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viking.som.yale.edu viking.som.yale.edu Document Transcript

  • 1Foote School Endowment Will Goetzmann, Dean Takahashi International Center for Finance, Yale School of Management, March 2002 The Foote School is a private, independent school established in 1916 in New Haven, Connecticut. Situated on 14 acres near Yale University, Foote is a bustling, energetic school with approximately 470 students and 90 full and part-time faculty and staff. The school recently embarked on an ambitious $5 million program to develop and enhance its campus with new arts, drama, music and gymnasium facilities. Although Foote is currently thriving operationally and financially, it faces some important challenges in the near future. The school must continue to attract and retain well-qualified faculty and staff with diverse backgrounds and offer a rich and diverse curriculum. The school is constrained, however, in its ability to grow enrollment without another major capital campaign and building program. Foote is further limited in its ability to raise tuition without becoming prohibitively expensive for most middle class families. In addition, the school has limited resources to provide the financial aid necessary to maintain, or more ideally increase, the ethnic and socio-economic diversity of the student body. From the context of its healthy current situation but less certain future, Foote is reviewing the investment and spending policies of its $4.5 million endowment. Background Foote School, a private school in New Haven’s East Rock neighborhood, serves approximately 470 children from kindergarten through ninth grade. It is one of several fine private schools in the city of New Haven, two of which, the Hamden Hall Country Day School and the Saint Thomas School, are within a short walking distance from Foote. New Haven itself is a modest- sized New England city that lost much of its industrial base as a result of the decline of the regional economy through the 1990s. Now primarily a college town, New Haven has come to rely heavily on the fortunes of its largest employer, Yale University. The public school system in New Haven, while of relatively high quality for an urban school system, nevertheless lags far behind New Haven’s private institutions. Although Foote’s tuition is beyond the means of many neighborhood families, the school is committed to provide financial aid to help needy families and promote a diverse student body. Foote has approximately 90 full and part-time faculty and staff members. A recent Visiting Committee Report from the Connecticut Association of Independent Schools noted, “ Foote School is distinguished by a long tradition of quality teaching. The School enjoys a seasoned faculty, a substantial number of whom have more than 20 years experience.” Although turnover has been low, the board is focused on improving faculty and staff compensation over the long term, an improvement that is especially necessary since compensation is low compared to that available in the public schools and in the local economy in general. The administration has run operations with fiscal discipline, generating consistent, modest surpluses in recent years. The total budget for fiscal 2001 included approximately $7 million of
  • revenues, more than 92% of which were from tuition and fees for after-school, vacation-care, and summer programs. Gifts for current use averaged roughly 2.5% of the total budget. Spending from endowment represented less than 3% of the budget. Until this year, reserves built up from operating surpluses provided a cushion against unexpected budgetary shortfalls and additional revenue from interest income. The administration, however, drew upon much of these reserves to help fund new building projects in recent years, and reserves are not expected to provide a financial buffer and interest income in the future. Foote’s strong balance sheet reflects the school’s financial conservatism. The school has no debt, and the administration budgets approximately 2% of the budget for capital expenditures relating to physical improvements and non-routine maintenance. The Foote Endowment The construction of the Foote School library in the early 1980s indirectly led to the creation of the Foote Endowment. Burton Malkiel, a finance professor, author of A Random Walk Down Wall Street, and Dean of the Yale School of Management, served on Foote’s board when the school began a fund drive for construction of a new library. The drive netted more funds than were needed for the construction, and a further, substantial private gift that covered much of the library's cost allowed the board to follow Malkiel’s recommendation to invest the residual funds in zero coupon U.S. Government bonds that were yielding 16% per year at the time. The bonds lay untouched for many years, accruing interest until they began to mature recently. The final, remaining bonds will mature in 2003 and 2004. In 2000, Foote initiated another building campaign, this time for the construction of theater and arts facilities and for the renovation and expansion of the gymnasium. At that time, the Foote finance committee took the opportunity to review the policies for the use and investment of the endowment, choosing an investment mix of stocks and bonds while keeping a considerable amount of the endowment in cash-related instruments for construction payments. The committee hired a few different investment managers for the Endowment, one of which was the Commonfund, a not-for-profit fund-of-funds manager specializing in educational endowments. In 2000, Dean Takahashi, parent of two Foote students and Senior Director of Investments at the Yale Investments Office, joined the board and was asked to chair the Foote Investment Committee. A 1983 graduate of the Yale School of Management, Dean has been a key part of the success of the Yale University Endowment over the past fifteen years. Together with David Swensen (Yale’s Chief Investment Officer), Dean has helped steer the Yale Endowment in a pioneering direction – away from traditional asset classes, such as publicly traded stocks and bonds, and towards a more diverse range of investments in less efficient markets. During Dean’s tenure, Yale’s allocation to U.S. stocks and bonds decreased from approximately 80% of the University’s Endowment in 1986 to roughly 25% of the portfolio in 2000. The remainder of Yale’s portfolio is invested in private equities such as venture capital and leveraged buyouts; absolute return strategies such as merger arbitrage, distressed security investing and long/short stock picking; foreign equities; real estate and natural resources. These allocation decisions have helped Yale’s long-term investment returns rank in the top percentile of large institutional funds.
