The Way Forward: How Endowments Can Manage Through Market Volatility (US)

The market volatility and ensuing global economic uncertainty caused by the COVID-19 pandemic is hitting educational institutions with particular force. Endowment fiduciaries need to be focused on reevaluating enterprise, operational and investment risks over the next 12 to 18 months and with an understanding that there is probably a “new normal” in the future.


Universities’ endowments are under strain as institutions continue to rely on them as a source of funding. Meanwhile, endowment fiduciaries are taking stock of fluid market dynamics. Some have begun to rebalance and reposition their portfolios to be more opportunistic. Others are drawing on their credit lines and other avenues of liquidity to meet shortfalls. Financial pressure at the operations level and financial sustainability at the overall institution matter to how endowment portfolios structure and manage investment risk, return and liquidity.

As the market volatility and recovery uncertainty persists, Aon’s Non-Profit Investment Solutions team offers four priority recommendations to endowment fiduciaries to help navigate rapidly changing dynamics and ensure successful stewardship.

  1. Understand liquidity pressure points
  2. Develop a cash flow plan to inform investment capacity
  3. Reassess portfolio strategies
  4. Review risk management strategy

We know that liquidity and cash flow are closely linked, but there are nuanced differences that lead us to highlight each individually.

1. Understand Liquidity Pressure Points

An educational institution can experience liquidity pressure points at different levels of the organization; at the enterprise and operational levels as well as in the investment portfolio(s) (i.e. endowment). Understanding where these stresses are and managing them is an imperative, particularly during times of uncertainty.

At the overall enterprise level, a recent Inside Higher Ed survey found that 89% of college and university presidents are concerned about their institutions’ financial stability. (Source: Inside Higher Ed: Responding to the COVID-19 Crisis: A Survey of College and University Presidents) Institutions that have access to credit lines are tapping them to help alleviate near-term financial stress. While the impact of the pandemic will vary for different institutions depending on the strength of their balance sheet, all are faced with revenue loss and budget uncertainty in the coming fiscal years.

From an investment standpoint, there are typically several asset pools which need to be considered within the confines of the educational institution, including unrestricted reserves and an endowment. The unrestricted reserves may get tapped for general budget shortfalls. Understanding where unfunded obligations exist within your portfolios, particularly for unrestricted reserves, is very important. These obligations can be found in private equity, private debt and hedge funds with drawdown terms. It also means knowing the sizing and timing of capital calls, distributions, and redemption terms of diversifying strategies with lock-ups.

In addition to understanding where investments with drawdown features exist, fiduciaries should conduct scenario analysis and stress testing to understand how changes in those expectations can alter overall endowment drawdown needs over the next 12-18 months. While the recovery path forward is uncertain, there are models and scenarios that can help frame the potential range of outcomes.

89% college and university presidents are concerned about their institutions’ financial stability

Total portfolio liquidity review should also analyze cash flow expectations beyond investments incorporating operational and broader enterprise cash flow needs, changes to gifts, expenditures and other cash reserves.

Fiduciaries should look beyond the next fiscal year and work with institutional stakeholders to develop a range of enterprise and endowment financial outcomes over the next 1-3 years to support the long-term financial sustainability of their institutions.

2. Develop a Cash Flow Plan to Inform Investment Capacity

Know when and how cash flows are moving through the endowment such that money can be deployed efficiently.

Institutional memory from the 2007-08 global financial crisis helped inform many endowments as they took steps to increase the resilience of their endowments and strengthen their balance sheets in the years leading up to the pandemic. Despite those actions, average annual spending rates have not gone down but remained steady at 4.5% in the latest NACUBO-TIAA study of endowments (2019 NACUBOTIAA Study of Endowments (NTSE), January 30, 2020). For many, the endowment is increasingly a significant source of funding for the operating budget.

4.5% average annual spending rates have not gone down but remained steady

In order to act upon current opportunities arising from pricing dislocations, fiduciaries should develop a detailed cash flow plan that accounts for broader institutional cash flow needs and the liquidity terms of existing endowment investments over the cash deployment period. Sensitivity analysis around private investments pacing can also help to fine tune expected cash flow needs over the near-term. It may be that liquidity buffers need to be bolstered by delaying or legging into transactions to rebalance portfolios. Some institutions have tapped their lines of credit for additional liquidity. While such funds must be invested conservatively such as in enhanced cash strategies, it can free up the portfolio incrementally to take advantage of nearterm opportunities to bolster endowment return.

Thus, a cash flow planning exercise that optimizes how funding can be allocated for rebalancing and where capital can be drawn from to make new investments are important elements for fiduciaries to manage through an unpredictable market environment.

3. Reassess Portfolio Strategies for More Flexibility

Given the low return on cash, we expect many endowments (who don’t already have a significant allocation to these investments) will continue to move toward private investments and alternative and diversifying sources of return from traditional return drivers.

With markets remaining choppy, we see endowment investors carefully evaluating opportunities arising from market dislocations created by the heightened volatile market environment from the pandemic. We are assessing those opportunities and prioritizing relative to other compelling investment ideas.

One way to do so would be through an Opportunity Allocation. The Opportunity Allocation is not an investment in and of itself. Instead, it is flexibility created in the investment policy statement that allows fiduciaries the ability to invest timely in strategies that may not fit within a traditional asset allocation construct or be well represented in policy benchmarks. The Opportunity Allocation is designed as a maximum allocation as opposed to a target. For example, an endowment may begin with a target allocation of 0% with a maximum of 10%.

An example of an emerging standalone asset class that can fit in an Opportunity Allocation would be China A-shares, which are China onshore equities that have become more widely accessible to offshore investors. Its risk and return profile is largely driven by domestic growth dynamics. This can be seen from the positive performance of A-shares relative to other developed equity markets in recent months, where market reflected China emerging earlier from the pandemic and gradually resuming economic activities.

Opportunity Allocation allows fiduciaries the ability to invest timely in strategies that may not fit within a traditional asset allocation construct or be well represented in policy benchmarks

4. Review Risk Management Strategy

Above all, fiduciaries should be clear about their risk management process for steering the endowment through volatile market environments. Having a clear framework and parameters that quantify risk capacity and tolerance over time periods and in different markets is critical to the success of managing endowment risks. Fiduciaries should be mindful that endowment outcomes are shaped by both action and inaction. Therefore, quantifying risk metrics that enable active decision making should also be a key part of the playbook.

While the ideal time to establish investment policies and risk tolerance are in more benign periods with level heads, volatile market periods do offer a period of reevaluation and testing of the policies It is also important to ensure the oversight procedures have built in flexibility to accommodate near term disruptions in market and asset class relationships.

Uncertainly looms large over higher education. The lack of insight as to if and when students return to campus, how teaching moves back to the classroom from remote learning, and when the myriad of extracurricular activities, which are a significant revenue source for many universities, such as athletics, returns, leads to much unease. It is the rare school which is not feeling such pressures. Fiduciaries who take the appropriate actions should lead their endowments to greater strength with a steady hand towards the long-term.


The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice. Investment advice and consulting services provided by Aon Investments USA Inc. (Aon Investments). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.

This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on Aon Investments understanding of current laws and interpretation.

This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Investments preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Investments disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Investments reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Aon Investments.

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