Most families have undertaken sophisticated estate planning to transfer assets as efficiently as possible to the next generation. This planning may include the establishment of a wide range of trusts or other entities or the use of strategies such as intrafamily loans. The terms of each of these types of trusts, entities, or other arrangements must be understood, as they may have important implications for asset allocation and portfolio implementation. For example, distribution requirements or limitation of a trust may impact the liquidity or income needs of a portfolio, which could, in turn, impact the asset allocation or implementation decisions.

Currency

Many global, multi-generational families have family members spread across countries, all of whom may be spending in different currencies subject to fluctuations in global exchange rates. For instance, more than 40% of Cambridge Associates’ non-US clients invest across multiple currencies. For such investors, it is crucial to consider a portfolio from a multi-currency perspective. Issues such as spending rate, currency adjustments, and currency-hedging strategies will be heavily affected by the country of domicile of individual family members, calling for a highly customized approach that accounts for how fluctuating currency values can impact myriad aspects of the portfolio.

Sustainability and Impact

For certain families, aligning investments with their values is of paramount importance. Some families, for instance, often consider sustainability and impact—frequently focused on the environment or on social justice—when making investment decisions. However, for multi-generational families, the level of interest in making impact-related investments may vary greatly across generations. Working through differences about values and goals and clarifying priorities can help ensure alignment among family members. In many ways, building a portfolio that incorporates impact investments to meet the goals of all stakeholders involved is emblematic of the need for a customized approach in working with family portfolios.

Portfolio Construction for Private Investors

The factors described above are influential in developing the right long-term investment strategy for a family. Armed with this information, and following several essential steps, a portfolio strategy that serves each unique investor can be built (Figure 2).

Step 1: The Family Enterprise Review

To fully understand and incorporate each family’s complexities into the long-term investment plan and ensure that the diversified investment portfolio meets the needs of all stakeholders involved, a Family Enterprise Review is the crucial first step in portfolio construction.

This review, which draws on best practices of institutional portfolio management, entails working with each stakeholder to gain a full sense of the key issues that will inform investment policy setting and, later, implementation. The broad scope and nature of the topics covered in this Review are summarized in Figure 3.

The expected key findings from the Family Enterprise Review include:

• An understanding of the appropriate purpose and structure for the investment portfolio;
• Short- and long-term financial objectives, spending and liquidity requirements, and time horizon(s) for the portfolio(s);
• A return objective and risk tolerance for the portfolio(s); and
• Additional parameters (e.g., the impact of assets held outside of the portfolio, tax considerations, the desire to engage in impact investing, themes of interest, biases, exclusions, etc.).

While these issues may seem straightforward, the specifics may differ for each member of the family. For example, a first-generation family member may have a low risk tolerance and a desire to use portfolio cash flows to support current living expenses. Meanwhile, a fourth-generation family member may be more comfortable with risk and illiquidity. The Enterprise Review can help families understand the range of objectives and risk tolerance among family members.

Knowledge of these differences can serve as an important factor in determining the optimal investment structure for the family. For example, family members that have similar long-term goals, spending, and risk tolerance, and can coalesce around a single asset allocation, might employ a relatively straightforward investment structure. In contrast, a family that has very different needs among family members might require an investment structure that can accommodate customized asset allocations. Of course, customization breeds complexity and expense and can reduce the benefits of scale, so families should consider the optimal balance in meeting each stakeholder’s needs.

Finally, the Family Enterprise Review can help families gain insight into the most appropriate family governance structure. Who will be the primary decision maker(s)? Who has defined authority to make decisions on behalf of the family? Is there a succession plan so that decision-making authority can evolve over time? Is there a plan to provide investment education to younger family members? Answers to questions such as these often are key outputs of a comprehensive Review and are integral to formulating the appropriate governance model.

A well-defined and transparent decision-making process is essential for the long-term success of both the client-advisor partnership and the investment portfolio. While critical, there is no single way to create this structure. On one end of the spectrum, for instance, a family could establish a board of trustees to oversee portfolio decision making. On the other hand, one individual could act as the sole decision maker. Various models exist between these two extremes, reflecting the preferences of each family, as reflected in Figure 4. The key is to decide on the most effective governance structure for the family, with clear roles and responsibilities.

Step 2: Policy Setting

At the conclusion of the Family Enterprise Review, the purpose of the portfolio(s), return objectives, and tolerance of risks will be established, which then allows policy setting at the asset class level to begin. Generally, the overarching goal for most portfolios is to maximize returns for an appropriate and pre-determined level of risk. To do so, the right balance must be struck between assets focused on capital appreciation, diversification, and protection against macroeconomic risks. Thus, the process for setting a portfolio’s investment policy generally includes:

• Reviewing the roles of various asset classes in the portfolio and establishing an asset allocation;
• Evaluating portfolio liquidity needs; and
• Drafting an Investment Policy Statement (IPS).

Asset Allocation. Asset allocation is the primary driver of long-term returns. For families and institutions alike, the basic building blocks of portfolio construction are similar. Fundamentally, how these building blocks are assembled and the balance between them are key factors in meeting an investor’s long-term investment objectives.

As depicted in Figure 5, each asset class has a different risk/return profile, and each plays a distinct purpose in the portfolio. The long-term target allocation for each asset type is thus set based on the strategic role that it should ultimately play in the portfolio. In addition, an allowable range for each asset class enables discipline around rebalancing and gives guidelines for potential tactical positioning. The combination of asset classes, and an awareness of their underlying risk factors, also creates the foundation for a crucial tenet of portfolio management: diversification.