  • Individual asset class performance has been notable as well, with each asset class in the Yale portfolio outperforming its benchmark over the past five, ten, and fifteen years. Much of this strong performance was due to the University’s distinctive approach of hiring small entrepreneurial firms to actively manage assets. The Yale Investments Office prides itself on picking top managers able to articulate and execute on investment strategies that have a strong value proposition. The University also recognizes the importance of an alignment of interests between managers and investors and has endeavored to structure management fees to facilitate this alignment. Finally, the Yale Investment Office staff maintains close contact with its managers to ensure that they remain focused on their stated objectives. As chair of Foote’s Investment Committee, Dean has attempted to lay the foundation for a sound investment program that will enable the Foote Endowment to enjoy success similar to that of Yale. Despite the fact that Yale’s portfolio is more than two thousand times larger than Foote’s $4.5 million endowment, Dean believes that many of the same principles and disciplines that govern Yale’s investment process should be applicable at Foote. Upon assuming direction of Foote’s investment program, Dean recognized that Foote needed to express explicit policies and goals for its endowment, including articulating a clear spending rule, reasonable asset allocation targets, plans for comprehensive risk assessment, and a strategy for putting the goals into practice. Accordingly, Dean’s initial efforts focused on reviewing the role of the endowment at Foote, penning a mission statement, reviewing the spending policy, defining a rebalancing rule, establishing policy asset allocation targets, and selecting new investment managers for the School’s active investments. In addition to Dean, current Foote Investment Committee members include three School of Management professors: Stanley Garstka, Will Goetzmann, Roger Ibbotson; and two members of the Yale Investments Office, David Swensen and Dean Takahashi. Also participating in Investment Committee meetings are two members of the Foote Board and Finance Committee, businesswomen Mary Jane Burt and Roxanne Coady, both of whom have considerable experience with management of for-profit enterprises; Foote Head of School, Jean Lamont and Jay Cox, a senior member of the school’s staff who is responsible for the execution of new strategies. Foote Endowment Allocation as of December 2000 As of December 2000, the endowment was approximately 48% in U.S. publicly traded equities, 10% in foreign equities, 26% in bonds (including 6% in zero coupon bonds), and 16% in money market funds. One of these money market instruments, the Commonfund Short Term Fund, was yielding about 7% per annum, considerably above prevailing money market rates. Exhibit 1 shows Foote’s asset allocation. At the close of fiscal year 2000 (ending June 30, 2000), the School’s endowment totaled roughly $4.5 million. Approximately $1 million of this amount might need to be drawn upon for the new building project. Although more than 85% of the construction costs were received or pledged in a recent capital campaign, some of the donations will likely not be received in time to cover all the costs.
