In order to meet their target return objective, many organizations allocate a significant portion of their endowment portfolios to higher-risk/higher-return equity asset classes. The volatile nature of these asset classes may lead to fluctuations in endowment spending from one year to the next. Organizations have several levers they can pull when looking to maintain, grow, and generate income from a portfolio, though the level of control they have varies across levers.
|Lever||Degree of Control|
|Fees and Expenses||Full|
|Spending Rate & Methodology||Full|
Ultimately, fiduciaries must decide what is most important to them as they pursue their mission. Is the priority maximizing the total amount available to spend, increasing the portfolio’s market value, or minimizing the spending variation year to year?
The methodology an organization uses to determine its endowment spending can help mitigate the impact of the volatility. Three methodologies the calculator examines are:
|Moving Average||Spend a fixed percentage of the average market value over a set time period.|
|Constant Growth CPI||Increase spending each year by the rate of inflation.|
|Geometric||Weight given to inflation-adjusted spending and target spending of market value.|
The output offers insight into total spent, volatility of spending, and ending market value based on the different ways of calculating spending applied to 20 years of historical performance data.
To begin, enter a starting value for your hypothetical portfolio, set a spending rate, and customize the asset allocation.
Complete the form below to create a report that can be saved and printed. You may reset the calculator to test additional inputs.