Why High Spending rate but Low Liquidity needs???

I thought a high spending rate is the same thing as high liquidity needs? Doing a qbank… " Spending rate of 6% and total return of 8.5%" But they say the 2% allocation to cash is sufficient since “liquidity needs are low”. But where is the spending rate of 6% going to be funded from if theres no cash balance? we are supposed to assume capital enroachments ? I dont get it i thought they were hand in hand

I believe the idea is that an endowment / foundation should follow a total return approach, therefore the spending needs can at least be partially covered from income and by liquidating a small portion of the portfolio.

… but you know what? I just came across another CFAI question where the entire spending rate plus management expenses where stated AS the liquidity requirement. WTF? I’m going to lose my F_ing mind… My approach has been to minimize cash for situations when the question is asking for the “appropriate cash allocation” (because you can liquidate holdings and use income), while still stating the spending rate in the liquidity constraint for the IPS. That seems to have been giving me correct answers thus far. Does that seem right?

i ran into that cfai question and i was very confused… i think your approach is correct. unless they decide to “trend” away from that . lol. fck.

McLeod, you mean stated AS return requirement above? was that a typo and if not then how is it different? they read the same to me

heer Wrote: ------------------------------------------------------- > McLeod, > > you mean stated AS return requirement above? was > that a typo and if not then how is it different? > they read the same to me In OP’s original question the spending requirement was not included in the cash allocation, but on IPS-type questions it is being included as a need for liquidity (cash). I’m guessing that they are expecting us to look at the same issue (spending requirement) from different angles depending upon what type of question it is (asset allocation vs IPS).

don’t know the particular questions but you can have a high return need without needing a high liquidity. the return can be in the form of dividends and interest which satisfies the liquidity needs without having an excessive amt of cash in the portfolio

There is something in the notes about foundations only keep 10-20% of that 5% annual spending in cash. I don’t know if this would apply to endowments also? The remainder of the liquidity is assumed to come from both income and capital gains/capital under the total return approach. I am guessing that it is the same for endowments. Also with endowments they factor in gifts and donations on an ongoing, yet unpredictable, basis. This would further put the amount of required cash on hand at a lower level. Does this help?

I reckon at least 10% of questions will be ambiguous to the extent that I’ll lose those marks despite knowing the underlying material.

IMO cash requirement (liquidity) is generally low for endowments due to the ‘generally’ low spending rates. The spending requirements are ‘generally’ met by income generated from the portfolio. One would still put spending rate under the liquidity constraint of the IPS, as the spending rate does require liquidity, whatever the extent of that requirement maybe.