Families that are subject to taxes additionally should consider after-tax returns when setting their asset allocation policy. For example, as discussed previously, higher allocations to tax-efficient private investments may be appropriate for families that can tolerate the illiquidity. Further, allocations to investments which derive a large portion of total return from current income (e.g., high-yield bonds, corporate bonds, private credit strategies, and bank loans) are typically less desirable due to the tax consequences, unless extreme valuations merit considering a tactical allocation or the investments offer diversification or other important benefits to the overall portfolio, notwithstanding their higher tax drag.

Portfolio Liquidity. Often overlooked—but just as crucial as the actual asset allocation—is a full evaluation of portfolio liquidity. Some assets will be highly liquid, while others (e.g., some hedge funds and private investments) will be semi-liquid to highly illiquid. Striking the right balance between the two is vital, and a good policy- setting process will include a stress test of the portfolio’s construction to ensure that liquidity will be sufficient—in both good times and bad.

The Investment Policy Statement. The policy-setting process concludes with the construction of a well-defined Investment Policy Statement (IPS). This statement provides a roadmap for all investment decisions and is highly personalized to the individual goals of the diversified investment portfolio. An IPS should include the portfolio’s long-term return objectives, allowable risk levels, time horizon, liquidity provisions, and spending needs, along with the policy asset allocation targets and policy benchmarks. If the family wishes to incorporate sustainability or impact objectives, these also should be included in the IPS. To allow for easy reference by all decision makers, a streamlined IPS that excludes extraneous language is recommended.

An IPS is intended to be a long-term plan that should withstand various market and macroeconomic gyrations. Properly set, it should rarely be adjusted. However, when the facts change, an adjustment in the plan may be warranted. Unlike perpetual institutions, families contend with human life spans, shifting family dynamics, and generational transitions. Events within the family ecosystem—for example, a sale of a business or an alteration to an estate plan—can also occur. For these reasons, an annual review of the IPS, with a focus on any changes to the foundational assumptions which ground it, is a best practice to ensure the IPS continues to reflect the family’s objectives.

Step 3: Implementation & Management

After the portfolio asset allocation policy has been set and the IPS completed, the focus can shift to implementation and management, which, yet again, should entail a customized approach.

For instance, while we typically make phased investments in newly constructed family portfolios, the details of the implementation process, including the timing and size of investments, will vary greatly from family to family, depending on multiple factors.

Once a portfolio is fully implemented, best practices for risk management and active monitoring of managers apply to both institutions and families. However, some differences exist in practice.

For instance, rebalancing is an important aspect of portfolio risk management, yet the cost of doing so can be particularly high for tax-paying families, depending on embedded taxable gains and their character. Thus, while it remains an important discipline, taxable families may in practice be better served by rebalancing less frequently or by using portfolio inflows to rebalance allocations without realizing taxable gains.

On a related note, making a manager change can be costlier for tax-paying families. To make a switch, one must have confidence that the newly selected manager is likely to outperform the existing manager, net of any taxes paid on realized gains at exit.

Finally, when allocating capital to an investment manager, families must pay heightened attention to selecting the vehicle or share class that is appropriate for their tax status, currency, and domicile. Given the complexity of the financial ecosystem for many global families, vehicle selection requires careful review.

Step 4: Oversight & Measurement

Finally, ongoing oversight and measurement against stated objectives is critical. All family portfolios should have well-defined policy benchmarks against which investment results will be measured. These benchmarks should represent the overall portfolio strategy and are useful not only in holding family principals, staff, and external advisors accountable over the long term, but in enabling families to effectively evaluate the success of their portfolio strategy against relevant, meaningful, and understandable metrics.

While they are essential to all portfolios, benchmarks will vary for each investor and often are expressed differently for institutional versus private investors. Institutions, for instance, can be highly sensitive to performance against established industry benchmarks and may measure their investment portfolios against comparable peers. In contrast, some families may focus less on returns relative to a benchmark but instead measure success in absolute returns. While the appropriate measure will vary by investor, the selected benchmark—as described in our paper on the subject—serves as the primary reference point for evaluating one’s investment decisions. Thus, establishing the investment policy benchmark is an important final step in portfolio strategy construction and warrants ample focus.

An Enduring Structure, Adapted Over Time

The investment philosophy we have applied to portfolios for over forty years grounds our approach to investing portfolios for families of substantial wealth. But it is only the foundation. To fully frame and build long-term, successful portfolios for private investors and families, a deep understanding of each family’s distinct goals, influencing factors, and ecosystem is required. By incorporating these unique dimensions—gained through the Family Enterprise Review—within a deliberate process of highly customized portfolio design and implementation, the most effective portfolio for each unique family can be built. This portfolio blueprint, however, must continue to evolve over time as the influencing factors underpinning a family’s investment strategy and implementation shift. A deep commitment to diligent monitoring and ongoing recalibration can promote continued relevance and enduring success as markets, needs, and generations change.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. While there is no definitive asset size at which institutional investment practices are appropriate for individual investors and families, specific portfolio and investment strategies are most effective at investable asset levels above $100 million. For a point of reference, Cambridge Associates’ average private client portfolio size is $350 million. This figure comprises the assets under advisement for private clients worldwide that use the firm for portfolio advice or management and receive performance reporting from Cambridge Associates.

