spending rates & asset allocation

lets say my endowment has a spending rate of 5%. Does this mean my cash allocation should be 5%? schweser says no via Qbank Question ID#: 93225, just seems counterintuitive to me - wouldnt i want to keep it in cash to meet spending needs?

I remember reading there are two ways to handle the liquidity needs of endowments… either hold off spending till near the year end when needs are known with more certainty, or keep a years worth of cash on hand. Someone can verify this.

smileygladhands Wrote: ------------------------------------------------------- > lets say my endowment has a spending rate of 5%. > Does this mean my cash allocation should be 5%? > > schweser says no via Qbank Question ID#: 93225, > just seems counterintuitive to me - wouldnt i want > to keep it in cash to meet spending needs? I would think that you need to earn 5% in cash dividends or interest income or sell stocks, bonds when the spending becomes due.

Spending need is a liability ( sometimes only due to tax reasons ). If you can match its horizon to asset duration , ( and not keep most of the money in cash) you have better chance at preserving the value of the portfolio. Cash does not even beat inflation . Fixed income is better than cash

markCFAIL Wrote: ------------------------------------------------------- > I remember reading there are two ways to handle > the liquidity needs of endowments… either hold > off spending till near the year end when needs are > known with more certainty, or keep a years worth > of cash on hand. > > Someone can verify this. You are getting confused with Foundations. Endowments have low liquidity requirements. If spending rate is 5%, cash doesn’t have to be 5%. Cash is needed only for rebalancing ect. Usually endowments have low fixed income securities in their portfolio because FI securities don’t keep up with inflation. Portfolio is mainly comprised of equities and alt investments.

Both foundations and endowments have relatively predictable spending and return needs that are governed by spending rates plus fees and inflation, absent a “spend-down assets” mandate in foundations, they function the same as an endowment. Even then “funds functioning as endowment” can be spent down just like a foundation. The only material difference is that foundations may: a.) be spent down if their mandate requires it versus endowments who must preserve into perpetuity b.) have a spending rate that may be mandated at 5% if it is a private foundation, versus endowments which spending rate depends on the proportion of the operating budget they fund for the beneficiary institution. I don’t think there is a clear cut answer to this question, like all IPS it always depends on what information they give you, but yes in general I think the preferred method to meet spending needs is through the “total return” portfolio rather than holding unnecessary cash that drags on return, but even then I think it would depend on the a.) relative forecasting certainty of spending needs, and b.) absence of any other gifts/contributions in the horizon.

Endowments are constantly getting inflows, unlike foundations, thus they can keep their cash levels low and remain fully invested. So to answer your question, no, they do not have to match their cash position to their spending rate

Good reply… but doesn’t it assume that the inflows are a.) steady and not lumpy, and b.) at least as large as spending rate