  • February 14, 2001 Meeting After a series of meetings through the Fall of 2000, in which the general goals of the committee were established, the committee met again on Valentines Day, 2001, to address a number of important issues: finalizing the statement of goals and investment policy for the endowment, deciding on the asset allocation policy, considering the proposal for the spending rule, and discussing possible external money managers that would implement the chosen strategy. The materials for the meeting, including the agenda are attached as Exhibit 2. Asset Allocation To help analyze the asset allocation, Dean applied some of the mean-variance and simulation methodology he used to evaluate Yale’s portfolio. He developed an efficient frontier employing nine different asset classes without constraints. He then developed two constrained frontiers. The first limited private equity to a zero allocation, and absolute return and real assets to 20% of the portfolio each. The second constrained frontier only permitted investments in publicly- traded asset classes: U.S. stocks, foreign stocks, bonds, inflation-linked bonds, and cash. Dean calculated the expected return and risk of Foote’s current policy allocation, the average allocation of college endowments under $500 million according to Cambridge Associates, the policy allocation for the multi-asset fund managed by The Investment Fund for Foundations (TIFF), and Yale’s target. In addition, Dean modeled two possible new target allocations for Foote. One subject to the partial constraints in alternative asset classes and the second using no alternative asset classes. The expected return and risk characteristics Dean used were based on a mix of historical information and judgment reflecting sensible long-term expectations. Returns were stated as real (inflation-adjusted) figures reflecting Foote’s need to cover expenses that fluctuated with inflation. Although Yale’s experience with various asset classes has been unusually good, Dean used relatively conservative estimates for the expected return for absolute return (7%) and real assets (6%). Dean explicitly proposed avoiding private equity given Foote’s size and the current overheated market environment. Spending Policy The recommended spending for a given year would be calculated by adding 70% of the prior year’s spending with 30% of the long-term 4.5% spending rate multiplied times the prior year’s endowment market value. This insures that the income from the endowment is smooth and largely predictable for operation purposes, and yet also reflects recent investment performance. Dean also used Monte Carlo simulations to assess the impact and interaction of different asset allocation choices with several spending rule options. The simulations modeled the risk of long- term impairment of the endowment market value by estimating the probability of halving the inflation-adjusted market value over fifty years. The simulations also examined risks of disruptive spending drops defined as a 25% drop in spending over five years and a 10% drop in any single year.
  • Execution Given the small size of the Foote endowment and the school’s limited resources, if the committee decided to choose an allocation that included absolute return and real assets, an outside management company would become necessary. While allocation to domestic and international stocks, bonds, inflation-linked bonds, cash and Real Estate Investment Trusts (REITs) could be accomplished with relatively low fees via mutual funds; Foote would need to look to a company like TIFF or Commonfund to access extended asset classes. While Foote has an historical association with Commonfund – the most widely used “fund-of-funds” employed by academic endowments – Dean and Dave both feel strongly that TIFF, a new fund of funds that serves foundations, is better at the selection and oversight of private equity and hedge fund managers. The issue of this oversight is particularly important due to the potential for operational risk. There are other trade-offs between the two. Commonfund offers index fund products with low fees, while TIFF’s equity products are all actively managed. TIFF is a smaller organization with less effort devoted to client contact and marketing of their services. Both are non-profits themselves. Issues to Consider There seem to be advantages to moving to a broader and more diversified asset allocation following Yale’s successful lead. Which asset classes should be included in the portfolio the small size of the Foote Endowment? At what level, if any, should allocations to various asset classes be constrained? How would you vote on the resolutions brought before the committee? What questions would you have about the materials presented? How would you decide on the “right” spending rule? How would you go about picking a manager? Quantitative Analysis Using the Ibbotson Analyzer and Optimizer through SOM’s Citrix system, develop one or two asset allocations for Foote School, one using easily managed, indexable asset classes and perhaps another using additional asset classes if you feel they are appropriate for Foote. Make long-term forecasts of your proposed recommendations. Using this analysis, write a clear, reasoned recommendation for Foote School’s investment committee. ---
