Background risk and nonprofit endowment portfolio volatility

Abstract

This article focuses on endowed operating public charities that receive income not only from sources such as donations, grants, and service fees but also from endowment portfolios. Using the Form 990 data between 2009 and 2016, this study examines if the risk from nonendowment income sources, namely background risk, is relevant to endowment portfolio volatility, and if there are any differences across four types of nonprofits where endowment assets are the most concentrated, including museums, universities and colleges, K‐12 schools, and hospitals. The results show that the association between background risk and endowment portfolio volatility is significant and negative for universities; however, it is either nonsignificant or significantly positive for other types of organizations. This study extends research on university endowments to other types of endowed nonprofits. The findings imply different endowment objectives and reflect different asset allocation strategies across types of organizations.

Simmer Down Now! A Study of Revenue Volatility and Dissolution in Nonprofit Organizations

“…Mayer et al (2012) extend this work by considering the full revenue portfolio, including overall measures of volatility and the shares of each revenue type. Similarly, Qu (2020) finds that revenue from sources outside program services and contributions may be the most volatile. Using rich financial data Wicker et al (2015) show German sports clubs experience systemic volatility which diversification is less effective at reducing.…”

“…Kingma’s (1993) discussion suggests high revenue volatility makes financial management more challenging, raising the possibility of vulnerability, decline, and dissolution. Yet, all existing studies of variation in nonprofit revenue are focused on the revenue mix or reward optimization (Carroll & Stater, 2009; Grasse et al, 2016; Mayer et al, 2012; Qu, 2019, 2020; Wicker et al, 2015), and the focus on revenue volatility is justified by its risks. Carroll and Stater (2009) suggest “stability may also lead to an increased ability for managers to accurately predict financial margins and consequently engage in more exact planning” (p. 963).…”

“…In this tradition, scholars have long supposed that stable revenue enhances the viability and sustainability of nonprofit organizations (Carroll & Stater, 2009; Kingma, 1993). Studies of variation in revenue, called revenue volatility, have typically been interested in strategies to reduce volatility (Carroll & Stater, 2009; Mayer et al, 2012; Qu, 2020; Wicker et al, 2015) under the assumption that stable revenue may allow more accurate planning and enhanced viability. Although this literature has illuminated strategies to mitigate volatility, it has left the material impacts of revenue volatility unstudied.…”

Endowment for a rainy day? An empirical analysis of endowment spending by operating public charities

“…Universities have the largest mean and median returns (Mean = 8.0%, Med = 9.2%), followed by K‐12 schools (Mean = 7.6%, Med = 8.6%) and museums (Mean = 7.5%, Med = 7.6%), whereas hospitals have the smallest returns (Mean = 6.1%, Med = 4.7%). The different levels of investment returns across types of organizations are likely to be driven by their asset allocation strategy (Qu, 2020).…”

“…On average, colleges and universities allocate over half of their investment portfolios to alternative assets (relatively illiquid and more risky than traditional equity investments) and the least proportion to fixed income and short‐term investments, while health care organizations allocate the highest proportion to fixed income and only a quarter to alternative assets. In addition, Qu (2020) finds that the association between background risk (i.e., volatility of non‐endowment income) and endowment portfolio volatility is significantly negative for universities, but not for other types of operating charities, implying different endowment objectives and asset allocation strategies across types of organizations. Therefore, mixing all types of organizations together in one analysis may obscure important differences among them.…”