Public School Endowment Fund Management Investing a Forever Fund

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Public School Endowment Fund Management Investing a Forever Fund

  1. 1. Public School Endowment Fund Management Investing a Forever Fund Children’s Land Alliance Supporting Schools 2008 Annual Conference
  2. 2. Assets that endow Public Schools in Idaho <ul><li>As of April 2008 </li></ul><ul><li>Approximately 2.1 million acres of land, over 50% of which is forested </li></ul><ul><li>$770 million in the Public School Permanent Endowment Fund and Earnings Reserve Fund </li></ul>
  3. 4. Where do public school endowment funds come from? <ul><li>Sale of endowment land </li></ul><ul><ul><li>Including extracted minerals </li></ul></ul><ul><li>Retained income from endowment land </li></ul><ul><li>Other dedicated sources </li></ul><ul><ul><li>For example: unclaimed estates, share of sale of federal land, unclaimed dividends </li></ul></ul><ul><li>Voluntary contributions </li></ul>
  4. 5. Understand the role of your fund <ul><li>The role of endowment funds varies by state: </li></ul><ul><ul><li>Supplement to other state funds </li></ul></ul><ul><ul><li>Funds for “extra” one-time items outside the normal budget </li></ul></ul><ul><ul><li>Dedicated to specific on-going spending </li></ul></ul><ul><li>The role influences objectives, asset mix and distributions </li></ul>
  5. 6. Mission of Idaho Endowments: Provide a perpetual stream of income by: <ul><li>Maximizing total return over time at a prudent level of risk </li></ul><ul><li>Protecting future generations’ purchasing power </li></ul><ul><li>Providing a relatively stable and predictable payout </li></ul>Source: Idaho Land Board Asset Management Guidelines
  6. 7. How the Idaho endowment funds support the Mission <ul><li>Maximize return vs. risk </li></ul><ul><ul><li>Diversify the portfolio </li></ul></ul><ul><li>Protect purchasing power </li></ul><ul><ul><li>Retain principal plus inflation (plus more) in the fund </li></ul></ul><ul><li>Provide a stable payout </li></ul><ul><ul><li>Maintain adequate spendable reserves to continue distributions during downturns </li></ul></ul>
  7. 8. Mission Endowment Fund Investment Board <ul><li>Provide professional investment management services to our stakeholders consistent with our constitutional and statutory mandates. </li></ul>Source: EFIB Strategic Plan
  8. 9. Goals: Idaho Endowment Funds <ul><li>We will provide good investment advice and the tools for implementing that advice </li></ul><ul><li>Develop a prudent long-term investment strategy </li></ul><ul><li>Select the best portfolio managers and other agents to execute that strategy </li></ul><ul><li>Diligently evaluate performance over time </li></ul><ul><li>Develop an effective spending policy </li></ul><ul><li>Help the Land Board fulfill their fiduciary responsibilities and communicate with its stakeholders </li></ul>Source: EFIB Strategic Plan
  9. 10. Who is the Idaho Endowment Fund Investment Board? <ul><li>Nine members, appointed by the Governor, confirmed by the Senate </li></ul><ul><ul><li>One Senator, one representative </li></ul></ul><ul><ul><li>One professional educator </li></ul></ul><ul><ul><li>Six members of the public familiar with financial matters </li></ul></ul><ul><li>Meets at least quarterly </li></ul><ul><li>Full-time staff of four </li></ul>Per Idaho Code 57-718
  10. 11. Management of Idaho’s Endowment Assets and Related Activities Governor Land Board Governor Atty. General, Controller, Sec. of State, Supt. of Public Instruction State Insurance Fund Workers Comp Insurance Supreme Court Regulatory Responsibility for Forestry and Mining Endowment Lands 2.5 million acres Endowment Funds $1.18 billion* Reserves $583 million* Judges’ Retirement Fund $64 million* $ Department of Lands 263 employees +200 seasonal Endowment Fund Investment Board - 9 Board Members - 4 Staff Members * As of 12/31/2007 Annual $ to 14 Beneficiaries Parks & Recreation Ritter Island Endowment $1.03 million* Management of Idaho’s Endowment Assets and Related Activities Management of Idaho’s Endowment Assets and Related Activities Management of Idaho’s Endowment Assets and Related Activities Management of Idaho’s Endowment Assets and Related Activities Governor Land Board Governor Atty. General, Controller, Sec. of State, Supt. of Public Instruction State Insurance Fund Workers Comp Insurance Supreme Court Regulatory Responsibility for Forestry and Mining Endowment Lands 2.5 million acres Endowment Funds $1.18 billion* Reserves $583 million* Judges’ Retirement Fund $64 million* $ Department of Lands 263 employees +200 seasonal Endowment Fund Investment Board - 9 Board Members - 4 Staff Members * As of 12/31/2007 Annual $ to 14 Beneficiaries Parks & Recreation Ritter Island Endowment $1.03 million* Management of Idaho’s Endowment Assets and Related Activities Governor Land Board Governor Atty. General, Controller, Sec. of State, Supt. of Public Instruction State Insurance Fund Workers Comp Insurance Supreme Court Regulatory Responsibility for Forestry and Mining Endowment Lands 2.5 million acres Endowment Funds $1.18 billion* Reserves $583 million* Judges’ Retirement Fund $64 million* $ Department of Lands 263 employees +200 seasonal Endowment Fund Investment Board - 9 Board Members - 4 Staff Members * As of 12/31/2007 Annual $ to 14 Beneficiaries Parks & Recreation Ritter Island Endowment $1.03 million* Management of Idaho’s Endowment Assets and Related Activities Governor Land Board Governor Atty. General, Controller, Sec. of State, Supt. of Public Instruction State Insurance Fund Workers Comp Insurance Supreme Court Regulatory Responsibility for Forestry and Mining Endowment Lands 2.5 million acres Endowment Funds $1.18 billion* Reserves $583 million* Judges’ Retirement Fund $64 million* $ Department of Lands 263 employees +200 seasonal Endowment Fund Investment Board - 9 Board Members - 4 Staff Members * As of 12/31/2007 Annual $ to 14 Beneficiaries Parks & Recreation Ritter Island Endowment $1.03 million*