  • Foote Investment Committee Agenda for February 14, 2001 Foote Library, 8:20 a.m. to 9:30 a.m. 1. Notes from December 11, 2000 meeting 2. Asset values and allocations as of January 31, 2001 3. Investment goals and objectives for long-term funds a. Endowment funds b. Designated Endowment funds c. Expendable long-term funds 4. Investment approach for Endowment and Designated Endowment a. Size and liquidity limitations b. Management considerations c. Multiple funds versus single diversified multi-asset fund  The Investment Fund for Foundations  The CommonFund d. Administrative and investment costs 5. Recommendation for revised asset allocation and investment policy a. Current policy b. New asset classes  Absolute return  Real assets  No private equity c. Possible policy allocations d. Quantitative assessment of allocations 6. Recommendation for revised spending policy a. Current policy b. Policy objectives  Discipline  Sustainability  Stability  Timeliness c. Spending rate d. Smoothing or averaging rule e. Timing f. Administrative logistics 7. Other issues, next meeting
  • Foote Investment Committee December 11, 2000 Meeting Report In attendance: Stan Gartska, Will Goetzmann, Roger Ibbotson, David Swensen, Dean Takahashi Mary Jane Burt, Roxanne Coady, Jay Cox, Jean Lamont. Time: 8:20 to 9:30 a.m. The Committee reviewed the Endowment fund balances as of December 9, 2000. Assets totaled $4,511,078. The Committee recommended that the cash balances in the Vanguard Prime Money Market Fund be invested at the end of the quarter according to the long-term asset allocation targets, rebalancing the portfolio to reduce underweight positions in the bond portfolio and to a lesser extent in U.S. equities. The Committee reviewed the consolidation and reorganization of money market accounts of current funds. The Committee followed up questions regarding the CommonFund Short Term Fund with particular focus on understanding risks in creditworthiness and interest rate exposure which might accompany the apparent high yield. In addition the Committee examined potential pricing problems. One suspect credit listed as one of the fund’s larger investments was in fact credit- enhanced and a better credit risk than the troubled parent company. Although the fund holds some investments with longer term interest rate risk, its reserve policy and current reserve levels offer reasonable protection against interest rate and credit risks. Lastly, while the fund does have potential pricing problems that might be gamed by participants, the large stable capital balance indicates that participants are not gaming the pricing system. The Committee recommends keeping short-term funds with the CommonFund for now, pending future review in conjunction with other investment assets. Prior to the discussion, Will Goetzmann informed the Committee that he is currently on the board of the CommonFund. Cash from campaign gifts in hand and those expected to be received this year will not be sufficient to cover the cost payments that will be due at the conclusion of the construction this summer. After assessing the excess balances in current funds and funds functioning as endowment, the Committee recommends drawing funds first from excess reserves in current funds and then from funds functioning as endowment to cover the cash shortfall. In order to maintain financial discipline, borrowing from current and endowment funds should be repaid by the operating budget with interest over time. Tax-exempt financing is impractical for Foote since less than $1 million of construction costs qualify for tax-exempt debt. Most of the gifts received from the capital campaign were designated specifically for construction and must be spent before tax-exempt debt can be assigned toward construction costs. The substantial upfront placement and other fixed costs of tax-exempt debt, more than offset the low, tax-advantaged interest costs for offerings of less than several million dollars. Taxable debt is relatively expensive compared to the opportunity costs of expendable reserves in Foote’s current and endowment funds. Taxable debt should utilized only as a last resort. The Finance Committee will develop more precise cash flow projections to help determine cash needs and available reserves from current and endowment funds.
  • The Committee discussed the fact that the endowment investment pool included a small portion of true endowment and a majority of expendable, board-designated quasi-endowment. Only the principal of the true endowment is legally not expendable. The Committee recommends that the Board eventually develop a clear distinction between board designated funds which will be treated as long-term endowment and other long-term funds which might be expended on appropriate long projects or as emergency reserves. The Committee will develop recommendations for investment policies and guidelines for the Endowment pool and the other long-term reserve fund. Next meeting early in 2001. The Committee will discuss possible changes to the asset allocation and investment policy and attempt to develop formal recommendations to revise the endowment spending policy.
