Endowments and Pension Funds (Bill Spitz)

8/7/2019 Endowments and Pension Funds (Bill Spitz)

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Endowment 101Endowment 101

National Press FoundationNational Press Foundation

William T .SpitzWilliam T .Spitz

Vice Chancellor forVice Chancellor forInvestmentsInvestments

Vanderbilt UniversityVanderbilt University


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DefinitionDefinition

An endowment is a perpetual fund,An endowment is a perpetual fund,the income from which is used tothe income from which is used to

support a particular project orsupport a particular project orpurpose as specified by the donor.purpose as specified by the donor.


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Key AttributesKey Attributes

Perpetual time horizonPerpetual time horizon

Important source of support to the operatingImportant source of support to the operatingbudgetbudget

Restricted by the donorRestricted by the donor Governed by the Institutions Board subject toGoverned by the Institutions Board subject to

the Uniform Management of Institutional Fundsthe Uniform Management of Institutional FundsActAct

Must preserve at least the original value of theMust preserve at least the original value of the

giftgift Must be invested prudentlyMust be invested prudently

Must pay attention to inflationMust pay attention to inflation

Must consider both the short and long termMust consider both the short and long term


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MechanicsMechanics

At Vanderbilt, more than 2,000At Vanderbilt, more than 2,000endowmentsendowments

Account for them separately usingAccount for them separately usingthe same method as a mutual fundthe same method as a mutual fund

Quarterly NAVQuarterly NAV--New additionsNew additionsadmitted at that priceadmitted at that price

Quarterly dividend to provideQuarterly dividend to providescholarships, pay salaries, etc.scholarships, pay salaries, etc.


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Goals of Endowment ManagementGoals of Endowment Management

(Primary)(Primary) Provide a steady, predictable (andProvide a steady, predictable (and

hopefully growing) stream of income tohopefully growing) stream of income tothe operating budgetthe operating budget

At least maintain the inflation adjustedAt least maintain the inflation adjustedvalue of the fund in perpetuity (Known asvalue of the fund in perpetuity (Known asgenerational neutrality orgenerational neutrality orintergenerational equity)intergenerational equity)

These may conflictThese may conflict--particularly over theparticularly over theshort termshort term


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Goals of Endowment ManagementGoals of Endowment Management

(Secondary)(Secondary) Stability of corpusStability of corpus

Achieve competitive returns forAchieve competitive returns for

PR/fundraisingPR/fundraising Outperform peer institutionsOutperform peer institutions

Maintain spending as a percent ofMaintain spending as a percent of

the operating budgetthe operating budget


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Specific Investment GoalsSpecific Investment Goals

Spending RateSpending Rate

+ Expected Inflation+ Expected Inflation= Required Rate of Return= Required Rate of Return

Typical SpendingTypical Spending 44--5%5%

HEPI InflationHEPI Inflation 5.5%5.5%

Target ReturnTarget Return 99--11%11%


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umulative InflationCumulative Inflation

2

3

4

5

67

8

9

96

964

967

97

973

976

979

982

985

988

99

994

997

2 2

3

H I

C I


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SpendingSpending

Typical formulaTypical formula--Spend 5% of a threeSpend 5% of a threeyear moving average of marketyear moving average of market

value. Smoothes out annual payoutvalue. Smoothes out annual payout Average spending rate 4.8%Average spending rate 4.8%


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How are Endowments Invested?How are Endowments Invested?

ma Lar e Lar estate or Endowments Endowments Endowments

to ks . . .

Bonds . . .

as . .Subtotal-"traditional" 94.6 61.1 53.5

Rea Estate .Hed e nds . . .

r vate Eq t . .

Vent re a ta .at ra Reso r es . . .

"Non-Traditional" 4.4 38.4 46.5

Ot er .

Total Endowment


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How Have EndowmentsHow Have EndowmentsPerformed? (Annual eturn forPerformed? (Annual eturn for

fiscal years ending / 00 )fiscal years ending / 00 )

ize Yr Yrs Yrs 0 Yrs

> $ illion$ 00mm to $ 0 0

$ 00mm to $ 00mm

$ 0mm to $ 00mm

$ mm to $ 0mm


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Hot topicsHot topics

Are some endowments too big?Are some endowments too big?

Should they spend some of their richesShould they spend some of their richestoday rather than hoarding capital?today rather than hoarding capital?

Are large universities too aggressive in theAre large universities too aggressive in theway they manage their endowments?way they manage their endowments?

Will they be able to earn their requiredWill they be able to earn their requiredreturns going forward? (Is 9returns going forward? (Is 9--11%11%

realistic?)realistic?) Are endowment investment officers paidAre endowment investment officers paid

too much?too much?


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Hot opics (Continued)Hot opics (Continued)

Should endowments be subject toShould endowments be subject tosocially responsible investingsocially responsible investingprinciples?principles?

Should endowments engage inShould endowments engage intargeted economic development?targeted economic development?

Does the endowment governanceDoes the endowment governancemodel work?model work?

Endowments and Pension Funds (Bill Spitz)

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