The post Portfolio Construction: A Blueprint for Private Families appeared first on Cambridge Associates.

This note highlights the key takeaways in the 2024 Endowment Radar Study and concludes with commentary about the role of the endowment going forward in a more challenging environment.

In 2024, endowments continued to deliver essential funding and stability for the nonprofit businesses of colleges and universities. The majority of institutions in our study:

• Relied on endowment funding to balance the budget of a nonprofit business model.
• Increased endowment spending to fund the growing costs of delivering higher education and making education affordable and accessible.
• Increased funding of financial aid and increased the tuition discount rate.
• Maintained a healthy balance sheet and limited growth of debt.

Endowment Spending Is Essential to Funding the Nonprofit Business Model

The colleges and universities in the Endowment Radar Study are nonprofit organizations, meaning they do not have shareholders or distribute profits. If there is an operating surplus or investment gain at the end of a fiscal year, those net assets are retained by the organization to support future fiscal years. The financial model works because subsidies afforded by tax-exempt status—fundraising and endowment distributions—make up the deficit between expenses and earned revenues (money earned from teaching and research). Most of the endowed colleges and universities in our study do not have sufficient revenues to fund their annual expenses without subsidies provided by spending from their endowment funds (Figure 2). The average operating deficit (margin) before endowment spending was -15.3%. An infusion of endowment spending provides a modest cushion and shifts the average margin to 4.4%.

Endowment Spending Has Grown to Outpace Inflation and Deliver Consistently

Colleges and universities are not immune from inflation. Over the past four years, median expenses for the cohort have grown 27% compared to 22% inflation growth for the broader economy, as measured by the Consumer Price Index (CPI). In 2024, the median expense growth rate was 6.5% exceeding 3.0% CPI. Endowment spending increased to contend with higher costs. The median change in endowment dollars distributed to the educational enterprise was 8.4% in 2024, a pace that exceeded inflation and the 6% median endowment growth rate (Figure 3).

Endowment Spending Reduces the Cost of Attendance

One of the pressure points for the operating margin is the growing “cost” of forgone revenue in the form of discounted tuition provided to students as financial aid and scholarships. Financial aid commitments have increased for the colleges and universities in our study every year. This trend continued in 2024, when the average growth rate in financial aid was 7.4%.

Nearly every institution in our study increased institutionally funded scholarships and financial aid awards in 2024 (Figure 4). The median tuition discount rate was 46%, meaning that only 54% of gross tuition charges were actually collected from students. Sticker prices do not tell the full story of the price of college.

The endowment distribution directly supports financial aid and scholarships via endowments restricted for those purposes and indirectly by subsidizing total costs, which increases the availability of other funds that can be used to support financial aid. Endowment support-to-financial aid is a coverage ratio that considers the direct and indirect roles the endowment plays in pricing strategy. It measures the relationship between endowment spending and financial aid discounts to students.

Figure 5 shows the range of endowment distribution-to-financial aid coverage ratios. At the 75th percentile, institutions have slightly more than a one-to-one coverage ratio; the endowment distribution exceeds the scholarships and aid awards. For the median institution, a ratio of 0.6x means that 60% of aid is offset by endowment subsidy. At the 25th percentile, the 0.3x ratio indicates that one-third of scholarships are offset by endowment spending. Those institutions are discounting at a level that exceeds endowment support.

Endowment Assets Are Key to Balance Sheet Health

The endowment-to-debt ratio helps us understand balance sheet health and reveals that most colleges and universities have been prudently managing their balance sheets. The median remained at a healthy 4.4x ratio, but the bottom quartile’s ratio (1.5x) indicates less balance sheet flexibility for future challenges. Average endowment growth (6.5%) outpaced growth in outstanding debt (4.2%). But for some, debt growth far exceeded the average (Figure 6). This may indicate strategic use of borrowing but could also be a sign of distress. Balance sheet health will be important as institutions weather the tumultuous 2025 operating environment.

Net Flow Rate Indicates Future Role of the Endowment

In addition to long-term performance, net flow—the ratio that calculates the net rate of endowment spending and inflows—is an indicator of whether the endowment will keep pace with the enterprise, lose purchasing power, or take on a greater role in the future. Most colleges and universities have negative net flow rates, but the degree that inflows offset spending from the endowment determine the liquidity profile and purchasing power of the portfolio.

This year, the median net flow rate was -3.0%, which is similar to prior years. In 2024, a higher range of endowment spending is notable, but not alarming. Average spending inched closer to 5% and at the highest quartile, spending ranged from 5.3% to 7.1% (Figure 7). This trend will be something to watch in 2025 for colleges and universities contending with new costs and impaired revenues imposed by an adverse political environment.

Conclusion

Why do endowments keep growing? While it may seem counterintuitive, endowments grow in size because they support institutions that are managing the higher costs of delivering their missions, like wages, physical plant and expanded programming. In 2024, college and university endowments had capacity to fund growing costs and commitments to financial aid. So far, the increase in endowment distributions has been sustainable as endowment growth has outpaced debt growth and new gifts and disciplined endowment spending have helped maintain endowment purchasing power.

