What family offices can learn from endowments

One of the main difficulties for Family Offices is to have benchmarks and clear references to compare while building its norms, structures and investment processes. In the pursuit of such references, a group of institutions stands out as a potential reference despite the low knowledge many Family Offices have about: university endowments.

Endowments are, by definition, assets donated for institutions, individuals or groups to be a future source of income. University endowments are the assets donated by people, usually alumni, whose main purposes are: (1) to generate long-term income for universities for institutional autonomy and (2) to provide an independent source of revenue.

That enables these institutions’ budgets to not rely solely on traditional sources of revenue such as student fees – which are not enough – and governmental funding – which is getting scarce. Therefore, endowments are becoming increasingly important as a stable source of funding for American universities’ activities.

According to NACUBO data from 2015, there are almost 1.000 university endowments in the US and Canada, with total assets that exceed US$ 500 bn. The main endowments account for, in average, over 30% of universities annual budget. Yale Endowment, for example, distributed US$ 1.08 bn in 2015 for Yale University, which, represents almost 75% of University of São Paulo (USP) budget in 2015 – a university with five times more students. This shows the increasing importance of such institutions as a budget base and factor of differentiation and excellence in global scenario.

Largest Endowments in the US, in billions of dollars

NACUBO (2015).

Endowments and Family Offices are institutions with long term horizons, usually facing the same challenges: to preserve the purchasing power of assets (in the long term) and to provide sources of funding to achieve one or more goals (in the short term).

A Family Office whose main objective is to perpetuate family wealth over generations and to provide a certain life standard for its beneficiaries, will face very similar challenges as those of an endowment.

Table 1: Comparison between Family Offices and Endowments

	Family Offices	Endowments
Beneficiaries	Family Members	University students
Short-term goals	Dividends and contingency allowance	Funding for the annual budget and investments
Long-term goals	To maintain the family’s wealth purchasing power	To assure a high teaching and research profile

Many Family Offices have yet other goals, so the complexity and difficulty of achieving goals can be even higher.

In terms of governance and management, while a family, through Family Governance, defines the goals, mandate and general norms through which the Family Office will work, a university, with its Corporate Governance, has a similar role to the family, defining its goals, objectives and rules that endowments will pursue and follow. Thus, both Family Offices as Endowments are structures that execute previously defined strategies, through Wealth Governance practices.

Among the interesting aspects already well developed in endowments, Family Offices can use as reference:

1. The rules and levels of annual distributions: endowments have refined its rules in the last decades so that there are more stable distributions over time, not compromising the assets over time. In the most interesting cases, are taken into consideration the average distributions of 10 years, current assets and also future perspectives of investments. The level of annual distribution in large endowments has been, averagely, around 5% of assets in the last years.
2. Allocation and management models: endowments are concerned with a long-term performance of the portfolio, looking for diversification, liquidity and a risk balance consistent with the goals and long-term horizon of investments. Also, there is a careful and rigorous selection of external managers with which it develops long-term relationships, doing very little trading and portfolio shifts.
3. Processes and governance: it is interesting to notice the significance of Investment Committees, usually with the mission of supervising the investing process and to provide support to the internal allocation and management team, which is responsible for the management and presentation of investment opportunities. These committees usually includes external independent members and one or more university representatives.

Well defined rules and investment processes, a robust and appropriate governance structure, and a motivated management team are reflected on the long-term returns: Yale Endowment, in the last 30 years, had an annualized return of 13,9%, while Harvard Management Company (despite a less bright recent performance) had an annualized return of 12,2% in the last 40 years – both much above inflation and reference benchmarks.

Such aspects demonstrate that American university endowments can be very interesting references in different aspects and should be closely observed by Family Offices.

 

ANTONIO FERNANDO AZEVEDO

Partner at INEO and co-author of The Investor Family and the Family Office.

MARCELO GEYER EHLERS

Partner at INEO and co-author of The Investor Family and the Family Office.