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I see a lot of confusion about college endowments on HN. It's best to think of them not as saving accounts but financial instruments. Annual university budgets

I see a lot of confusion about college endowments on HN. It's best to think of them not as saving accounts but financial instruments. Annual university budgets make use of the returns off of the endowment, often covering more than half of their expenses. Their long-term plan is to never tap into the principal. In fact, the hope is to increase the principal with new donations to expand the annual returns to fight against inflation and support new initiatives.

daniel-cussen 4y ago
Oh so they're usurers.
godelski 4y ago
> It's best to think of them not as saving accounts but financial instruments. I mean I get that (not that a bank isn't a financial instrument...) but to what ends? The example I gave is should be clear, because of the large wealth of money that is. $54bn is no laughing matter. Stanford has $30bn. These are sums that completely pay for the operating costs of the universities and students. On interest. If the point is to be like dividend investors, it does not appear (at least from what I'm seeing) that they are actually acting like someone with a goal to live off of dividends. There's more growth than that. Or there's something missing that I don't understand (more likely).
- deleted 4y ago
  [deleted]
- laGrenouille 4y ago
  Using Harvard as an example, they had an operating expenses of $5.0 billion in 2021 [1]. In order to cover that, they would need to be having a consistent rate of return around 9% on their ($54 billion) endowment. That a fairly good estimate of the rate of return for the stock market over the past 25 years, so not unreasonable. Though, this ignores that most of the endowment consists of restricted funds that can only be used on certain ways. Also, generally you need to cut a few percentage points if you want to guard against inflation. So yes, Harvard could cover just about all of their budget with the endowment returns, though they probably need some extra income to cover the holes formed by the restricted funds and avoid inflation pressure. Is their current usage of the returns too conservative? Probably. Do they have an absurdly large pile of cash that they have no business holding on to? Not really; the investment returns roughly correspond with their current operating costs. [^1] https://finance.harvard.edu/financial-overview https://finance.harvard.edu/financial-overview
  - tallanvor 4y ago
    I was taught that you should estimate a 4% rate of return, which means Harvard's endowment can cover around 40% of their budget. Much of the remainder will come through research grants, and a rather small percentage will be tuition and fees.
    - laGrenouille 4y ago
      Yes, that's what I learned as well. And that's actually close to what Harvard reported using last year ($2.1 billion from the endowment; 40% of the budget). I was only using the more aggressive number as a thought experiment to the original poster about what it would take the cover the entire operating budget.
  - pastacacioepepe 4y ago
    I admit I don't know about university endowments, so the question is: what are those $40+ billion dollars sitting there for every year? Does a university really need a balance that may be larger than some nation's GDP?
    - chrisseaton 4y ago
      > what are those $40+ billion dollars sitting there for every year? It’s not sitting there - it’s invested and working. Investment returns pay for operating expenses.
      - pastacacioepepe 4y ago
        Thanks for the answer, makes sense from a purely economical perspective, but I wonder if universities should fund themselves through speculation and financial instruments. Sounds way too detached from the actual purpose of the institution. Would it make sense for hospitals to do the same? Why not theaters next? In the end, if keeping the balance in check is the main thing an istitution is bound to do, why not stop doing education (= expenses) and just focus on investments?
- ModernMech 4y ago
  > I mean I get that (not that a bank isn't a financial instrument...) but to what ends? Tenure means a guaranteed job for life, and the university needs the money to guarantee it. The position exists even if there aren’t sufficient student or research grants to fund it. Harvard is a bad example to use here because they are so massive. Other schools aren’t situated as well. And yea the endowments have taken a life of their own but tenure is a part of why they exist.
- ghaff 4y ago
  >There's more growth than that There has been an almost unprecedented ten year period of growth in the equity markets. And the big endowment which I keep my eye on at least has done significantly better than the market. It's prudent not to count on that continuing--not that the school could turn on a dime with respect to their revenue mix anyway.

daniel-cussen 4y ago

Oh so they're usurers.

godelski 4y ago

> It's best to think of them not as saving accounts but financial instruments. I mean I get that (not that a bank isn't a financial instrument...) but to what ends? The example I gave is should be clear, because of the large wealth of money that is. $54bn is no laughing matter. Stanford has $30bn. These are sums that completely pay for the operating costs of the universities and students. On interest. If the point is to be like dividend investors, it does not appear (at least from what I'm seeing) that they are actually acting like someone with a goal to live off of dividends. There's more growth than that. Or there's something missing that I don't understand (more likely).

deleted 4y ago
[deleted]
laGrenouille 4y ago
Using Harvard as an example, they had an operating expenses of $5.0 billion in 2021 [1]. In order to cover that, they would need to be having a consistent rate of return around 9% on their ($54 billion) endowment. That a fairly good estimate of the rate of return for the stock market over the past 25 years, so not unreasonable. Though, this ignores that most of the endowment consists of restricted funds that can only be used on certain ways. Also, generally you need to cut a few percentage points if you want to guard against inflation. So yes, Harvard could cover just about all of their budget with the endowment returns, though they probably need some extra income to cover the holes formed by the restricted funds and avoid inflation pressure. Is their current usage of the returns too conservative? Probably. Do they have an absurdly large pile of cash that they have no business holding on to? Not really; the investment returns roughly correspond with their current operating costs. [^1] https://finance.harvard.edu/financial-overview https://finance.harvard.edu/financial-overview
- tallanvor 4y ago
  I was taught that you should estimate a 4% rate of return, which means Harvard's endowment can cover around 40% of their budget. Much of the remainder will come through research grants, and a rather small percentage will be tuition and fees.
  - laGrenouille 4y ago
    Yes, that's what I learned as well. And that's actually close to what Harvard reported using last year ($2.1 billion from the endowment; 40% of the budget). I was only using the more aggressive number as a thought experiment to the original poster about what it would take the cover the entire operating budget.
- pastacacioepepe 4y ago
  I admit I don't know about university endowments, so the question is: what are those $40+ billion dollars sitting there for every year? Does a university really need a balance that may be larger than some nation's GDP?
  - chrisseaton 4y ago
    > what are those $40+ billion dollars sitting there for every year? It’s not sitting there - it’s invested and working. Investment returns pay for operating expenses.
    - pastacacioepepe 4y ago
      Thanks for the answer, makes sense from a purely economical perspective, but I wonder if universities should fund themselves through speculation and financial instruments. Sounds way too detached from the actual purpose of the institution. Would it make sense for hospitals to do the same? Why not theaters next? In the end, if keeping the balance in check is the main thing an istitution is bound to do, why not stop doing education (= expenses) and just focus on investments?
ModernMech 4y ago
> I mean I get that (not that a bank isn't a financial instrument...) but to what ends? Tenure means a guaranteed job for life, and the university needs the money to guarantee it. The position exists even if there aren’t sufficient student or research grants to fund it. Harvard is a bad example to use here because they are so massive. Other schools aren’t situated as well. And yea the endowments have taken a life of their own but tenure is a part of why they exist.
ghaff 4y ago
>There's more growth than that There has been an almost unprecedented ten year period of growth in the equity markets. And the big endowment which I keep my eye on at least has done significantly better than the market. It's prudent not to count on that continuing--not that the school could turn on a dime with respect to their revenue mix anyway.