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Business Officer Magazine

Growth Spurt

To celebrate its centennial, Abilene Christian University set an ambitious endowment goal—and exceeded it.

By Jack Rich

As early as 1997, we began to view our endowment’s potential. We tallied its value at approximately $70 million and challenged ourselves to increase that total to $250 million by the end of 2006. Given our asset size and investment policy, that stretch goal seemed beyond reach. Yet, a decade later, we not only achieved the numbers—we nurtured the endowment to a healthy $253 million. The momentum has continued, delivering sufficient funds to reach $280 million by June 30, 2007.

Several deliberate actions contributed to this fast-paced growth. Each represents part of an ongoing process aimed at adjusting our policies and practices to feed a thriving endowment.

Develop Donor Confidence

Almost every endowment depends on gifts from donors. At ACU, we believe a well-run endowment will stimulate donor interest in current and deferred gift programs. Donor confidence—the belief that hard-earned contributions will be handled professionally—is critical to maximizing support.

That’s why we often point out to donors that, throughout its 100-year history, ACU has received $137 million in endowment gifts and paid out $122 million in distributions to support the university. And, even though we distributed almost as much as we received in gifts, the endowment grew to $280 million (see Figure 1, “ACU Cumulative Gifts, Cumulative Distributions, and Endowment Value”). In other words, endowment gifts keep giving. Comparing gift and distribution amounts to current endowment value enables donors to see the impact of a long-term perspective.

ACU focuses primarily on major donor prospects. Our strategy includes sophisticated donor identification and research; systematic cultivation; intentional donor stewardship (including reporting and appreciation); and aggressive estate-planning education. Additionally, we invest heavily in developing and funding the ACU Foundation, a wholly owned subsidiary that focuses on deferred giving. This donor development program requires the consistent investment of time and resources, applied to current and deferred gifts.

Figure 1 ACU Cumulative Gifts, Cumulative Distributions, and Endowment Value

Think Big

A conscious effort to think and, when possible, to act like a larger endowment drove many of the decisions we made during the past 10 years. In fact, we often used this concept as a reminder to the investment committee as we wrote and revised ACU’s investment policy.   

I would not advise, however, to blindly follow what others are doing. We did not think it was practical or advisable to try to duplicate everything reflected in larger endowments. However, we did believe that we could learn by observing investment strategies and decisions made by those managing large portfolios. Clearly, we could not make the exact investments that larger endowments made. Our size and expertise prompted us instead to look for investment alternatives through which we could gain exposure to desired asset classes. 

We also analyzed why larger, more effective endowments and foundations were taking certain steps. Why, for instance, did larger endowments tend to have different spending calculations than most institutions? Why was the asset allocation of faster-growing endowments so different from our own? How would we staff a larger endowment? What were the barriers to implementing the changes we discussed?

A lack of in-house investment expertise limited our ability to locate sufficient information to conduct and complete due diligence on potential investments. Therefore, instead of looking at direct investments, we used “funds of funds” for our absolute return exposure, venture capital, and buyouts.

As we began understanding the reasons for policies used by others, we adapted our investment policy. Often the changes were incremental or spread over time. For example, we began with a modest allocation to alternative assets; today, we have more than 50 percent of our assets allocated to alternative strategies (see Figure 2, “Evolution of Asset Allocation Targets”).

By examining the approach taken by larger endowments, we recognized the need to smooth out spending and, eventually, to have a dedicated investment staff. As a result, we started thinking about how we might fund that staff.

Even if we had not reached our goal, the changes implemented in its pursuit left our endowment well-positioned for the future.

