Maintaining Purchasing Power in Today’s Environment | CPI + 5%

April 24, 2017 |
2 minute read
|

At Commonfund, we understand the challenge institutions face of maintaining the purchasing power of their endowment. In fact, achieving a rate of return sufficient to cover inflation, distributions and investment costs – typically CPI + 5 percent – is much harder today than previously.

How Big is the Gap?

Over the last 30 years, large endowments have achieved CPI + 5 percent, even beating it by more than 300 basis points annually. The big lead has come to a startling halt; for the most recent 10 years, even the largest endowments have started trailing CPI + 5 percent by more than 100 basis points per annum.**

What Happened?

The loss of nearly $20 trillion in global public equity markets during the financial crisis did not help; neither did the $12.7 trillion expansion of monetary policy. Interest rates have been kept artificially low, corporate debt issuance has doubled since the crisis, active equity managers have lagged, investors have been forced to take on more risk – high yielding equity sectors became the new bonds. We have been in a new era. The question posed by many investors is whether this new era will persist, or evolve.

Contact us today to learn more about CPI +5%

How we met the challenge?

Commonfund is a pioneer of the endowment model of investing, and we realize that as the market environment has changed, how we apply the endowment model has evolved. Its underlying tenets – that of an equity bias, the benefits of diversification and the advantage of the liquidity premium remain. But today we seek to benefit from more advanced tools in return and risk analytics that provide the opportunity to execute more effectively – to access low cost beta, to uncover more diversified and persistent alpha, and to measure and access the premium for illiquid assets more effectively – all designed to help Commonfund investors achieve CPI + 5 percent.

How will we get there? Commonfund's View

img_cpi_plus_5

Appropriately, the theme of Commonfund Forum 2017 was Bridging the Gap. Together. Over 500 attendees and speakers focused on this challenge for three days in San Antonio, Texas. Commonfund President and CEO, Catherine Keating presented “Meeting the Challenge of CPI + 5%” to kick-off the meeting. She concluded that the approach above – maintaining an equity bias, diversification and pursuing the liquidity premium – still provides the potential to achieve the necessary return goal. However, executing for today’s market environment is key.

Important Notes

Past performance does not assure future results. Returns are net of fees.

**The NACUBO-Commonfund Study of Endowments (NCSE) is an analysis of financial, investment and governance policies and practices at endowed institutions of higher learning. For fiscal 2016, 805 U.S. institutions representing $515.1 billion in endowment assets participated. For additional information on the NCSE data shown, please go to http://www.nacubo.org/Research/NACUBO-Commonfund_Study_of_Endowments.html. Copyright 2016 The Common Fund for Nonprofit Organizations and the National Association of College and University Business Officers. This is the most recent NACUBO-Commonfund Study of Endowments (NCSE) to date.

Source:  NACUBO-Commonfund Study of Endowments and Commonfund Research. Copyright 2016.

Keith Luke

Author

Keith Luke

Stay connected with the Insights Blog

Popular Blog Posts


Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Investment Strategy | Insights Blog

What is an OCIO?

Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing...

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. 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. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.