Sign up  |  Log in

Endowments

Hello All,

Having trouble with Endowments (among other things…)

But, specifically, I don’t understand this Spending Requirement?
why? well for starters, I’m reading the CR and they say, that any shortfall to an endowment can be supplemented by way of extra grant money.

Also, if the spending rate is greater than what the fund was able to generate on a real basis, we still don’t use the corpus/asset base of the portfolio to cover the shortfall.

Basically, what I’m asking is…how do these “spending rules” tie in with an Endowment not being allowed to dip into it’s asset base…seeing as we can set the spending rate anyhow?

thanks,
a

If you weren't successful on your Level III exam, you'll want to be the first to know when Schweser study materials are available for 2020 exams. Sign up below, and we'll notify you as soon as they are available for sale.

from the top of my head (aka verify what i’m saying) but endowments, i believe, are required by law to spend a minimum percentage of assets - usually 5%.

If you run the endowment you can choose to spend more. Why is the spending as a percentage of assets important - it transfers into your required return each year as usually the endowment states that they want to maintain the asset base on real terms (i.e. return inflation plus spending %)

if you don’t return the spending percentage you can then either riase more capital to cover the shortfall OR you dip into your existing asset base. generally, because endowments are a perputity, you don’t want to dip into the asset base so they often state shortfalls will be made up by increasing grants. the key here, and what i believe answers your question is that endowments are supposed to have an infinite life.

thanks strikershank,

I will take this and build on it. I think it will help to clear up a lot of my concerns. the only modification I would add is that, Foundations (not Endowments) are subject to the 5% min spending rule.

cheers,

It’s weird they take that slant. I don’t recall that “just get extra grant money” hack. In fact endowments were many times contrasted with foundations by the fact that you must be more careful (think: Roy’s safety first) to meet the income need of an endowment since it’s assumed the recipient is more dependent on the steady income stream. (If a foundation doesn’t make its investment return target, “just fund fewer projects next year”.)

caveat: I learned this from Schweser last year.

I just read the CR yesterday, the endowment doesn’t regulation trquire the 5% of Corpus as spending rate, but fundation fund does.

im not having trouble with endowments. in fact, im very well endowed.