If we have inflation rate (2%) and the growth of university spending need (4%), the endowment return objective for the next year should be:
(1+2%)*(1+4%)*(1+management fee)*(1+current spending need) -1
Am I right?
I have not encountered such a problem before but your formula seems right
Can someone please comment on this? it appears to me that the inflation is already captured in the increase in spending requirement year on year, is it not?
They’ll say if the growth in spending is inclusive or exclusive of general inflation. If they say NOMINAL GROWTH is 4% and inflation is 2%, that tells you there’s ~2% real growth and 2% inflation.
I think it’s captured in the growth of operating expenses.
My understanding was (based on someone’s explanation in a thread in the past days) that if you have growth in operating expenses and inflation rate than you don’t need to add inflation rate.
Which would mean, I would leave out the (1 + 2%) term from the formula of the OP.
And now I _ am _ confused.
I wouldn’t. If they have a spending rate of 4% and their spending grows at 4% more than inflation (which is 2%), their return requirement would be 4% + 4% + 2% + mgmt fee. Or multiplied if asked for geometric.
So I think mox got it right.