Shad Reed is on the Board of Trustees for the Wesley Ridge World Hunger Organization. The primary role of the organization is to oversee a large endowment fund that was originally established in 1995 as the Wesley Ridge U.S. Hunger Fund to provide food to low income children in the United States. Recently, the original donor for the endowment has died and provided the fund another $200 million in his will and broadened the scope of the fund to provide food for hungry children all over the world. With the new addition, the endowment’s assets are currently valued at $600 million. When the fund was originally established, the spending rate was 5%; however, with the broader scope, the payout has increased to 6%. Also, since funds are going to be distributed to other countries, the board has determined that approximately 25% of the foundation’s annual payout will be in the foreign currencies of other countries. The fund’s investment policy statement which has been revised by the board is shown below: Return Objective: Accounting for inflation of 2.5% and the new spending rate of 6%, the return requirement for the plan is 8.5%. A total return approach is appropriate. Risk Tolerance: Above average, although risk tolerance has declined due to higher spending needs. Liquidity: The endowment has minimal operating expenditures – liquidity requirements are low. My question: is it possible to have a 8.5% return objective and low liquidity requirement?
anyone? i feel the same … 8.5% is too high a liquidity need (atleast by no means it seems to be a LOW liquidity need)
edit: liquidity need should be 6% although total return obj = 8.5% (we dont take inflation for calculating the liquidity requirement) so 6% seems ok. its only a % above minimum reqd 5% (as for foundations) and foundations have above avg risk tolerance with a 5% spending requirement, all else equal. so we can say it has avg to above avg risk tolerance for endowment in this case. agree / disagree?