  • DRAFT (February 14, 2001) Proposed Statement of Goals and Investment Policy for Endowment The goal of the Foote Endowment (and funds board designated as endowment) is to provide significant, stable and sustainable funding to support the school’s annual operating budget and specific donor designated programs. Endowment funds will be invested with the objective of earning high, long-term returns after inflation without undue risk of permanently impairing the long-term purchasing power of assets or incurring volatile short-term declines in asset values or annual spending flows. The portfolio will be invested with a strong equity bias with significant diversification across investments with fundamentally different risk characteristics. In general, assets will be invested in commingled funds that provide liquidity and diversification of security specific risk at reasonable cost. The portfolio will be invested with a long-term horizon without attempting to time market movements. Allocations to asset classes will be maintained in accordance with policy targets and ranges as specified below. The Investment Committee will review the policy targets and ranges on an annual basis. Possible Policy Asset Allocation Targets Proposal A Proposal B Asset Class Target Range Target Range Domestic Equities 40% +/- 10% 25% +/- 10% Fixed Income 20% +/- 10% 15% +/- 10% Developed Foreign 15% +/- 10% 17% +/- 10% Emerging Markets 5% +/- 10% 8% +/- 10% Absolute Return 0% +/- 10% 20% +/- 10% Real Assets 0% +/- 10% 15% +/- 10% Inflation-linked Bonds 15% +/- 10% 15% +/- 10% Cash 5% +/- 10% 0% +/- 10% Total 100% 100%
  • DRAFT (February 14, 2001) Proposed Spending Policy for Endowment The goal of the Foote spending policy is to provide a sustainable, stable annual source of income from the Endowment to the operating budget. The spending policy helps provide financial discipline to the school by providing a clear, unequivocal amount of annual funding from the Endowment consistent with sustainable and equitable long-term operations. Spending from Endowment (and funds designated as endowment by the board) shall be determined by a spending rule that smoothes the volatility of spending from year to year using a weighted-average formula which takes into account spending from the prior year and the current market value of the Endowment. Spending for a fiscal year shall be calculated by adding 70% of the prior year’s spending amount to 30% of the Endowment market value at the beginning of the prior fiscal year times the policy spending rate of 4.5%. Spending for fiscal year[t] = 70% X (spending for fiscal year [t-1]) + 30% X (4.5% X Endowment Market Value at beginning of fiscal year [t-1]) Adjustments will be made to incorporate the effects of new gifts, additions or fund decapitalizations. Spending from new gifts or additions to the Endowment in their first year shall be at the same rate as other Endowment funds adjusted pro-rata to reflect the partial year of inclusion in the Endowment.
  • Efficient Frontier 10% 9% Expected Return 8% Yale 7% 6% CA<500 TIFF Target B 5% Target A Foote 4% 3% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 14.0% 14.5% Standard Deviation Unconstrained Constrained:Abs.Ret:20%,Real:20%,Pvt.:0% Constrained:Abs.Ret,Pvt. And Real at 0% Asset Classes Foote Target A Target B CA < 500* TIFF Yale U.S. Equity 50.00% 40.00% 25.00% 42.50% 25.00% 15.00% U.S. Bonds 40.00% 20.00% 15.00% 21.50% 15.00% 10.00% Dev. Mkts 10.00% 15.00% 17.00% 10.00% 20.00% 5.00% Emer. Mkts 0.00% 5.00% 8.00% 2.90% 5.00% 5.00% Absolute Return 0.00% 0.00% 20.00% 7.50% 20.00% 22.50% Private Equity 0.00% 0.00% 0.00% 8.20% 0.00% 25.00% Real Assets 0.00% 0.00% 15.00% 3.70% 5.00% 17.50% Cash 0.00% 5.00% 0.00% 3.70% 0.00% 0.00% TIPS 0.00% 15.00% 0.00% 0.00% 10.00% 0.00% Total Weights 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Port. Exp. Return 4.40% 4.40% 5.69% 5.57% 5.38% 7.46% Port. Std. Dev 13.59% 12.26% 11.70% 12.83% 11.40% 11.90% Port. Exp. Growth** 3.52% 3.68% 5.04% 4.79% 4.76% 6.81% * A subset of Cambridge Associates universe consisting of institutions whose endowment size is less than 500 Million. ** Exp. Growth Rate = (1+Exp.Ret)*e^{(-Std.Dev^2)/(2*(1+Exp.Ret)^2)}-1
