Endowment Fund Operations Best Practices

December 14, 2020 - Stephen Van de Wetering

An endowment fund is the financial lifeblood of any university. A good operation helps investment teams fulfill their commitment to the school, keeping university finances in check.

When most think of endowment fund management, they think of investments, and rightfully so.

Endowment Fund Operations_San Jose State University

After all, an endowment is responsible for funding academic and athletics programs, employee salaries, construction projects, and various campus activities. What’s more, the health of the endowment determines tuition rates and financial aid to students.

But what should not be overlooked is operations.

An endowment’s middle- and back-office plays a crucial role in facilitating investment activities, analysis, and decision-making. In today’s climate, a good operation is more important than ever.

Challenges Endowments Face

Long before COVID-19, endowments faced their share of challenges… and still do today.

According to a 2015 Morneau Shepell study, “a majority of endowments and foundations say their biggest concern is insufficient fund returns to meet their spend objectives.”

The study also highlighted a catch-22 many endowments face: a requirement to maintain low-risk, fixed income investments (that generate limited returns), but in order to meet universities’ spending needs, endowments need higher-return investments.

However, higher returns generally equate to higher risk, and most mandates do not permit such risk.

What’s more, endowments must make up for lost sources of income due to the pandemic. With attendance at sporting events and presence of students on campus limited, universities feel the pinch.

It doesn’t help when many colleges, including 7 out of 8 Ivy League schools, have underperformed on their investments.

How A Good Operation Helps Endowment Funds: Best Practices

The aforementioned challenges that endowments face have a lot do with spending, budgeting, and investing.

Some might think, “what does the middle- and back-office have to do with these issues?”

While the source of those challenges are not related to operations, endowment fund middle- and back-offices can still help make things easier for investment teams and those dealing with overall finances.

Below illustrates the best practices that endowment fund operations teams can follow.

Adjust One’s Mindset; Recognize Importance and Interconnectivity of the Work

The most important underlying component is a change in mindset.

It’s about recognizing no department operates in a silo. Everything is connected, no matter how small or tangentially related it is.

With lost sources of school revenue, endowment fund investment teams are under extra pressure to support the university financially.

An investment team needs all the help it can get from the operations team. For starters, it means timely, accurate reporting that investment managers can rely on to make well informed decisions on their portfolios.

Such decisions based on good data can help investment performance, which in turn improves the school’s financial health.

Indeed, the middle- and back-office activity is ultimately connected to the university achieving its end goals.

At the end of the day, schools have a bottom line to answer to. When budgets are tight, all activities will be closely viewed under the microscope.

It’s this type of understanding that should motivate an endowment’s operations team to do the best it can. It’s truly a team effort to keep the university’s lights on, figuratively and literally.

Eliminate Inefficient Practices

As part of the quest to do a great job, operations can find ways to be more efficient.

For example, it means moving away from manual work. Many processes for endowment funds are Excel-based, compiling data from different sources and creating the reports. These tasks are increasingly time-consuming as the data grows in volume and complexity. And by nature of humans doing this work, there’s always the risk of error.

Improving the quality of work is also about ways to leverage automation technology. In one of our recent posts, we explained how automation works for money managers.

To improve investment performance reporting, check out our best practices.

In short, endowment investment and operations teams can spend more time on higher-level activity by automating the manual, routine, and predictable of work. Automation can reduce otherwise unnecessary costs.

As it relates to adjusting one’s mindset, making these changes in workflow means breaking away from a “this is how we’ve always done things” approach.

Leverage New and Better Portfolio Management Systems

Tying into efficiency and not doing things the old way, endowment fund teams can look at various financial technology solutions to help their cause.

Of course, the key is getting the right systems. As we mentioned in one of our recent posts, investment managers need technology that can consolidate functionality, integrate with other systems, and be serviceable for the long term.

There are new, modern solutions out there that help with investment reconciliation and performance reporting, trade order management, portfolio risk management and rebalancing tools, compliance and investor due diligence, just to name a few examples.

Some systems will combine said features, or they will make it easy to integrate with the other platforms.

Sure, new systems will require an initial investment, but legacy technology and inefficiency could very well keep costs higher than they should be. Not to mention, the old ways of doing things could limit the quality of output.

TAMP1 logo

Our turnkey asset management platform, TAMP1, helps investment organizations of all types in managing their reconciliation reporting and performance data, integrating with thousands of other custodians and systems. Investment teams have one place to view everything.

Having a single place in the cloud to access all investment reports, data, and documents would be a major time-saver for investment teams. They can easily customize reports, share with other interested parties, and ultimately be in better position to make good decisions that help investment performance.

Whatever an endowment fund team does, they should really consider the possibilities and opportunities with the right kind of fintech.

Document Processes

Endowment fund management teams need continuity.

Employees may come and go, and all work procedures should be accounted for.

The last thing a university’s endowment needs is the departure of key personnel who know everything with no framework left behind to replicate best practices. A university’s finances are at stake.

We recently wrote an article about the importance of documentation for operations, as it promotes transparency and accountability, as well as ensuring processes will be done correctly.

Setting Up Endowment Operations for Future Success

Endowment Fund_Graduation Cap and Dollar Bills

Endowment funds indeed face many challenges in the wake of COVID-19, unlike any in more “normal” of times.

Those in charge of managing the endowment fund are under tremendous pressure, as the university relies on their investing expertise to keep the school well funded.

A good operation provides the much-needed support to those in charge of the investments.

A well run middle- and back-office does its part by providing timely, accurate, and reliable reports and data. Leveraging automation and new financial technology are some of the ways to achieve objectives.

With the right operational support, investment teams get a better and faster understanding of their portfolios. Ultimately, it will be easier to make decisions for the betterment of the endowment.

The endowment fund is the lifeblood of the university, and anything operations can do to help, directly or indirectly, will always be welcomed.

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