Figure 2 Evolution of Asset Allocation Targets

Target Allocations

  January 1995 February 1998 August 2000 August 2002 May 2004 May 2006 Actual as of June 2007
Equity Oriented 56.5% 60.0% 58.5% 55.0% 50.0% 50.0% 53.1%
Domestic Equities 40.5% 37.5% 35.0% 35.0% 27.5% 20.0% 23.6%
International Equities 13.5% 17.5% 17.5% 14.0% 12.5% 17.5% 20.7%
Developed Markets 13.5% 17.5% 17.5% 14.0% 10.0% 11.5% 13.4%
Emerging Markets 0.0% 0.0% 0.0% 0.0% 2.5% 6.0% 7.3%
Private Equity/Venture Capital 2.5% 5.0% 6.0% 6.0% 10.0% 12.5% 8.8%
Fixed Income & Cash 30.0% 22.5% 22.5% 20.0% 10.0% 10.0% 9.9%
Real Assets 13.5% 17.5% 19.0% 15.0% 20.0% 20.0% 17.8%
Energy and Natural Resources 2.5% 2.5% 5.0% 5.0% 10.0% 12.5% 10.1%
Real Estate 11.0% 15.0% 14.0% 10.0% 10.0% 7.5% 7.7%
Absolute Return 0.0% 0.0% 0.0% 10.0% 20.0% 20.0% 19.2%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Abilene Christian University

Engage the Investment Committee

ACU’s president often hears me say that the most important aspect of our endowment transformation is an active and engaged investment committee. Without a committee that was willing to learn and grow, no change was possible. What we did during the 10-year period was progressive, yet it could have derailed at any point along the way. 

Of course, change did not occur overnight. Some on the committee pushed the administration to be more progressive; others were uncomfortable with the pace and magnitude of changes. The committee, however, was willing to learn as a group. 

All-day meetings, conducted quarterly, became the norm. Several committee members flew long distances to participate. Others, who could not physically attend a meeting, often joined us by phone. We spoke not only with our investment managers; on occasion we also invited “thought leaders” to our meetings. Over several years, our staff and consultants prepared the committee for changes by looking at investment theory and practices of portfolio managers with excellent track records.

Committee members agreed to expand their investment management knowledge in other ways. For example, as a group, we read Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (2000, Free Press), by David F. Swensen; Endowment: Perspectives, Policies, & Management (1990, Association of Governing Boards of Universities and Colleges), by William F. Massey; and Endowment Management: A Practical Guide (2004, AGB), by Jay A. Yoder. Then we discussed key aspects of the books and how those might affect our policies.   

Over the 10-year period, the committee benefited from good continuity. Of the 10 members currently on the committee, three have served for the entire period and three others have served for five years. Another retired from the board after 12 years of service on the committee. We also added non-trustee members to the committee to provide investment expertise missing on the full board. Committee members unable to invest the time necessary chose to move to other committees.

Exercise Discipline in Spending

Appointing a CIO: Ready or Not?

How do you know if you need a chief investment officer?

When Abilene Christian University (ACU) had a $70 million endowment, we didn’t give the question much thought because we didn’t know how we would afford the unknown cost. Yet, when we set our sights on reaching an endowment of $250 million, we recognized that the question was not if, but when, we would need this expertise.   

Justifying the Possibility
Our goal was not to create and finance a CIO position, but rather, to grow the endowment. The CIO position was a logical outcome of that goal. So, somewhat arbitrarily, we decided that we would need a CIO once our endowment reached our target of $250 million. 

Back in 1997, when we launched an endowment campaign, we reviewed salaries for investment professionals at the time and inflated them for 2006, the year by which we hoped to reach our goal. This process helped us establish the management fee that we charged to the endowment. As the investment committee added alternative investments and as our asset allocation became increasingly complex, the need for a CIO became a frequent topic of discussion.

The committee began to actively promote the need for a CIO in 2004. The endowment was only $167 million at the time, but our investments had grown sufficiently complex that they needed full-time attention. With a funding model already in place, the decision to add the CIO was straightforward. 

To allow for a smooth transition, I moved into the role in August 2005, when ACU’s endowment totaled $189 million. Previously, I served as ACU’s CFO and, several years later, as executive vice president. In those roles, I had endowment responsibility but spent less than 5 percent of my time in this area. 

Assessing the Situation
Based on my experience at ACU, I don’t believe there is a magic number at which it makes sense to add a full-time CIO. In general, I would recommend that an investment committee consider the possibility when assets reach between $150 million and $250 million—a level at which investment options typically become more varied and complex.

In the case of ACU, we learned that the size of the endowment was less important than its composition. If, for example, an endowment is making direct investments in hedge funds or private equity (versus funds of funds), and if the asset allocation policy calls for a significant allocation to alternatives, then the need for a CIO will come sooner. If the endowment is invested in more traditional assets or the committee is uncomfortable moving to direct investments or alternatives, then the need for a CIO may be postponed. 