  • Model Inputs Real Expected Return Characteristics Exp. Real Standard Asset Class Return** Deviation U.S. Equity 6.0% 20.0% U.S. Bonds 2.0% 10.0% Dev. Mkts 6.0% 20.0% Emer. Mkts 8.0% 30.0% Abs. Ret 7.0% 15.0% Pvt. Eq. 12.5% 25.0% Real Assets 5.5% 15.0% Cash 0.0% 5.0% TIPS 3.0% 5.0% ** These are arithmetic means. Correlation Matrix U.S. Equity U.S. Bonds Dev. Mkts Emer. Mkts Abs. Ret Pvt. Eq. Real Assets Cash TIPS U.S. Equity 1.00 0.45 0.60 0.30 0.30 0.40 0.00 0.00 0.15 U.S. Bonds 0.45 1.00 0.30 0.20 0.35 0.25 0.00 0.50 0.25 Dev. Mkts 0.60 0.30 1.00 0.50 0.30 0.25 0.10 0.00 0.25 Emer. Mkts 0.30 0.20 0.50 1.00 0.30 0.10 0.15 0.00 0.25 Abs. Ret 0.30 0.35 0.30 0.30 1.00 0.25 0.40 0.25 0.40 Pvt. Eq. 0.40 0.25 0.25 0.10 0.25 1.00 0.10 0.00 0.25 Real Assets 0.00 0.00 0.10 0.15 0.40 0.10 1.00 0.30 0.50 Cash 0.00 0.50 0.00 0.00 0.25 0.00 0.30 1.00 0.10 TIPS 0.15 0.25 0.25 0.25 0.40 0.25 0.50 0.10 1.00
  • Spending Profiles Along Various Efficient Frontiers (Risk Parameters Calculated based on a 4.5% spending rate and 70%-30% Rule) 60% Probability that the Endow.Mkt. Value Foote Target A 50% Unconstrained Halves in Fifty Years 40% 30% TIFF CA<500 Constrained: Abs.Ret:20%, 20% Real:20%, Target B Pvt.0% 10% Yale Constrained: 0% Abs.,Pvt. and 0% 5% 10% 15% 20% Real at 0% Probability of a 25% Real Spending Drop over Five-Years Table I Spending: 4.5% Spending Rate, 70%-30% Smoothing Rule 25% Drop in 50% Drop 10% Drop in Median Med. Endow Spending over in End. Value Spending in Spending Mkt.Value Exp Return Std. Dev Five Years over 50 Years 1-Year in yr 50 end of yr 50 Foote 4.40% 13.59% 19.32% 52.40% 6.54% $113 $2,324 Target A 4.40% 12.26% 15.81% 48.20% 4.34% $127 $2,646 Target B 5.69% 11.70% 7.83% 17.90% 1.67% $267 $5,870 CA<500 5.57% 12.83% 11.09% 25.30% 3.18% $230 $4,991 TIFF 5.38% 11.40% 8.39% 22.40% 1.70% $231 $5,013 Yale 7.46% 11.90% 3.22% 2.50% 0.69% $668 $15,698 Table II Spending: 4.5% Spending Rate, No Smoothing Rule 25% Drop in 50% Drop 10% Drop in Median Med. Endow Spending over in End. Value Spending in Spending Mkt.Value Exp Return Std. Dev Five Years over 50 Years 1-Year in yr 50 end of yr 50 Foote 4.40% 13.59% 23.04% 48.00% 22.87% $121 $2,659 Target A 4.40% 12.26% 19.96% 43.60% 20.57% $135 $2,934 Target B 5.69% 11.70% 12.79% 14.60% 16.48% $268 $5,908 CA<500 5.57% 12.83% 15.88% 20.80% 19.02% $233 $5,168 TIFF 5.38% 11.40% 13.32% 17.80% 16.56% $233 $5,141 Yale 7.46% 11.90% 7.44% 1.50% 13.26% $642 $14,416 Table III Spending: 5.0% Spending Rate, 70%-30% Smoothing Rule 25% Drop in 50% Drop 10% Drop in Median Med. Endow Spending over in End. Value Spending in Spending Mkt.Value Exp Return Std. Dev Five Years over 50 Years 1-Year in yr 50 end of yr 50 Foote 4.40% 13.59% 23.66% 64.60% 8.35% $92 $1,636 Target A 4.40% 12.26% 19.72% 60.70% 5.69% $104 $1,876 Target B 5.69% 11.70% 10.48% 30.20% 2.45% $222 $4,306 CA<500 5.57% 12.83% 14.15% 37.80% 4.19% $191 $3,623 TIFF 5.38% 11.40% 11.30% 35.80% 2.53% $191 $3,669 Yale 7.46% 11.90% 4.48% 5.20% 0.94% $571 $11,876
  • Appendix: Monte Carlo Simulations Portfolios are evaluated by calculating risk parameters that are obtained using “Monte Carlo” simulation techniques. For every given real expected return and standard deviation, risk parameters are obtained by averaging 1000 simulated paths. The two significant criteria are: (1) Disruptive Spending Drop (DSD)- the probability of a 25% Real Drop in Spending over a five- Year Period; and, (2) Purchasing Power Impairment (PPI)- the probability of a 50% Real Decline in the Endowment Market Value over a fifty-year horizon. The values for these two risk factors are given in the third and fourth columns of the Tables I – III. One other short-term risk is calculated in column five: the probability of a 10% year-to-year Real Spending Drop. The last two columns give the median (of all the 1000 paths) spending in year 50 and the median endowment market value in the 50th year.