Transcript Spending Policy Forum
Spending Policy Forum
2013 JFNA Investment Institute
Palm Beach Gardens, Florida
Policy Development Example | Spending Policy Approaches
2 Approach
Traditional Inflation Based Income Based Banded Inflation
Description
Pre-specified percentage of moving average of market value – typically 5% of a three year moving average of beginning market values Increase spending each year based on rate of inflation Spend all current income Last year’s spending plus an inflation rate, but bound by ranges, e.g. – no more than 6.5% nor less than 3.5% Spending Reserve Segregation of 5-10% of market value in separate account, invested in 90 day treasury bills. Reserve is drawn down when endowment performance is less than policy target Stabilization Fund A fund created from endowment returns in excess of the target spending rate which is used to control the long run growth of the total endowment. The stabilization fund is invested alongside the endowment, but with a different (higher) spending rate. “Yale Rule” The amount released under the spending rule is based on a weighted average of prior spending adjusted for inflation (80 percent weight) and the amount that would have been spent using 5 percent of current Endowment market value (20 percent weight). “Stanford Rule” The calculation is an average weighted 60% on the actual payout from the current year and 40% on the target payout rate. This policy results in a “smoothing” of the payout amount, and it is designed to cushion the university from swings in the yearly endowment value due to market fluctuations.
February 12, 2013 2013 JFNA Investment Institute | Palm Beach Gardens, FL
Effective Spending Rate
By Fiscal Year
Education
Spending Rate (%)
5,5% 5,5% 5,5% 5,6% 5,5% Foundations 5,8% 5,9% 4,7% 5,1% 4,7% 4,6% Operating Charities 5,8% 5,5% 5,1% 4,3% 4,9% 4,8% 4,4% 4,6% 4,5% 4,6% 4,2%
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
NOTE: All performance information reflects net total returns. Fiscal year end for the majority of educational institutions is June 30th. For the foundations and operating charities sectors fiscal year end is typically December 31st. Information for educational endowments is drawn from the NACUBO Commonfund Study of Endowments. Information for other sectors is drawn from the Benchmarks Study for the respective sectors. Copyright 2013 The Common Fund for Nonprofit Organizations and the National Association of College and University Business Officers. All rights reserved.
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Spending Policy
Educational Endowments Foundations Total Top Quartile Total Top Quartile
Percentage of a moving average 75% 66% 47% 42%
Spend all current income 4% 8% 6% 5%
Average percentage 4.7%
Decide on an appropriate rate each year 11%
4.7%
14%
5.1%
20%
5.1%
19% Operating Charities Total Top Quartile
72% 50%
6% 6%
5.1%
19%
5.0%
25% Grow distribution at a predetermined inflation rate * Spend a pre-specified percentage of beginning market rate 4%
Average pre-specified percentage spent 4.8%
Last year's spending plus inflation with upper and lower bands 4% Weighted average or hybrid method (Yale/Stanford Rule)
Meet IRS minimum of 5 percent
Other 7% * 8% 0% 6%
4.7%
5% 8% * 11% 1% 6%
5.0%
1% 2%
50%
9% 0% 12%
4.9%
2% 2%
56%
12% 3% 1%
1.0%
6% 9% 0% 9% 0% 0%
*
6% 13% 0% 6% * Less than 1 percent, results not meaningful or not applicable.
NOTE: All performance information reflects net total returns. Fiscal year end for the majority of educational institutions is June 30th. For the foundations, operating charities and healthcare sectors fiscal year end is typically December 31st. Information for educational endowments is drawn from the NACUBO-Commonfund Study of Endowments. Information for other sectors is drawn from the Benchmarks Study for the respective sectors. Copyright 2013 The Common Fund for Nonprofit Organizations and the National Association of College and University Business Officers. All rights reserved.
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Important Notes | Market Commentary
Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund managers. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties.
5 February 12, 2013 2013 JFNA Investment Institute | Palm Beach Gardens, FL
Important Disclaimer
Use Of This Presentation
This presentation is copyrighted by Commonfund; all rights reserved. While you may copy it for your personal use, you are not permitted to publish, transmit, or otherwise reproduce this presentation, in whole or in part, in any format to any third party without the express written consent of Commonfund. In addition, you are not permitted to alter, obscure, or remove any copyright, trademark or any other notices that are provided to you in connection with this presentation
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Controlled Growth Distribution Policy
•
Jewish Federation of Metropolitan Chicago Unrestricted Endowment Distribution Policy
o o
Target distribution =
2.5
% more than prior year
Adjustments will be made to ensure that
… • … distribution equals
4% to 7%
of assets … • … this notwithstanding, year-over-year change must fall within range of
+8% to – 4%
o
Additional risk controls:
• No increase – in dollars or as % of assets – allowed in year following a distribution cut
CGDP Flowchart
For existing endowments baseline is previous
year’s distribution Under “normal” conditions … … distribute 2.5% more than previous year
as long as distribution falls within 4-7% of assets
For new endowments baseline is set at 5.5%
of assets
… raise distribution to 4% of assets, unless:
from the prior year … If the normal increase would cause the distribution to fall above or below 4-7% of assets … If distributing 4% of assets would require raising the distribution by +8% or more
… reduce distribution to 7% of assets, unless:
If distributing 7% of assets would require cutting the distribution by -4% or more from the prior year …
… increase distribution by +8% above previous year … that the distribution cannot go up (in dollars or % of assets) in any year following a cut
Subject to the requirement …
… reduce distribution by -4% below previous year …
• • •
CGDP Objectives
Greatly improve payout consistency
o o o o Budget focused distribution policy based on dollar amount, not percentage Greatly reduced market dependence – eliminates “feast or famine” reliance on market performance Distributions grow steadily in real terms - targeted annual increases with limits Limits frequency and severity of distribution cuts
Balance tensions between long- and short-term objectives
o o Growing endowment assets is a long-term process Managing budgetary needs is a short-term process
Key Benefits:
o More predictable distributions o o o Less year-to-year variability Endowment assets growing in real terms rather than shrinking Larger distributions over very long run
$100 $50 $0 $250 $200 $150
Joseph in Egypt Revisited Navigating Fat Years and Lean Years
Pro Forma Distributions and Assets 5% Moving Average vs. CGDP (Hypothetical 60/40 Portfolio) $2 $1 $0 $5 $4 $3 $10 $9 $8 $7 $6 MovAve Distribution CGDP Distribution MovAve Assets CGDP Assets
‘Steady State’ (Smooth Spend -Down)
Endowment Outlays
Barriers to ‘Replacement’ Funding
‘Branding’ Lack of Alternatives Grantee Dependency
‘Big Finish’ (Large Terminal Grants)
Endowment Outlays
‘Big Start’ (Major Initial Grants)
Endowment Outlays
From the Beginning, Think About Ending