Our goal for hosting these roundtables is twofold: to share information, research and best practices, and to facilitate a meaningful dialogue and the exchange of ideas among participants.
The discussion centered around four themes:
The conventional approach for many endowments is to set CPI+5% (i.e., inflation plus a spending/distribution percentage) as a return target. Often, there may be other unique variables for organizations which can influence their return targets and those should also be considered. One example is higher education institutions may consider using the Higher Education Pricing Index (HEPI) - an inflation index designed specifically to track the main cost drivers in higher education. This inflation measure more accurately reflects the change in cost inputs for these institutions than the Consumer Price Index.
While the definition of risk can be specific to each institution, the greatest risk is “not meeting an organization’s mission” and should thereby inform the level of risk an institution is willing or able to accept. The conversation ranged from the perceived safety of investing in a single asset class (i.e., cash) to ensuring the portfolio is well diversified to achieve real purchasing power.
Commonfund research has found that investments in private equity strategies can be used to explain relative performance differences among institutions. Allocation to this asset class and access to top managers matters, as the discrepancy between top and bottom performing managers is most prevalent in private vs. public investment strategies.
Arguably one of the most underrated tools contributing to parity among generations, is an institution's spending formula – i.e., choosing the methodology for the spending formula rather than focusing solely on the spending rate. For many, the most pertinent risk related to the endowment is spending volatility, or the change in the spend dollars from one year to the next, – which has a direct impact on the consistency of the financial support provided to the institution. Spending policy should not only influence strategic asset allocation but should also be thought of as another important policy decision for endowment investing alongside diversification.
This productive discussion re-enforced the importance of engaging committees on these and other important topics as they strive to increase the potential of preserving real purchasing power of a long term portfolio.
These concepts are covered in further detail in the video, Playing to Win.
Interested in being a part of the conversation? If you would like to attend our next discussion, being held in Portland, OR on September 27th, 2023, or another upcoming regional roundtable, please fill in the form below.