In 2025, this sustainable business model faces intense headwinds that threaten to destabilize the financial equation. Revenue challenges include declining demographics for college students and new policies that could reduce government funding for financial aid and research. Potential taxation could increase costs to endowments and reduce endowment funding available for the mission. It will be challenging to maintain the vital role of the endowment in the near term. But endowment funds will be even more essential to delivering education, innovation, and research that benefit the greater good.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. While there is no definitive asset size at which institutional investment practices are appropriate for individual investors and families, specific portfolio and investment strategies are most effective at investable asset levels above $100 million. For a point of reference, Cambridge Associates’ average private client portfolio size is $350 million. This figure comprises the assets under advisement for private clients worldwide that use the firm for portfolio advice or management and receive performance reporting from Cambridge Associates.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.

The post Endowment Radar Study 2024: Why Colleges and Universities Have Endowments appeared first on Cambridge Associates.

• Of the 255 CA clients that responded to the 2024 survey, 157 reported engaging in Sustainable and Impact Investing (SII) (54%). A group of 49 institutions have consistently responded to three consecutive surveys in 2020, 2022, and 2024. From this group, we have seen a steady increase in SII integration from 45% in 2020 to 61% in 2022, and now 69% in 2024.
• The number of respondents to the survey increased by 111 institutions, representing a 77% increase from 2022.
• Religious institutions have the highest SII integration with 93% of respondents. Foundations, cultural/research institutions, and colleges & universities all have most respondents integrating SII with 64%, 61%, and 58%, respectively.
• Institutions that do not engage in sustainable and impact investing mainly cited they were not interested or that their mission is solely addressed via programmatic/philanthropic activities or perceived negative impact on financial performance. However, nearly one-quarter of these institutions anticipate engaging in sustainable and impact investing in the future.

Investment Structure

• The ways in which responding institutions incorporate sustainable and impact investing most often include: developing an Investment Policy Statement (IPS) that integrates SII priorities, principles, and decision criteria; engaging with advisors to implement; and informing their investment managers that SII/ESG is important.
• Approximately 63% of respondents engaged in sustainable and impact investing allocate more than 5% of their portfolio to sustainable and impact investments, with nearly one-third allocating more than 25%. Over the past five years, 78% of the respondents reported they increased their allocation to sustainable and impact investing. Approximately two-thirds of respondents reported plans to increase their allocation to sustainable and impact investing over the next five years.

Implementation Strategies

• Institutions continue to employ a range of strategies to achieve SII objectives, including ESG integration, impact investing, negative screening, and program-related investments. ESG integration remains the most commonly used tool.
• Respondents reported that anti-ESG/DEI sentiment and/or legislation had minimal impact on approach to SII with 93% reporting no effect.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. While there is no definitive asset size at which institutional investment practices are appropriate for individual investors and families, specific portfolio and investment strategies are most effective at investable asset levels above $100 million. For a point of reference, Cambridge Associates’ average private client portfolio size is $350 million. This figure comprises the assets under advisement for private clients worldwide that use the firm for portfolio advice or management and receive performance reporting from Cambridge Associates.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.

The post Sustainable and Impact Investing 2024: Insights and Perspectives appeared first on Cambridge Associates.

The Fed is embarking on a rate-cutting cycle after hiking rates by over 500 bps since March 2022. The Fed has been cautious about cutting rates due to inflation concerns and lagged the Bank of England and European Central Bank, which cut rates for the first time this cycle earlier this summer. The Fed’s stance has shifted as inflation and labor market risks have become more balanced. August data showed US headline inflation at 2.5% year-over-year, the lowest reading since February 2021, while US nonfarm payrolls data indicated a softer labor market than previously thought. Given the recent deterioration in the labor market, the Fed opted to start with a less common 50-bp cut, as opposed to a typical 25-bp move.

The initial market response was mixed following the announcement. US equities initially rallied, while Treasury yields and the US dollar fell, but those moves mostly reversed during Fed Chair Jerome Powell’s press conference. This initial market response is unsurprising given the split expectations on whether the Fed would cut by 25 bps or 50 bps. Interest rate traders have priced in 100 bps of cuts in 2024 and another 160 bps in 2025, and recently shifted to slightly favoring a larger 50-bp move to kick off this rate-cutting cycle. Shifts in interest rate expectations has added to equity market volatility recently, leading some investors to move out of crowded positions like the Magnificent 7 and yen/USD carry trade.

While the September 18th decision emphatically sets the course, the future pace and extent of rate cuts are crucial. According to the Fed’s updated summary of economic projections, it expects to cut rates by a total of 200 bps through 2025. That is up from the projected total of 125 bps at its June meeting, but it is below what the market expects over the same period (260 bps) and is well below the average amount of cuts delivered in the first year of the cutting-cycle when there is a recession (320 bps). This reflects the balancing act the Fed is trying to strike as it attempts to normalize policy while simultaneously mitigating inflation risks and supporting a softening labor market. The Fed faces two-way risks: cutting too much, too soon could stoke inflation, while cutting too little, too late could risk a recession. While the Fed has clearly grown more concerned about the labor market, it still appears to be guiding toward a soft landing based on its latest projections.

We believe the US economy is softening but that growth next year will remain positive. This should be positive for risk assets but less so for high-quality bonds. There have been nine rate-cutting cycles since 1984, five of which occurred without a recession. On average, US equities returned 17.1% in the first year following the first cut when this was the case, versus -1.0% when a recession occurred. On the other hand, US Treasury securities usually generate positive returns when the Fed cuts rates, but their upside is limited absent a recession.

