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

April 24, 2017  | by Keith Luke, Paige L. Rabalais

Investment Strategy

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 for more information 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

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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.

 

Authors

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Keith W. Luke is a member of Commonfund Asset Management Sales and Service and leads a team responsible for client relationship management and business development. In this capacity, he and his team provide service and investment solutions across endowments, foundations, healthcare organizations and other nonprofits. Keith is a member of both the Commonfund Asset Management Executive Group and the Commonfund Operating Committee, and is President of Commonfund Securities, Inc. Prior to joining Commonfund, he was in commercial banking for 19 years, most recently at Citibank, where he held a number of marketing and strategic planning positions in The Private Bank and Corporate Bank. Prior to Citibank, Keith was with HSBC USA (formerly Marine Midland Bank) in corporate finance and investment banking. He earned a B.A. in Economics at Duke University and an M.B.A. in Finance from NYU Stern School of Business.

Keith W. Luke
President and Chief Executive Officer, Commonfund Securities, Inc.
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Paige L. Rabalais is a member of the Commonfund Asset Management Sales and Service team with a focus on business development and is responsible for the development of outsourced CIO solutions across endowments, foundations, healthcare organizations and other nonprofits in the southern United States. Prior to joining Commonfund, she managed institutional relationships with Neuberger Berman in New York, NY and Strategic Value Partners in Greenwich, CT. Previously, Paige was a senior regional marketing associate with Putnam Investment in Boston, MA. She earned a B.S. in Business Management from Babson College and an M.B.A. in Finance from Tulane University. Paige holds Series 6, 7, 30, 31, 63 and 65 licenses and has also been awarded the Chartered Alternatives Investment Analyst designation. She is currently a Director of the YWCA of the City of New York where she serves as co-chair of the investment committee. Paige is also a former board member of Oldfields School in Glencoe, MD where she served on the investment committee.
Paige L. Rabalais
Director, CAIA

Disclaimer

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 manager. 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. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

Disclaimer

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 manager. 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. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.