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· Strategic Endowment Solutions
· Endowment Management Standards
Endowments
An endowment is a permanent fund bestowed upon an individual or institution, such as a university, museum, hospital, or foundation, to be used for a specific purpose. Endowments are created by gifts restricted by donors. They may be unrestricted or restricted to specific divisions or programs. Categories of restriction include Academics, Athletics, Faculty and Staff Salaries, the Library, and Student Financial Aid. When a gift is made to the endowment, the principal is maintained in perpetuity. It is invested for the purpose of producing present and future income that may either be expended or added to the principal.
SFI offers an integrated investment solution delivering investment management, asset allocation and related advisory services for your entire portfolio. SFI's tailored services to meet your specific needs include:
- Policy Review and Counsel
- Investment Management
- Monitoring and Reporting
- Rebalancing
Strategic Endowment Solutions
Policy Review and Counsel
- Development or review of investment policy statement
- Collaboration on goal setting, spending policy, risk and other factors
- Creation of strategic asset allocation policy
- Setting of rebalancing policy and procedures
- Definition of roles and responsibilities
Investment Management
- Multi-manager, multi-strategy approach
- Rigorous analysis of managers and strategies
- In-depth manager research
- Rigorous due diligence
- Active portfolio construction
- Disciplined daily portfolio monitoring
- Systematic risk management
Monitoring and Reporting
- Setting of appropriate benchmarks in line with portfolio objectives
- Production of quarterly performance and risk analysis reports based on client specifications
- Customized reporting
Rebalancing
- Investment perspective to rebalancing - not simply mechanical
- Quarterly/monthly (or more often) portfolio analysis versus target allocations and ranges
- Notification and trade recommendations
Endowment Management Standards
Objectives - Policy Statement
Briefly state the objectives of the endowment and create a statement of investment policies. The board, in consultation with the institution's administration, should determine the objectives of the endowment and the policies that will guide its management. They should be explained in a written statement and periodically reviewed and updated. A few of the issues that an effective policy statement should address include:
- The role of the endowment in supporting the institution's mission
- The role of the endowment in maintaining a healthy balance sheet
- How much of expendable gifts should be channelled to the endowment as opposed to current spending
- Who should have the responsibility for investment decisions
- Which investment decisions, if any, should be delegated to outside consultants, advisors or investment managers
Spending Policy
Decide how much of the endowment to transfer each year to the operating budget.
In deciding the amount to be transferred from the endowment to the operating budget each year, the board, working with the administration and its counsel, must carefully balance two opposing claims: the current needs of the institution and its constituencies versus the obligation to preserve the endowment for future generations. Withdrawals from endowments, on average, tend to converge at 5.5% of the net asset value of the endowment. Institutions with smaller endowments tend to take a somewhat higher percentage and vice versa. It has been demonstrated that when it comes to spending, less is usually more. Comparing spending rates of 4-7%, for instance, it has been demonstrated that after about 20 years, the lower rate, having allowed for greater capital accumulation, will result in a higher absolute dollar level of payout. Of course, institutions must be mindful of legal spending limits.
Asset Allocation
Determine the optimum balance of the portfolio to achieve the targeted level of return while limiting risk.In seeking the return you need to support payout policy - at an acceptable level of investment risk - you start with your most crucial decision, the balance of the endowment portfolio among the asset classes, a decision that the investment committee should review each year and maintain through rebalancing. As the cornerstone of your institution's investment policy, asset allocation should be based on a planning and decision process that is carried our in systematic, disciplined manner. Today's thinking in asset allocation emphasizes portfolio construction over security selection to achieve a portfolio that optimizes risk and return (factoring in individual institutions' preferences, risk tolerance, objectives and resources).
Manager Selection
Select the right investment specialist for each part of your diversified portfolio.
Investment managers must be studied in depth, not just for past performance, and selected to effect a diversification that will optimize return while limiting overall portfolio risk. Selecting investment specialists has become a specialized skill because there are so many to choose from - from well known "stars" to lesser known, but highly skilled firms. All candidates must be analyzed in depth. Performance data alone can be misleading, especially if it covers less than a five-year period (and past performance has never proven to be a sure indicator of future success). Because of the complexity of the manager selection process, many investment committees retain the assistance of consultants or delegate much of the research to staff, if internal resources are sufficient.
Risk Management
Systematically search for risks in every facet of the investment process. Think of risk as the possibility of failing to meet the board's objectives, and make sure every facet of your endowment management system, internal and external, has built-in disciplines to recognize the risks and promptly neutralize them. Most investors think of risk in terms of losses to their endowment as a result of outcomes in the security markets. However, failures can occur in any part of the investment management process - in operations, custody, legal and regulatory, and accounting. Thus, risk management should be viewed as a specific discipline that pervades every facet of investment management.
Costs
Continue to search for way to improve cost efficiencies. The costs of your investment program can quietly undercut returns; make sure you keep those costs down. Cost control essentially involves three types of activity:
- Diligent investigation of alternative candidates
- Tough negotiation of fees
- Efficient management of the firms managing investments for you
Responsibilities
Define in writing the roles of trustees, staff and consultants. To promote harmony and effectiveness within your investment program, define the roles of trustees, the business or investment officer and staff, and your consultants, in writing, and make sure each understands and agrees. The board should take care to achieve a balance in the composition of its investment committee; ideally, it will include trustees with various backgrounds in business and finance, but also in other fields not directly related to finance and investing so as to benefit from diverse points of view
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