  11. 12. Interdependency of investments, contributions and distributions Distribution Policy <ul><li>What level of distributions can be supported by expected income? </li></ul><ul><li>How much income should be reinvested for future growth? </li></ul><ul><li>Any restrictions on spending principal? </li></ul><ul><li>How variable is the income? Can a smoothing reserve be built? </li></ul>Contributions <ul><li>Any future contributions expected? </li></ul><ul><li>How variable? </li></ul><ul><li>Can the contribution be distributed or must it be permanently retained? </li></ul>Investment Policy <ul><li>How will the assets supporting future distributions be invested? </li></ul><ul><li>What are the risk/return expectations? </li></ul>
  12. 13. Portfolio Diversification: Optimizing Risk/Return <ul><li>Most portfolio management today is based on “mean variance optimization” of various asset classes – a mathematical way of determining the right level of diversification </li></ul><ul><ul><li>Long-term return expectation (mean) </li></ul></ul><ul><ul><li>Expected volatility (variance) </li></ul></ul><ul><ul><li>Correlation with other assets (optimization) </li></ul></ul><ul><li>Most avoid “tactical” shifts in allocations </li></ul>
  13. 14. Source: NEPC
  14. 15. Asset Mix – Idaho Endowment Fund <ul><li>Diversified mix </li></ul><ul><li>Different expectations for return and risk </li></ul><ul><li>Different correlation with each other (not shown) </li></ul>
  15. 17. Expected long-term return Idaho endowment funds
  16. 18. Idaho Endowment Fund Potential range of investment returns
  17. 20. Mix of All Endowment Assets (Assuming Land value of $1.1 billion) Total value of all assets = approximately $2.3 billion Dept. of Lands EFIB
  18. 21. Idaho’s endowments have significant restrictions on spending the principal or corpus. Distributions cannot be made from the sale of land or from the principal of the Permanent Fund.
  19. 22. Idaho Public School Endowment Impact of fund structure on expected returns, contributions, distributions and reinvestment Distributions are expected to be 4% of the fund and to grow 4% above inflation Source: Callan Associates, EFIB analysis
  20. 24. Land Grant Endowment Beneficiaries
  21. 25. Measuring investment performance
  22. 26. <ul><li>Monthly investment report posted on the EFIB website </li></ul><ul><li>Overall return vs. benchmark </li></ul><ul><li>Asset mix </li></ul>
  23. 27. <ul><li>Returns by asset class </li></ul><ul><li>Returns for each outside manager, both absolute and relative to their benchmark </li></ul>
  24. 28. Idaho Endowment Fund Investment Performance ( For cumulative periods ended December, 2007) Before fees.
  25. 29. Idaho Endowment Fund Investment Performance ( By calendar year) Before fees.
  26. 30. Peer comparison: Idaho Endowment vs. Public Pension Funds Source: Callan Associates
  27. 31. Peer comparison: Idaho Endowment vs. Other Endowment Funds Source: Callan Associates
  28. 32. Peer comparison: Risk and return vs. Public Pension Plans Source: Callan Associates
  29. 33. The important role CLASS plays <ul><li>Those who govern endowment trusts have a fiduciary duty to the beneficiaries of the fund </li></ul><ul><li>However, many endowment stakeholders do not understand, or choose to ignore, this fiduciary duty, and attempt to pressure the governing authority to give improper consideration to non-trust issues </li></ul><ul><li>Governing authorities appreciate CLASS support when they must stand up to stakeholders whose interests are not aligned with the public schools </li></ul><ul><li>Support of prudent and effective management of public school endowments may also benefit other land grant endowments </li></ul>
  30. 34. Questions to ask Investment Policy <ul><li>What is your investment policy? </li></ul><ul><li>Governance of the investments (who decides what, delegation) </li></ul><ul><li>Goals and objectives (performance measures) </li></ul><ul><li>Restrictions on investing (constitutional, statutory, self-imposed) </li></ul><ul><li>Asset mix (diversification) </li></ul>
  31. 35. Questions to ask Spending/Distribution Policy <ul><li>What is the Distribution Policy? </li></ul><ul><li>Governance (who decides how much) </li></ul><ul><li>% of assets, % growth </li></ul><ul><li>Based on total return or cash return </li></ul><ul><li>Level of expenses </li></ul><ul><ul><li>Paid by the fund or from general tax revenues </li></ul></ul><ul><li>Interaction with other fund sources </li></ul>
  32. 36. Questions to ask The three most important ones <ul><li>How can I track your investment performance? </li></ul><ul><li>What outdated constraints impede your ability to earn the best long-term return? </li></ul><ul><ul><li>Suboptimal governance </li></ul></ul><ul><ul><li>Outdated investment restrictions </li></ul></ul><ul><ul><li>Budget constraints (staff, consultants, investment managers) </li></ul></ul><ul><ul><li>Bureaucratic roadblocks (e.g. purchasing procedures) </li></ul></ul><ul><li>How can I help eliminate these constraints? </li></ul>

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