As such, we believe investors should maintain equity and high-quality bond allocations in line with policy.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. While there is no definitive asset size at which institutional investment practices are appropriate for individual investors and families, specific portfolio and investment strategies are most effective at investable asset levels above $100 million. For a point of reference, Cambridge Associates’ average private client portfolio size is $350 million. This figure comprises the assets under advisement for private clients worldwide that use the firm for portfolio advice or management and receive performance reporting from Cambridge Associates.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.

The post The Fed Cuts Aggressively, but Remains Cautious About Future Cuts appeared first on Cambridge Associates.

Building an optimized investment infrastructure begins with clearly defined goals and identifying who, both inside and outside the family, will play a role in the wealth management process. Some families choose to build a family office to oversee some, or all of the functions related to managing their wealth in-house. However, for many families, the best approach is to build a team of advisors who are experts in their fields and who can work together to meet the family’s investment needs. This paper serves as a guide for families who have decided to outsource the investment function of their portfolio by partnering with an investment advisor. Its aim is to help families understand the different structural components to consider as they work to create an institutional-caliber portfolio (Figure 1). These structural components include investment management, banking, lifestyle services, legal representation, tax accounting/reporting, and philanthropy.

But First, a Word on Governance and Controls

For a family who has experienced a liquidity event, governance may not be top of mind. However, reflecting on how investment decisions will be made can often provide valuable direction on what type of partners they need. An honest assessment of a family’s desire to be involved in day-to-day investment decisions, oversight, and implementation—and their experience in making such decisions—will guide families to solutions that make the most sense for them. In some families, a primary wealth owner may prefer to make and approve all investment decisions, while in others a delegate or investment committee may be preferable. Considering these complex foundational questions up front can help determine optimal partners.

Investment Management

Working with an Advisor

Investment advisors provide a range of services to help manage a family’s wealth. First, they help the family create an investment strategy that aligns with their financial goals and risk tolerance. This includes due diligence, strategic asset allocation, risk management, investment selection, and regular monitoring of investments. Investment advisors can also provide investment education and retirement planning, estate planning, and tax planning. The role that an investment advisor takes on within an investment infrastructure differs from family to family. For this reason, they often operate in close coordination with lawyers, accountants, and tax specialists to ensure a comprehensive approach to wealth management.

Fiduciary Versus Advisory

When selecting an investment advisor, families should first consider the difference between a fiduciary and advisory relationship (Figure 2). They should consider a fiduciary relationship if they seek a partner who is legally bound to act in their best interests, especially if they prefer not to be deeply involved in day-to-day investment decisions. On the other hand, an advisory relationship might be suitable for families who desire more control over their investment choices and are comfortable with a more collaborative approach.

Portfolio Administration

Handling day-to-day portfolio operations is no small task. Families should note that the amount of time required to source and evaluate investments often goes well beyond what an individual alone can handle, even if they have a strong investment background. Meeting a portfolio’s oversight requirements also involves significant work. An outside investment manager can help family investors sort through the universe of available funds and strategies to identify which investments may best suit their goals. Whether a family creates a single, “one-stop shop” office to support its needs or elects to build a broader team of experts, a strong team is needed to oversee the execution of the playbook. From there, the focus should be on working with reputable and experienced service providers with strong references and a track record of success.

The work of portfolio administration also includes placing and signing off on trades, completing subscription documents, paying capital calls, cash monitoring, approving consent documents, and tracking performance. Cash management—for example, uncovering opportunities to achieve better cash yields than a custodian bank might be offering—is another key administrative task. Considerable work with selected banks is required to set up accounts and services, which we discuss in more detail below.

Many wealth owners try in earnest to take on all this work themselves, but find it becomes too challenging to manage in conjunction with other day-to-day obligations. In most cases, families should have someone readily available to undertake these responsibilities. Some investment advisors, including Cambridge Associates, can manage operational activities for clients—in either a fiduciary or advisory capacity. Alternatively, families who have opted to build a family office often handle portfolio operations with an in-house team.

Banking

Another key infrastructure choice that families need to make involves selecting a bank and the type of investment account they will use to operate and oversee their portfolio. There are two main options to choose from: a brokerage or custodian account (Figure 3).

A brokerage account is typically lower cost, as assets are held in a large general account on behalf of families. Because securities in a brokerage account are tied to a broader pool of assets, they may become encumbered or put in jeopardy in the event of a bank failure. By contrast, a custodian account is considered a more secure method of holding assets, with all securities held in the name of the account holder. Custodian accounts allow for assets to remain freely transferable providing an additional layer of capital protection in the event a bank or broker comes under financial pressure. For these reasons, custodial accounts are often referred to as “safekeeping” accounts. The landscape of brokerage account providers is fairly broad. However, when it comes to custodians, choices are more limited. When deciding between brokerage and custodial platforms, families should also consider the related costs. As service utility varies by preference and goals, families should know what they are signing up for (Figure 4).

Large custodians target families with assets of $200 million or more. These banks generally have better online portals, more service options, investment capabilities, and superior customer service teams. However, they also have revenue targets to consider when taking on new business, so they prefer larger clients and typically charge around 5 basis points (bps) on market value. Mid-size custodians generally charge a higher fee of around 10 bps, but don’t have defined revenue targets by relationship. In some cases, these banks may want to maintain an existing relationship with the family if a third-party manager is brought in. Alternatively, families with smaller mandates can seek out smaller custodial account providers, which offer no-frills services with fees starting at around $12,000. Figure 5 approximates what percent of assets are custodied once a portfolio is built out and fully allocated to its asset class targets.

