The Financial Shock from Covid-19 to Canadian University Endowments: The Reaction, Response, and Implications

Abstract

Using data from the University of Toronto and University of Alberta endowments from 2018–2020, this research provides a thorough analysis of the asset allocation strategies used in practice during the COVID-19 pandemic and why those alterations are essential for the future implications of the positions held by endowment funds. It will review the University of Toronto and Alberta endowments response to the COVID-19 pandemic to shed light on several existing endowment behaviour models. Findings, based on primary sources, indicate that the University of Toronto and Alberta endowments have increased the portfolio weighting in bonds, international/global equities, and alternative/other assets in 2020 relative to 2019. This implies that the portfolio weight increase in the latter three asset classifications are consistent with a Merton theoretical view of the most optimal asset allocation as compared to Black. We suggest that a Merton approach to asset allocation is advantageous when there are adverse shocks in the market. This is due to the need to balance current financial obligations with future cash flows. We support Merton’s view which argues that placing a higher weight on those asset classifications demonstrates a trade-off of risks and returns to optimize resources (Merton, 1991). With spikes in current liabilities, decreasing exposure to risky short-term investments is needed to finance those activities. While on the other hand, taking on risky assets is advantageous in present circumstances to take advantage of volatilities in the markets to maximize future cash-flows’ benefits.