If a foundation has a requirement to spend 5% annually on grants should this be noted under liquidity constraints? I’ve come across a few problems that don’t state this and simply say, “No specific liquidity needs are given.” This seems incorrect to me. Thoughts?
Also, if we have an annual spending requirement of 5% for grants would we disqualify an asset allocation if there income is less than 5% (i.e. 4% current income) My thought was yes, because this would erode or principal over time the minimum income reture should be 5% to me. The answer still chose the allocation because it met the other requirements even though the current income was less. Perhaps is the 5% spending of grants annually not considered compared to income return when selecting appropriate asset allocations in portfolios?
I can remember that I read a Schwer example where this was an issue. The current income (in terms of cash that is paid annually) was less than the required income (let’s say 5%), but the total income (interest payments, dividend payments plus gains from increase in stock prices) was higher than 5% - even though the current income was less than the 5%. It was stated the total return is relevant for this purpose. This is because it is possible to sell a portion of the portfolio to generate cash (if the portfolio for example was worth 100 originally and is now worth 105 you could sell 5 of the portfolio and still have a portfolio that’s worth 100). The problem that the total return could be volatile (say -5% this year, +10% next year) was not addressed.
It sounds like it some cases it would not be acceptable and in others in would be. I’m assuming we’ll just have to pay close attention on exam day and read the stipulations of the questions.