2014 FEG INVESTMENT FORUM Producing Results in an Unpredictable World GAME ON: Rip Mecherle, CFA University of Tennessee Executive Director of Investments NACUBO: 2015 ENDOWMENT AND DEBT MANAGEMENT FORUM Nolan M. Bean, CFA, CAIA Fund Evaluation Group, LLC Managing Principal EVALUATING AND EXECUTING CHANGES TO SPENDING POLICY
41
Embed
Evaluating and Executing Changes to Spending Policy (2.3.15)
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
2 0 1 4 F E G I N V E S T M E N T F O R U M
Producing Results in anUnpredictable World
GAME ON :
Rip Mecherle, CFAUniversity of TennesseeExecutive Director of Investments
NACUBO: 2015 ENDOWMENT AND DEBT MANAGEMENT FORUM
Nolan M. Bean, CFA, CAIA Fund Evaluation Group, LLCManaging Principal
EVALUATING AND EXECUTING CHANGES TO SPENDING POLICY
• FY 2012 university decided to fund development efforts by shifting 50 bps from spending to fees
• Shift in spending distribution, along with post‐Credit Crisis market returns, created confusion amongst beneficiaries – Forgot (underestimated the impact of) shift on distributions
– Didn’t understand the look‐back impact of rolling average calculation
Move from 3‐Year Moving Average (without cap and floor) to a 7‐Year Moving Average with a 6% Cap and 3% Floor1
• Gradual increase of 1 additional year per year to formula until 7 years included in calculation
• Starting year new formula would be 2011: post‐Credit Crisis, after endowment had 3‐year annualized returns of 11%– “Anchor” the transition formula in a period of strong performance– Maintain the average effective payout rate2
– Lower year‐to‐year volatility in distributions
1 % of Prior Calendar Year‐End Market Value2 Dollars Spent ÷ Beginning Market Value
Analysis begins in 1990 and assumes an initial value of $100.The Moving Average formulas incorporate a 3% floor and 6% cap.Hybrid policy is 70% of last year's distribution adjusted for inflation and 30% of a 3 year moving average 4.5% policy.
• Coordinate asset allocation and spending policies to ensure the long‐term spending rate is consistent with the investment approach and an institution’s risk tolerance, factoring in level of institutional support (% of operating budget funded)
• Spending policy can be designed to “smooth” amount distributed from year‐to‐year
• When selecting a methodology, no correct answer, just a “best‐fit” solution that addresses institutions’ varying needs to maximize spending, minimize volatility, or maximize market value
• Expected returns today are lower this historically—consider reducing absolute spending level
DISCLOSURES• This was prepared by Fund Evaluation Group, LLC (FEG), a federally registered investment adviser under the Investment Advisers
Act of 1940, as amended, providing non‐discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directed to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202 Attention: Compliance Department.
• The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it.
• Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities. Net Returns – Returns net of fees may or may not include the reinvestment of all dividends and income.
• Results on pages 13‐16 and 19 are based on hypothetical projections and may differ from actual results.
• Past Performance is not indicative of future results.
• This report is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.
• Index performance results do not represent any managed portfolio returns. An investor cannot invest directly in a presented index, as an investment vehicle replicating an index would be required. An index does not charge management fees or brokerageexpenses, and no such fees or expenses were deducted from the performance shown.
• Any return expectations provided are not intended as, and must not be regarded as, a representation, warranty or predication that the investment will achieve any particular rate of return over any particular time‐period or those investors will not incurlosses.
• The information on pages 33 was obtained from the 2013 NACUBO‐Commonfund Study of Endowments (NCSE). The study includes a survey of 835 U.S. colleges and universities. The study divided the data into six categories according to size of endowment, ranging from institutions with endowment assets under $25 million to those with assets in excess of $1 billion. Data is for the 2013 fiscal year (July 1, 2012 ‐ June 30, 2013). The National Association of College and University Business Officers ( NACUBO) is a membership organization representing more than 2,500 colleges, universities and higher education service providers across the country and around the world. Commonfund Institute houses the education and research activities of Commonfund and provides the entire community of long‐term investors with investment information and professional development programs. NCSE returns are presented net of fees.