Created by families, for families


Look to Higher Ed for Higher Returns

By William Smith, CFP®


Is your email inbox cluttered with offers to magically cure a host of problems? One popped up last weekend promising to fix my slice in 15 swings. I simply needed to mimic PGA TOUR pro Rory McIlroy’s swing plane. No mention of the thousands of hours Rory has invested developing his craft, nor a nod to his rare natural talent. Nope, that’s all, just 15 swings. Although skeptical about this offer, I do believe that by following the best practices of high achievers in any field, we can improve our performance.

For struggling investors, is there a model to emulate? One that would increase their chances of keeping it in the fairway? Turns out there is.

Many of the investment industry’s leading professionals, our Rory McIlroys, manage the endowment assets of our nation’s top colleges and universities. Endowments of all sizes share a common goal: to provide a current income to support today’s priorities and invest for growth to fund tomorrow’s initiatives. They do this by establishing a “spending policy”, a percentage of the portfolio that’s available to be distributed currently, and positioning their investments to achieve a return that offsets the effects of inflation, “preserving purchasing power.” Yale University’s Nobel Prize-winning professor James Tobin eloquently described this challenge, “the trustees of endowed institutions are the guardians of the future against the claims of the present. Their task is to preserve equity among generations.”

Professor Tobin’s job description for university trustees would well suit investors wishing to draw from their portfolios to support their current lifestyles while hoping to leave a legacy for their children, grandchildren, or a favorite charity.

Were we able to study how endowments allocate their investments and set spending percentages, that might offer valuable perspective. Thanks to the folks at TIAA and NACUBO (the National Association of College and University Business Officers) who publish an annual survey, we have that information readily available.

The 2020 NACUBO-TIAA Study of Endowments covering the year ending June 30, 2020 had 705 of the nation’s top endowed institutions participate. Representing more than $600 billion in assets, managers from the likes of Harvard, Princeton and Yale, along with those closer to home from UNC Chapel Hill, Duke and Elon, all reported how their investments were allocated, how much they withdrew from their portfolios, what rate of return they achieved, along with a multitude of other data.

The portfolios of the smaller funds ($100 million and below) typically allocated their assets roughly 70% to global equities and 30% to fixed income, a shift from 60% / 40% years ago due to a decade’s long stretch of low interest rates. This cohort of endowments realized net average annual returns of 7.5% over the past 25 years. Further, they spent roughly 4.5% of their portfolios annually over that timeframe, leaving 3% net growth, enough to outpace inflation – their primary goal. These results would likely garner a passing grade in Professor Tobin’s book.

With this reference, we can model these university endowments to improve outcomes in our personal portfolios. If you’re uncertain whether you have the proper asset allocation or if you’re spending more than your portfolio can support, we would recommend an in-depth consultation with your advisor. However, a CliffsNotes summary plan might read:

1. Set a broadly diversified asset allocation you can tolerate and maintain, especially through market corrections.
2. Consider spending no more than 4.5% of your portfolio each year.
3. Rebalance when market forces cause your allocation to drift from target.

Following these 3 steps will most certainly increase the likelihood of your having a successful investment experience.

If only fixing your slice was that easy.

Bill serves as President and Chief Executive Officer of the firm as well as Chairman of the Board.  Based in the Greensboro office, he oversees client relationships, assists in new business development efforts, and works directly with many of Trust Company’s not-for-profit clients.


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