Making the Move
ACU moved to a full-time CIO when the investment committee implemented a policy that taxed the college’s existing processes. This happened earlier than the endowment level at which most institutions add investment staff. But, as long as a CIO can add value to the process, the position can pay for itself in increased returns.

Like many of our policies, our spending rule has changed several times through the years. With each change, we attempted to reduce both the volatility of spending distributions and the absolute level of spending.

Fifteen years ago, 85 percent of our investable assets were in fixed-income vehicles, and our policy was to spend all income. Given the high interest rates at the time, we depended on a high distribution rate. Through the years, we progressed from spending all income to spending 5 percent of the three-year moving average value of the endowment. In the late 1990s, we established a policy to further reduce spending distributions to 4.5 percent. The reduction from 5 percent to 4.5 percent was to be implemented during a five-year period.

In 2002, after experiencing significant declines in spendable distributions, we adopted a hybrid spending distribution model—much like those favored by many larger endowments. Today, in an effort to reduce spending volatility, we base our spending on a variation of the Yale Spending Rule—a combination of the previous year’s actual spending adjusted for inflation and 4.5 percent of a percentage of the endowment. (For details, see Figure 3, “Spending Rule Distribution.”)

Since we reduced our spending rate from 5 percent to a target rate of 4.5 percent only in the past few years, the change did not significantly affect the size of our endowment in the past decade. However, this reduction in spending should positively impact the endowment growth going forward.

Plan Ahead for Investment Management

Early in our planning, we realized that funds to pay investment management expenses would always face competition from requests to finance academic priorities. To address this, we estimated the cost of managing a $250 million endowment with a full-time investment professional on staff. In 1997, we began charging the endowment a management fee, based on a percent of the endowment, to cover all expected expenses (consulting fees, salaries, investment tools, custodial fees, and so forth) for an endowment of $250 million. This approach allowed us to invest in the tools, people, and systems that we would need to manage a progressive portfolio once we reached our endowment goal. 

By putting this funding mechanism in place, we were prepared to hire a full-time chief investment officer when the complexity of our investments began to exceed the resources we had available to manage the portfolio. Because the investment committee was involved in this discussion all along, the members knew that they could support the hiring of a full-time CIO without hurting the operating budget. When the portfolio reached approximately $175 million and included increasingly complex assets, the committee recognized that it was time to implement the staff-management strategy (see sidebar, “Appointing a CIO: Ready or Not?”). Because we had a system and secure funding in place, the management transition was seamless.

We still charge a management fee that covers only investment expenses. Any funds not used in a given year can be returned to the endowment or used to supplement the operating budget. In the early years, much of the fee was reinvested in the university. Now that ACU has a full-time investment professional, the amount given back to the operating budget has decreased. Looking forward, we believe this arrangement will continue to serve our needs as we plan for a $1 billion endowment: As the endowment grows, the fee will automatically adjust to ensure adequate funds to cover long-term expected needs. 

Although the investment committee fully supported this process, the initiative was considered an administrative issue and did not require board approval. We could have simply charged investment expenses to the endowment as they occurred. The approach we chose, however, helped us plan ahead and determine logical points at which to add staff without unduly taxing the endowment.

Figure 3 Spending Rule Distribution

Prior to 1994          
1994-2001 2002-2003 2004 to Present*
Spend all current
5% of the three-year-moving-average endowment value  4.5% of the three-year-moving-average endowment value (reduction phased in over 5 years) 4.5% of beginning market value times 30% plus 70% of the previous year’s spendable distribution, adjusted for inflation plus 1% **
* Example calculation
Endowment value of $100 million at June 30, 2006
o Previous year spending distribution of $4 million
o CPI of 2.6% for the year ending June 30, 2006
The spending distribution of funds from the endowment for 2007 would be calculated as follows:
4.5% (30% x $100,000,000) plus 70% ($4,000,000 x 100% +2.6%+ 1%) =
4.5% ($30,000,000) + 70% ($4,000,000 x 103.6%) =
$1,350,000 + 70% ($4,144,000) =
$1,350,000 + $2,900,800 =
$4,250,800 spending distribution for the year ending June 30, 2007

**This calculation represents a variation of the Yale Spending Rule. 
More than 20 years ago, a group of economists extracted the best elements from two approaches and crafted the Yale Spending Rule. The objective of the smoothing formula was to decrease volatility of spending, almost always produce an increase in spending each year, and reflect recent gifts and good performance in the financial markets.

