are management fees considered a liquidity requirement? i thought not, but again, i was wrong. if an account has a required return of 7% (let’s say it’s the spending rate for an endowment) and a 1% mgmt fee, what goes under the liquidity constraint portion of the IPS? 8%?
8% plus don’t forget for minimum spending rate for foundations internal management fee can be included in the 5% required but ouside management fees are additional. I hope I have this right
thanks, florin. i realize this is like asking for the equation for standard deviation at this point in the game.
florinpop Wrote: ------------------------------------------------------- > 8% > plus don’t forget for minimum spending rate for > foundations internal management fee can be > included in the 5% required but ouside management > fees are additional. I hope I have this right No, investment management fees (whether internal or externally incurred) are not included as part of the 5% required, but foundation operational / gifting expenses such as to perform granting services are included as part of the 5%.
But yes to the 8%.
Swan I thought they were not included only if outside… are you sure?
what I had also understood was the 5% related to spending fees…not including any management fees whether internal or external…
I’m very sure. I started two weeks ago, so I just covered foundations / endownments very recently.
cfasf1 Wrote: ------------------------------------------------------- > are management fees considered a liquidity > requirement? i thought not, but again, i was > wrong. > > if an account has a required return of 7% (let’s > say it’s the spending rate for an endowment) and a > 1% mgmt fee, what goes under the liquidity > constraint portion of the IPS? 8%? random side note, don’t forget any endowment/foundation spending rate over 5% puts it at risk of eroding principal, which is typically a big no-no
Damn I already forgot all that crap No way I’ll pass this exam 
florinpop Wrote: ------------------------------------------------------- > Damn I already forgot all that crap > No way I’ll pass this exam i feel ya… crap it’s almost 2 am …i’m off to bed.
This may be a stupid question but why would you put the entire return requirement as a liquidity constraint? I have not seen any IPS with the entire return requirement as a liquidity need.
Because foundations are bound by the IRS to spend 5% (not including invesment manager fees) per year or be penalized due to their tax exempt status. Thus it is a liquidity requirement for them.
sv102307 Wrote: ------------------------------------------------------- > This may be a stupid question but why would you > put the entire return requirement as a liquidity > constraint? I have not seen any IPS with the > entire return requirement as a liquidity need. that was what i was getting at. i didn’t remember seeing anything like this before i ran into this quesiton.
but i guess it makes sense… then again, we don’t include the mgmt fee for an individual’s ips liquidity requirement and it’s a fee we have to pay, no?
ng30 Wrote: ------------------------------------------------------- > cfasf1 Wrote: > -------------------------------------------------- > ----- > > are management fees considered a liquidity > > requirement? i thought not, but again, i was > > wrong. > > > > if an account has a required return of 7% > (let’s > > say it’s the spending rate for an endowment) and > a > > 1% mgmt fee, what goes under the liquidity > > constraint portion of the IPS? 8%? > > > random side note, don’t forget any > endowment/foundation spending rate over 5% puts it > at risk of eroding principal, which is typically a > big no-no Not necessarily, foundations are bound to spend the 5% whether they want to or not and investment management expenses are likely to drive that amount higher. Also, if it’s one time, it can use that carry forward as a credit. And in the case of both (but more commonly foundations) it depends on the donor’s terms. If the donor has specified a lifetime over which the foundation is to spend itself out of existance such as a 10 year self amortization then then it’s okay as well. But what you’re referring to with the protection of real purchasing power is aluded to as ‘intergenerational equilibrium’ or some stuff like that.
I guess my main problem with this IPS stuff is when do we get really specific and put down hard numbers like the 8% figure and when do we put qualitative stuff only. Like the problem 5 reading 21 in the CFAI book where you create the IPS for the Medical Research foundation. The liquidity constraints section says only "Based on asset size and the predictable nature of the cash payouts liquidity needs are low. When do you put in boiler plate langauge like the above as opposed to actual numbers?
acc to schweser videos internal management fee is included in the 5% and external management fee is excluded. I will look up if CFAI has anything contradicting but the videos clearly state that.
yes that is my understanding - internal mgmt fees are included in the 5% spend - but external fees are not. saw it somewhere in the cfa text. So the 5% (including internal fees) + any external fees should go in the liquidity constraint for the year. cheers…
what is this “internal” fee?