Graphic: A new look at endowment spending
The role of an endowment is to provide long-term income for its beneficiary supported by investment returns and outside donations. But that support can be uncertain and winnowed over time by inflation. A fund’s spending policy, dictating how much of its assets are spent each year, will exacerbate the downside in poor markets.
Asset drain: Endowments using the moving-average rule annually spend a given rate* of the trailing three-year average balance of a portfolio. As a byproduct, it results in more cash as percentage of the fund being
spent in down years.
Power outage: A recent paper** evaluating the effects of the current spending rules on portfolio value highlights the decline of purchasing power created by inflation and relatively large cash outflows in down markets.
New approach: The research looks to adjust spending by factoring in annual donations* and inflation, creating what is called the purchasing power rule. Modeled data show a more positive relationship between plan return and spending.
*5% annually for exhibit purposes. **"Spending Policy Customization for Institutional Preferences" by James Yaworski of Carlson Capital Management. ***Market performance approximated by a 60/40 portfolio of MSCI ACWI/Bloomberg Barclays U.S. Aggregate Bond index.
Sources: InvestorForce, Bloomberg LP, U.S. Bureau of Labor Statistics
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