After electing whether to use a brokerage or custodian account, account-specific add-on services can be determined. If a custodian relationship is selected, families can opt to add accounting services, including alternative asset pricing, so they have an official book of record. This service is useful for tax purposes, as transaction records and tax document collection can be shared with the tax provider.

Performance reporting is another add-on service that many families use to compare data against that of investment service providers. However, if a family’s investment consultant provides performance reporting, they will want to confirm whether two sources of performance data are useful to them or if this is an unnecessary cost. Some custodians offer nominee services to investors, whereby assets are purchased in the name of the bank. This is done for specific reasons, such as maintaining privacy of holdings and managing administrative complexities between clients and their banks. As families determine what kind of accounts they need, they should consult their existing tax service providers to be sure they are meeting all the bank’s documentation and regulatory requirements. An investment manager can next review the final account structure and domicile information and help recommended which investment vehicles may be best suited.

Beyond selecting where assets will be housed, families often need to negotiate terms related to borrowing and lending. For example, they may have an interest in taking a line of credit against their assets or becoming involved in private lending. In such cases, it’s important to consider both the existing banking relationship and the service offerings of other banks to determine an optimal approach.

Lifestyle Services

Services such as property management, bill pay, and support personnel can serve as additional components of an investment infrastructure that are not related to the portfolio. In many cases, support personnel include individuals who are responsible for cash and balance sheet management and tax coordination. The time and convenience provided by such services can allow family members to focus on other priorities such as business ventures and philanthropic work. Other benefits of lifestyle services include additional risk management and enhanced privacy. Finding the right service level starts by defining the scope and objective of the work, be it office staffing, property management, or household and travel administration. It is important to partner with service providers that align with the family’s specific preferences.

Legal Representation and Structuring

In addition to choosing an investment account type or entity, families need to consider their legal representation and structuring needs. Investors need legal support to determine optimal investment structuring strategies and to review investment agreements as new ideas are evaluated. Asset protection is another key component of legal representation—including the use of trusts and limited liability entities. Families should work with legal professionals who have expertise in wealth management and understand their unique needs.

Likewise, determining a clear legal structure is essential for ensuring a smooth transfer of wealth to future generations. A comprehensive succession plan that addresses issues, such as leadership transition, governance structures, and other family dynamics, will help ensure continuity of the investment strategy and an enduring focus on the family’s key values. For these reasons, a family’s legal representation should also be well-versed in wills, trusts, power of attorney, and healthcare directives.

Tax Accounting and Reporting

Tax accounting and reporting is a crucial component of a family’s investment operations. Beyond ensuring compliance with tax laws and regulations—including income reporting, deductions, and capital gains rules—effective tax accounting can also help maximize an investor’s tax efficiency and preserve wealth. Tax laws and regulations are complex and change frequently. Tax advisors who specialize in working with family investors can help with meeting requirements and identify tax planning opportunities. They can also assist investment transaction record keeping, make it easier to prepare tax returns, and respond to any tax inquiries. In some cases, investment managers can work with custodian banks to help streamline the flow of tax documents to maximize efficiency.

Philanthropy

Many families choose to set up a family foundation as part of their wealth planning. This type of capital pool requires a distinct kind of portfolio management, one that adheres to a unique set of spending requirements and liability needs. It can be beneficial to work with a partner that has experience in managing the fund disbursement process and tracking ongoing commitments. Families can also work with a philanthropy advisor to help them define and implement their giving strategy. Philanthropy advisors specialize in helping families clarify their values, mission, and priorities. Having a well-defined philanthropic plan in place can give families greater confidence in their giving strategy.

Complexity Considerations

For families of significant wealth, complexity is a natural byproduct of a well-managed portfolio. Generally speaking, the infrastructure needed to properly support the daily, weekly, monthly, and annual operations of an institutional-caliber portfolio will parallel the portfolio’s size and scale. A relatively straightforward investment structure with few family partnerships can allow for easier implementation and support. By contrast, more complex investment structures—such as unique pooling vehicles to support the needs of many beneficiaries—require additional flexibility. These structures also usually require enhanced tax management and accounting services. Families should conduct a thorough assessment of their internal resources, including time, expertise, and willingness to engage in investment management. If the complexity outweighs the family’s capacity for effective management, simplifying the investment structure or seeking external expertise may be prudent. On balance, an investment framework’s multidimensionality should help—not hinder—the work of serving the family’s long-term financial goals.

Building Toward Success

If or when a family’s wealth picture changes, it may be time to take a step back and determine the right partners and processes for moving ahead. Building the right investment infrastructure will play a crucial role in helping to preserve and maintain wealth over the long term. Families should take care not to underestimate the amount of work that effective investment management and wealth governance involves. Identifying their unique areas of expertise will help to clarify the areas where collaboration and partnership can be best used. In all instances, costs should be commensurate to the value delivered.

