The use of passive investment strategies in the management of college and university endowments

This study explores the use of passive investment strategies or indexing in the management of small college and university endowments. Though widely accepted in the investment literature and used in other institutional investment settings, indexing is not widely used as an investment strategy in college and university endowments.;The purpose of this study is to understand why and how colleges and universities passively invest or index their endowment assets. Six small colleges and universities were selected for the study based upon purposeful sampling. The study involved interviewing the CFO and other informed participants on each campus, and data collection through the review of relevant documents.;The study presents eight conclusions: (1) Investment committees considered passive strategies after experiencing disappointing investment results from under-performing, actively managed funds. (2) Investment professionals, either new committee members or consultants, were the change leaders in introducing indexing as an alternative asset allocation strategy. (3) The use of indexing was influenced by the investment committee's perception of the efficiency of the market in which the committee desired to improve performance. (4) Most institutions used indexing as a complementary strategy, indexing 25--44% of their domestic equities (11--20% of total endowments); while one used indexing as an exclusive strategy, indexing all of its equities and 54% of its total endowment. (5) Choice of index mutual funds was influenced by the familiarity of the firm and its products to the investment committee. (6) The decision to index was seen to be consistent with policy, but no institution reported having investment guidelines and objectives that identified indexing as an alternative investment strategy prior to the decision. (7) The management process is therefore incomplete, missing an important explicit step that would ensure that the investment committee addresses the most important decision regarding the implementation of its asset allocation decisions---how best to invest each asset class, either actively or passively. (8) Indexing may conflict with an institution's socially responsible investing policies. (9) The role played by the CFO in the transition to indexing varied by institution and was influenced by the composition of the investment committee and the level of investment expertise of the committee and the CFO.