Hi all, An endowment fund has 1 billion asset, 4% to 6% spending need, my question is, how do I determine the weight of cash? if the original weight is 2% with expected return 4%? Shall I increase/decrease/maintain the 2% weight? I chose increase coz I thought due to the 6% spending need, I might need 6% cash. The correct answer is maintain the 2% because “it’s good enough for endowment with 6% spending need”, how do I get this? many thx.
You have missed one of the fatal points: The Total Return Approach
cash as an investment is BAD generally , unless you are a low life insurance company or bank with several short term needs. cash as a byproduct of investment i.e. dividends / interest income or re-balancing left overs is NEEDED to satisfy liquidity needs unless they don’t exist ( i.e. usually for individuals ) In this case let’s NOT call it cash , simply as liquidity
ok, thx. The correct answer DID mention total return approach. It says the liquidity need can be drawn from total return gain. The next question of it, asked, if 2% cash is a pension fund, should I increase/decrease? (60% retired lives) The correct answer should be “increase” right? Does the pension use total return approach too? thx
You are missing the point. Endowments don’t have unexpected liabilities like some pensions plans may have because of early retirement options and pension plans must pay out all the benefits due to the beneficiaries. That warrants a need for higher liquidity.