As families navigate the complexities of wealth management, it is crucial to remain proactive in building and adjusting their investment infrastructure. We encourage families to regularly review their investment goals, governance structures, and service provider relationships to ensure they align with their evolving needs. Ultimately, family investors should feel safe in the knowledge that they are operating an institutional-caliber portfolio—confident that their capital is not only protected from undue risk but being put to work in the service of their unique ambitions and values.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. While there is no definitive asset size at which institutional investment practices are appropriate for individual investors and families, specific portfolio and investment strategies are most effective at investable asset levels above $100 million. For a point of reference, Cambridge Associates’ average private client portfolio size is $350 million. This figure comprises the assets under advisement for private clients worldwide that use the firm for portfolio advice or management and receive performance reporting from Cambridge Associates.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.

The post Optimizing Wealth Infrastructure for Families appeared first on Cambridge Associates.

This paper frames a decision-making process to enable an institution to achieve something that feels untenable—a roadmap for action (or not). The result may feel unsatisfactory, perhaps for all stakeholders on some level, but a divisive climate demands a clear perspective and an explicable institutional response. Fiduciaries have a responsibility to determine a course of action that considers the future of the institution given its mission and mandate.

A return to first principles and an orderly decision-making process can enable an institution to move forward and feel confident about how and why the outcome was achieved. The resulting position and/or action around divestment is an outcome of the process.

In summary, our experience suggests a decision-making process as follows:

1. Define the exclusion. Each institution needs a well-defined process to evaluate divestment proposals and determine the specific investments that would be excluded from the portfolio. Included in the exclusion definition are the reasons for divestment, expected outcomes, and how they would be measured. Following a consistent process and criteria are especially important to address fervent opinions equitably and to communicate clearly.
2. Navigate complex issues with good governance. Good governance is a roadmap that can provide structure, processes, and policies to respond to and communicate with stakeholders while upholding fiduciary responsibilities.
3. Weigh other considerations. There are several related considerations that need to be included in the evaluation, namely costs, timing, legal requirements, and the relationship to a bigger picture.

Define the Exclusion

What is Divested and Why

What set of investments should be excluded from the investment portfolio? Divestment proposals usually start with a sentiment or concern. Recommendations for divestment may be as broad as a demand to avoid affiliation with perceived unacceptable behavior or more specific recommendations for exclusion of economic sectors, regions, nations, or companies associated with or involved in conflict, human rights violations, and other harms. To implement a divestment effort, the investment management team needs clarity about the investments that should be excluded from the investment portfolio. This is often quite difficult, as investments that fail an aspect of the exclusion criteria may have other qualities that are additive to the portfolio in other ways.

Closely related to the recommendation of what should be excluded is the answer to why should it be excluded. Is the reason for the divestment decisions a moral statement or an effort to influence policy through economic impact? Some divestment policies require an economic reason if endowment resources are going to be redeployed because the endowment is an asset with economic value. Would the institution divest to avoid economic risk and stranded assets, or is the intention to influence geopolitical strife—such as compelling a company to stop supplying equipment to an aggressor nation—through withholding capital? If change is the goal, investor engagement as a shareholder may provide a more direct path to influence a company’s decisions.

Values

Many calls for divestment ask an institution to express its values or exercise power to change the course of a conflict or to support a specific movement. Organizational values can be more specific for a private foundation, but shared values are harder to define for a university. By their very nature, universities are designed to explore and cultivate different perspectives. For example, students may weigh values differently or may have different values entirely, especially in today’s divisive political and cultural environment. Faculty and alumni stakeholders bring their values and expectations as well. As a result, it is difficult to eliminate a particular type of investment based on shared institutional values. It is up to those with fiduciary responsibilities to determine whether these divestment requests reflect the mission and commitments of the entire institution.

Goals and Outcomes

What will be the outcome of eliminating a sector or set of companies? How will the impact of the divestment decision be measured over time? Before embarking on a divestment journey, it is important to understand the destination. What is the ultimate goal of the call to action? Are outcomes measurable within the institution or beyond?

Decision makers must determine if the goal is achievable and aligns with institutional and investment principles and policies. This includes weighing fiduciary responsibility, investment implications, and institutional and societal implications.

Navigate Complex Issues with Good Governance

Stakeholder concerns are a form of engagement, and each endowment program needs effective governance to acknowledge and respond to inquiries and requests clearly and effectively. Endowment governance shapes the structure, policies, and processes that direct endowment investments. Good governance is the framework for engagement and communication.

Structure

The first step is to develop a governance structure to consider requests, so that a group is prepared to do the work on behalf of the institution if a divestment issue is presented. Who is eligible to make a divestment recommendation? Who decides whether to implement the request? A decision that involves an interpretation or amendment to existing policy is the responsibility of the Board of Trustees. However, an institutional governance structure can identify the group of people that will receive the divestment proposal. That body may be the Board, the investment committee, a sub-committee of the Board, or a separate group designated to evaluate resources in light of institutional policies. ⁵ Policies and guidelines provide a framework for the group to assess the considerations of the proposal and to determine the best course of action. While one viewpoint may be expressed in the divestment proposal, it is important for the group to consider different sides of the issue within the institutional community.

Process

What is the review and evaluation process? Process establishes the criteria for consideration and the steps for how a proposal may flow from consideration to potential adoption. Criteria for consideration will provide guidelines on specificity of the divestment request, rationale, and goals. Some institutions specifically ask that a proposal include how divestment will help achieve the desired goal. Criteria should also determine the financial and broader considerations for the institution, such as reputation and social or moral implications. Providing the basis and expectations for the divestment request will enable the governing groups to assess the institutional merit and determine how the proposal fits into the broader policy framework.

