Large outflow expected in coming year when doing IPS

I always thought the rule of thumb was that if a large lump sum outflow was needed immediately or in the very short term (~ 3 months), you should reduce the net investable assets by that amount. If the lump sum outflow was expected longer term (later in the year), then you can add that amount to your expenses needed for the coming year.

In Schweser Volume 2, page 89, it says "Betita will donate $750,000 to his alma mater over the coming year in one lump sum. I would think to add that to your year’s expenses. But the answer key says “Since the $750,000 will be donated within the next year, the total amount should be subtracted from the portoflio and not considered part of the investable asset base.”

Does anybody else feel that this is inconsistent with how CFAI does these questions?

I would always take it away to start with from your investable assets. I think that they won’t give you any gray areas on this, doubt it will be a multipart question that you have a different spend rate for each year.

hope so…and i think youre right.

in 2002 morning exam q1 the endowment had a $200 million payment due on a library in 8 months and the $200M was reduced from the net investable assets…so i guess rule of thumb is that any large lump soon happening in next yr should be reduced from NIA right away since it cant be used to generate your return.

Here is what I think, and what I would do.

If the outflow occurs immediately, obviously deduct. If it is anytime after immediately but within the year, I would look to see if they provide a risk free rate (for instance an asset allocation chart that has ST treasuries), and I would discount the value by that amount, and reduce the investable asset base by that number and state that that amount is going into treasuries in the liquidity section.

If the amount is any time after immediately but within the year and you have no RF rate, still deduct it from NIA, although realistically the closer to the year end the more unreasonable that is since it would have been earning returns the whole year, but meh, thats how they do it.