Source: Abilene Christian University

Find the Right Consultant

With a small endowment and limited staff expertise, we needed a consultant who could not only track our investments but also invest time and energy in educating our committee and staff. In addition, we sought a consultant willing and able to change with us as our policies and practices evolved.

We have used the same consultant for 15 years. At key times, he has helped us examine our asset allocation, find managers for alternative investments, and report on our achievements and failures. Because staff had limited time to identify skilled portfolio managers and understand the changing investment environment, our consultant focused on those tasks while we concentrated on understanding investment theory. One of the selected managers has provided additional resources in governance and investment theory as well as a second opinion on our asset allocation modeling.

Early on, our consultant challenged us to look beyond traditional asset classes and to expand our asset allocation options. The consultant’s models helped us understand the benefits of such a strategy and its impact on expected returns and volatility.

Invest in Education and Staff Support

Don’t Miss the 2008 Endowment Management Forum

Learn about investment management issues and trends in higher education endowment management at NACUBO’s Endowment Management Forum, January 23–25, in New York City.  Developed and presented by veterans in college and university endowment management, the forum focuses on asset allocation, diversification of investments, and risk management, as well as the dynamic effects of the economy and financial markets on institutional endowments.

Speakers include campus experts and top financial and investment authorities on the major markets. Findings of the 2007 NACUBO Endowment Study will be presented. The forum provides time for participating in discussion, asking questions, meeting the experts, and networking with colleagues from around the country.

This program provides a balanced perspective of the investment management world.  Learn about operational issues, market direction, and the impact of regulatory and legislative actions, such as UPMIFA. Discuss current issues, including working with investment committees and investment service providers such as consultants and managers.

The forum is designed for chief financial officers, treasurers, senior investment officers, trustees, foundation officers, and professional endowment fund managers. To register or for more information on this and other programs, go to or call 800.462.4916.

Once we set our endowment goal, we began looking for ways to enhance our knowledge and capabilities. Thanks to the management fee charged to the endowment, we had funding to travel to conferences and to meet other endowment managers.

For a growth plan like ours to work, it is important to have a champion on staff.  Because of my interest in investments, and because my responsibilities included oversight of the endowment, I filled that staff champion role—and ultimately transitioned to the CIO position. I’ll admit that finding the time to focus on the endowment while fulfilling my roles as CFO and executive vice president was sometimes difficult. However, without such an investment of time and attention, we probably would not have made many of the moves that we did.

A Decade of Growth

Generally, it is less risky to act like the crowd. But, ACU’s investment committee was willing to break the mold of a modestly sized endowment. When it would have been easier and less challenging to look like everyone else, committee members chose a different approach.

The committee’s willingness to adopt policies and practices usually associated with larger endowments led to a number of accomplishments. Ten years after setting an ambitious goal, ACU now has:  

  1. a knowledgeable and engaged investment committee;
  2. a highly diversified portfolio, with more than 50 percent of assets in alternative investments;
  3. long-term operational funding in place, which is sufficient to support the increasingly complex portfolio; and
  4. investment returns that, in the past year, have placed us in the top 1 percent within our asset class, according to NACUBO Endowment Study rankings. Our three-, five- and 10-year returns are in the top 3 percent. In contrast, before setting our $250 million endowment goal, our returns ranked near the bottom within our asset class.

More important, however, ACU is ready for the future. Today—although we aren’t yet there financially—we think like a $1 billion endowment. We are looking at adding staff and determining when we will need them. We are also looking at investment tools that will give us the ability to manage an increasingly complex portfolio. To help us do so, we continue to visit with larger endowments to learn from their experiences.

The $1 billion endowment level may elude us for another 10 or 15 years, depending on gifts and investment returns. Still, ACU is well positioned to take full advantage of whatever assets we have the good fortune to manage.

JACK RICH is chief investment officer at Abilene Christian University, Abilene, Texas.