Policy

The investment policy ultimately must reflect all of the guidance for how endowment assets will be invested. Institutional leadership must base their decision in policy and have a firm understanding of both the short-term and long-term financial implications of divestment. How does the justification for divestment align with institutional bylaws and investment policy? Does the current investment policy outline ethical investment guidelines or environmental, social, and governance (ESG) guidelines? If current policies are insufficient, the Board may need to revise or augment them. Some institutions also have a specific divestment policy to manage proposals.

• Investment policy: The investment policy governs endowment investments. It outlines the goals of the investment program, investment strategy, and asset allocation guidelines, risk and liquidity parameters, and any ESG and impact investment guidelines. If the investment policy rules out divestment or outlines divestment consideration criteria, then no additional policy is needed to address divestment.
• Divestment policy: Some institutions also have a specific divestment policy or statement to outline how divestment considerations are managed. A divestment policy can be employed to outline criteria for consideration and the decision-making process. If a recommendation to divest is approved and requires a change in investment policy, the Board will need to refer to the divestment statement or revise the investment policy to accommodate the new approach.

Weigh Other Considerations

There are further considerations that fiduciaries need to weigh before making a divestment decision because endowment assets are part of a vast institutional ecosystem and must comply with laws and regulations. When responding to calls to divest, we believe institutions should assess financial and regulatory implications, and if the endowment is the appropriate mechanism to affect the issue at hand.

Costs

Divestment narrows the investment opportunity set and introduces new trade-offs. In addition to the elimination of certain direct investments, the divestment decision may steer the portfolio away from asset managers that do not screen for the excluded investments. The divested assets may ultimately become less favorable holdings because of growing pressure to move away from the goods and services involved in the conflict. Or they may be profitable endeavors, and, as a result of divestment, the institution chooses not to participate in financial gains. For example, firms with sales generated in aerospace and defense outperformed the broader index of stocks over the past five years.

Is the institution willing to trade off real, long-term dollars that could be used to provide impact in a different way? Higher endowment returns educate more students, hire more faculty, and invest in teaching and research that can influence policy through writing, legal work, and media. How should the institution balance current causes and views with future views, obligations, and priorities? The endowment is composed of long-term capital intended to support the institution in perpetuity. A change in investment policy can alter the long-term return potential of the portfolio.

Timeline

Very specific, short-term changes to investment policy are contrary to the long-term nature of a diversified investment strategy and the time horizon of the perpetual assets. It takes time to divest, especially if ownership is through external investment managers and private investments that involve longer-term lock-ups for limited partners. Does the timing of the cause inspiring divestment align with the long-term nature of an endowment? Are there other more immediate forms of expression that could affect change sooner?

Another element of timing is how often fiduciaries will review the divestment. How long will the institution withhold capital? If the offending company or industry changes its ways will positive change call for restored investment? At what frequency will circumstances be reviewed to evaluate outcomes? Are those responsibilities defined in the governance process? Questions of timing are connected to the desired outcomes and the nature of the concern.

Legal and Fiduciary Responsibilities

The endowment functions within the bylaws of the institution, as well as regional and national laws. It is important to understand whether the exclusionary action of divestment is permitted under those laws. The action may also be counter to government policy, so it is important to understand the potential impact on government contracts and oversight. Does the opposition impel the institution to extend its boycott to its own government?

Bigger Picture

Endowment policy fits into broader institutional strategy and actions. If the divestment issue is an institutional priority, are other elements of the institution also being employed or deployed to address the issue? How does the endowment’s divestment fit into a broader strategy? Is the endowment one piece of an activist strategy? Would the divestment action be amplified by other forms of activism and collective change? For example, if the endowment is divesting from a popular food chain that is operating in a contentious region, but members of the university community continue to eat at the local franchise, the endowment would be held to a different standard than the community and would be divesting in an isolated vacuum.

Concluding Thoughts

Divestment is a complex decision. The endowment portfolio is composed of a group of gifts entrusted to the institution in perpetuity. Endowment funds are invested with a shared mandate to withstand geopolitical and economic tumult and to equitably distribute funding to multiple generations of stakeholders. The endowment assets serve the entire institution, forever. Fiduciaries have a responsibility to determine a course of action that considers the future of the institution, given its mission and mandate.

This paper offers considerations for how to manage calls for divestment and raises questions that need to be answered to respond clearly and effectively to divestment requests. To navigate tumultuous times and passionate entreaties, we believe institutions need to lean into good governance. It is important that the decision-making process provides clarity, and by extension an opportunity for learning, listening, and engagement, especially when the outcome of the process will not satisfy all stakeholders. An orderly process and response can enable an institution to move forward and feel confident about how and why the outcome was achieved.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. While there is no definitive asset size at which institutional investment practices are appropriate for individual investors and families, specific portfolio and investment strategies are most effective at investable asset levels above $100 million. For a point of reference, Cambridge Associates’ average private client portfolio size is $350 million. This figure comprises the assets under advisement for private clients worldwide that use the firm for portfolio advice or management and receive performance reporting from Cambridge Associates.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.
4. There is a separate but related question that asks if an institution should take a political stance, from acknowledgement to action.
5. Relevant policies may include the investment policy, ethical investing guidelines, ESG guidelines, divestment criteria or policy, and university mission and values statements.

The post The Divestment Question: Focus on Governance appeared first on Cambridge Associates.