Investment objective: endowment x foundantions

CFA Level III Portfolio Management
#1

Although the investment objective of endowment and foundations are very similar (primary objective (keep the puchase power, spendings rule, apropriate volatility in y years), and secondary objective (excess of return over a benchmark) I have realized something that I’d like to confirm:
Foundations: legally it has 5% as spending rule plus investment fee = it is the real rate of return required
Important: if the foundation has any donation it doesn’t change real rate of return and any donation should be granted. (Reading 33 page 51 ‘flow-through’)

Endowment: constant growth (fixed amount adjusted by HEPI), Market Value Rule (4% to 6%) or hybrid rule.
Nevertheless, the donations reduce the net spending rate. (Reading 33 page 53).
Does it mean the required real return is lesser than the spending rate?

#2

Endowment’s required real return does not incorporate donations for its investment objectives. It does, however, allow the endowment to take on more risk since the net spending rate is lower.

Said differently, the target real return of an endowment should be at least equal to, if not more than its spending rate.

1 Like
#3

Thank you and makes all sense.

It’s very usual this question and sums up it very well.

Thank you again.