The Other Views commentary on regulations for endowments and foundations (“New best practice threshold for endowments, foundations,” July 27) intrigued me.
First, “best practices” is a term that is perhaps a bit overused, as it's quite difficult to properly understand or agree upon what it means. Is it “what most people do,” “what a particular group of pundits says it is,” or something else? I won't deny that I frequently use the term, too, and must also confess that it's often what I believe is best. And therefore speaking of what I believe is best, endowments and foundations, as well as private pension funds, should take the lead from public pension funds and the new Governmental Accounting Standards Board requirement to report internal rates of return on their plans.
The industry has made a huge mistake by assuming that time-weighted returns should be used for every form of performance reporting, when it really serves a rather limited role: to explain how a manager, who doesn't control external cash flows, has done managing the portfolio. The asset owners, however, should want to also know how they're doing. That is, how their portfolio is performing, taking cash flows into consideration.
Endowments and foundations need to rethink the way they measure performance. This will require some education, though it's not that complicated. Time-weighting eliminates or reduces the impact of cash flows, and thus is ideal to judge managers, who don't control the flows. Money-weighting takes these flows into consideration, and so serves as the best way to report on the portfolio's performance. There's a difference between the manager's performance and the portfolio's performance: Both are important, and both need to be measured.
DAVID D. SPAULDING
Founder and CEO, The Spaulding Group Inc.
Somerset, N.J.
