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Insights from Congressional Inquiry Responses

In February of this year, the Senate Finance Committee and House Ways and Means subcommittee sent letters to 56 private colleges with endowments greater than $1 billion seeking information on how they manage and spend those funds. The inquiry was aimed at understanding how endowments fulfill their charitable and educational purposes, particularly in the face of rising tuitions. Since answers were due on April 1, a number of schools have made their letters public. RFG has read these letters, with a focus on information shed on the internal and external costs of managing the endowments.

Many of the schools stated that endowments were essential to the long-term financial stability of the institutions (“Intergenerational Stewardship” in the words of NYU), while also pointing out that viewing endowments as “rainy day funds” or “nest eggs” was inappropriate (Princeton). Accordingly, the answers attempt to show how schools strike a balance between supporting the annual operating budget and providing financial aid to students on the one hand, and providing stable and secure long-term resources on the other. This resulted in a payout rate of approximately 5% for most of the schools we reviewed. Most schools also pointed out that many endowment funds are restricted in their use.

In general, there was a lack of uniformity to the methodology the schools applied when answering questions on the size and cost of managing endowments. Some schools reported costs as a percentage of endowment value, while others reported costs as an absolute dollar amount. Some schools included outside service provider costs, such as legal, tax, custodians, and consultants as an “internal” investment office cost (in addition to staff compensation and overhead), while others separated such professionals as outside costs.

None of the responses we read reported actual carried interest costs, which is generally viewed as profit sharing rather than a cost of management. The responses differed as to how they treated fees paid to investment managers that were paid out of a commingled fund, rather than directly by the school’s endowment.

One of the answers we read stated that all investment office functions were outsourced. Most however, have internal investment offices that range from about six full-time staff members, on the small side, to about 50 employees at the other end of the spectrum. Harvard ($37.6 B) underlined its hybrid investment model leaning heavily on internal investment managers. In its answer, Harvard wrote that it recently conducted a cost of management study, which found completely externally managed funds generally cost between one and two percent in management fees, while Harvard’s model cost .75 percent. In its words, “Three key factors that contribute to these savings are (1) lower cost structure for internally managed portfolios, (2) lower management costs, including performance fees, and (3) lower expenses for general management activities. In addition to these cost savings, the HMC model provides other tangible benefits such as better liquidity and flexibility, and better alignment between performance and compensation (through asset class benchmarks, claw backs and multiyear payout of incentive compensation).”

With the above as background, we have created a chart summarizing the responses submitted by several of the endowments with respect to certain investment costs. The chart is available to investment offices, and can be obtained by emailing

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