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Beating the Heat: Five Best Practices for Endowments and Foundations


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Endowments and foundations have found themselves defending their diversified asset allocation strategies in light of U.S. public markets’
strong performance. Here are five ways to keep your cool when asset allocation conversations heat up.

Published in: Economy & Finance
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Beating the Heat: Five Best Practices for Endowments and Foundations

  1. 1. Knowledge. Experience. Integrity. CALLAN INVESTMENTS INSTITUTE Research Spotlight July 2015 Beating the Heat Five Best Practices for Endowments and Foundations Have you found yourself defending your diversified asset allocation strategy in light of U.S. public markets’ strong performance? Here are five ways to keep your cool when asset allocation conversations heat up: 1 Emphasize quality in manager selection. Hire managers to be long-term partners and try to mini- mize turnover. Determine your access to first- and second-quartile alternatives managers and also your resources to source those managers. When thinking about management fees, look at the big picture. What is the long-term goal? What does it cost to get there? What are the risks? 2 Manage resources efficiently and effectively. Think long-term across the entire program, including staffing. Hire people who understand managers and manager selection. Look for people who are not only investment-savvy, knowledgeable, and experienced, but also those who fit with the culture and who buy into the investment process. Low staff turnover is correlated with higher returns. If you are considering a boost to your alternatives allocation, do you have the appropriate legal and accounting staff to handle the additional work? Is your custodian able to handle alternatives? Successful organizations take a long-term view. They think about current spending needs versus future spending goals. Decide if you are going to spend more on the current generation at the expense of future generations, or if you will spend less on the current generation to benefit future generations. Cody Chapman, CFA, CAIA Vice President, Fund Sponsor Consulting Cody, a member of Callan’s Research Oversight Committee, works with endowments, foundations, and other institutional investors on strategic planning, manager review and special requests.
  2. 2. 3 Invest for the long term. Consider current spending needs versus future spending goals. Develop an investment policy that will take you through good and bad times. Factor in board turnover. Evaluate the role of asset classes in your portfolio. Look at sector, geographic, and risk exposure across all asset classes. Assess your liquidity needs and access to cash in the event of a worst-case scenario. Create an asset allocation for a full market cycle and have the courage to stick with it when times get tough. 4 Establish an appropriate governance structure. There are typically three types of structures for decision making: a board with an investment committee that makes all investment decisions, a board with an investment committee that oversees a CIO and approves all investment decisions, or a struc- ture where much of the investment responsibility is delegated to the CIO and investment office staff, who are able to make real-time investment decisions, and who report to the investment committee. The third option is the most agile and best-equipped to react to rapidly changing market conditions or manager situations, but it requires an experienced and knowledgeable staff. 5 Create and sustain a thoughtful and appealing culture. Promote learning, independent research, and having informed opinions. Look with a cautious but open mind at new asset classes and opportunities. Emphasize continuity, institutional memory, and stability. Each institution is unique. Callan recommends focusing on your own program versus trying to replicate the headline-grabbing returns of some endowments. “One cool judgment is worth a thousand hasty counsels. The thing to do is to supply light and not heat.” — Woodrow Wilson The overwhelming majority of institutions employ some form of market value-based spend- ing formula. Studies of historical performance and spending for private foundations conclude that a spending rate greater than 5% almost guarantees the erosion of a foundation’s grant- making capacity in constant dol- lars over the long term. 4.0% 4.5% 5.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 738 736 769 776 772 842 850 823 831 835 4.4% 4.2% 4.6% 4.5% 4.4% 4.3% 4.6% 4.7% 4.7% 4.9% Total institutions * equal weighted Source: Fiscal Years 2004-2013, NACUBO Endowment Study For Further Reading Callan’s 2015 Capital Market Projections Endowments and Foundations: Thinking Big Callan National Conference Workshop, 2015 Commonfund white papers NACUBO research Average Annual Spending Rates* as a Percentage of Endowment’s Value Note: The rise in spending rates during FY 2009–2011 reflects poor investment returns in 2008 and 2009. The fall in spending rates in FY 2012 is attributed to strong investment returns in the prior two years.
  3. 3. Corporate Headquarters Callan Associates 600 Montgomery Street Suite 800 San Francisco, CA 94111 800.227.3288 415.974.5060 Regional Offices Atlanta 800.522.9782 Chicago 800.999.3536 Denver 855.864.3377 New Jersey 800.274.5878 Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which Callan has not necessarily verified the accuracy or completeness of or updated. This report is for informational pur- poses only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of this report is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation. Reference in this report to any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan. Past performance is no guarantee of future results. This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact. The Callan Investments Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to subsidiaries or parents, or post on internal web sites any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such material internally in their business. We service over 50 endowment-and-foundation plans that have more than $32 billion in assets under man- agement. For more information please visit our website, or email About Callan Associates Callan was founded as an employee-owned investment consulting firm in 1973. Ever since, we have empowered institutional clients with creative, customized investment solutions that are uniquely backed by proprietary research, exclusive data, ongoing education and decision support. Today, Callan advises on more than $1.8 trillion in total assets, which makes us among the largest independently owned invest- ment consulting firms in the U.S. We use a client-focused consulting model to serve public and private pension plan sponsors, endowments, foundations, operating funds, smaller investment consulting firms, investment managers, and financial intermediaries. For more information, please visit About the Callan Investments Institute The Callan Investments Institute, established in 1980, is a source of continuing education for those in the institutional investment community. The Institute conducts conferences and workshops and provides published research, surveys, and newsletters. The Institute strives to present the most timely and relevant research and education available so our clients and our associates stay abreast of important trends in the investments industry. © 2015 Callan Associates Inc.