Building a Monumental Endowment - Introit

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Kevin J. Ruth, Tower Hill School (DE)
Timothy R. McIntire, Carney Sandoe & Associates and
Santa Fe Leadership Center
2011 NAIS Annual Conference
Overview
 Opening Remarks
 Fundamentals
 nomenclature
 purity
 governance
 Traditional Model for Endowment Growth
 Layered Model
 Layer One: “Long-Term”
 Layer Two: “AF Added”
 Layer Three: “CF Added”
 Layer Four: “TEP Added”
 Simulations
 Q&A
Fundamentals (1) - Nomenclature
Endowment ≠ Cash Reserves
 Do not confound the two terms
 Cash reserves = 100% liquid; different purpose
 An endowment portfolio may include cash as strategic component
Fundamentals (1) – Nomenclature, continued
PURPOSE OF ENDOWMENT
“Intergenerational Equity”
--James Tobin, “What is permanent endowment income?” American Economic Review 64.2 (1974)
Three Types of Endowment
 Permanent (true) endowment
 Quasi-endowment (board-designated)
 Term endowment (restricted use for limited term)
Fundamentals (1) – Purity and Governance
A Note on Purity
 Suggestion: do not commingle other assets with your endowment
Governance
 Endowment is the board’s business
 Establish separate Investment Committee and Gift Acceptance Committee
 May choose to work with external endowment manager
 May choose to work with large endowment management company
 Pay attention to minimum requirements
 Beware conflict of interest when managing funds (board members)
 Endowment spending policy
 Consult NACUBO (nacubo.org) for guidance on UPMIFA and FASB standards
How do we grow an endowment?
The Traditional Development Model
(Small Shops)
 Annual Fund is main focus
 Gifts for restricted purposes
 Grant proposals
What about endowment?
 “We have so many current needs…”
 “It’s difficult to raise money for endowment…”
 “Hopefully, someone will leave us a bequest…”
The traditional model, by design, relegates endowment to the back-burner.
Current needs are assigned as Priority 1, while future needs tend not to be
assigned a Priority at all.
○INTERGENERATIONAL EQUITY○
○INTENTIONALITY LEADS TO SUSTAINABILITY○
A Note on Sustainability of Small Endowments
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SAMPLE ACADEMY
Endowment corpus: $1.5 million
Annual inflow to endowment: $0 (but hoping for that mega-gift…)
Average return: 6.0%
Management fee: 0.5%
Draw: ???
Let’s do some math…
How much can you afford to draw from your endowment?
(NACUBO-Commonfund 2010 Study: average was 4.5%)
Remember to think like a trustee: intergenerational equity
Answer(s)?
What can we learn from that illustration?
1.
2.
3.
1.
2.
3.
Intergenerational equity = paying attention to inflation
Inflation = diminished returns
Diminished returns = reduced draw capacity
ERGO…
Endowment inflows cannot = $0
Stagnant/no inflows = weak/no draw
Weak/no draw = diminished impact on students and programs
A BETTER ENDOWMENT GROWTH MODEL
 Promotes regular, sizeable inflows to endowment
 Allows for accurate forecasting of sustainable spending over time
 Provides a way to outpace inflation, benefitting students and programs
 Builds on and enhances the traditional model
 Utilizes a well-crafted endowment spending policy
Monumental Endowment Growth Model
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CAVEATS
Must be in financial position to delay gratification
Leadership at all levels must be committed to endowment growth
Full alignment within school community
School alignment with low time preference
How’s your ego?
Our Friend…Benjamin Franklin
1790 – Benjamin Franklin’s will spells out 1,000 Pounds each to the cities of
Philadelphia and Boston (as well as to Commonwealth of Pennsylvania)
Stipulation – money must be invested at 5% interest, and cannot be touched
for 100 years; then withdraw ¾ and use for civic projects. Remaining ¼ is
reinvested for another 100 years.
8th Wonder of the World – compound interest
Result: hundreds of projects funded; trade school in Boston (Benjamin
Franklin Institute of Technology); science and technology museum in
Philadelphia (Franklin Institute); grants still being made
GIFT – Global Investment Foundation for Tomorrow
globalinvestmentfoundation.org
Applying Franklin’s Model to Independent Schools
1 – Compound interest is our friend
2 – Term endowment is our friend
3 – Can be structured around existing endowment
4 – Takes courage, foresight, and stick-to-it management!
How Do We Model It?
Working Investment Allocation
Asset Class
U.S. Lg Cap Eq
U.S. S/M Eq
Int'l Eq
Private Eq
U.S. Core FI
High Yield FI
Real Estate
Cash
Allocation
Min Target Max
0% 20% 80%
0% 20% 60%
0% 20% 40%
0%
0% 40%
0% 10% 80%
0% 10% 20%
0% 10% 40%
0% 10% 100%
Typical Independent School Scenario
Typical Scenario – The Long Term View
Typical Scenario – What If We Didn’t Spend?
Typical Scenario – Recap
Before
After
 $500K initial funds
 $500K initial funds
 Maintain $500K principal
 Maintain $500K principal
 4.5% draw
 No draw
 0.5% management fee
 0.5% management fee
 3.75% inflation
 3.75% inflation
 6.0% return on assets
 6.0% return on assets
RESULT
Rapid depletion
RESULT
$17.4 million
(Real dollars)
We call the “typical scenario” LAYER ONE
The Power of Layering Your Endowment
Long-Term
Layer One
AF Added
CF Added
TEP Added
Layer Two
Layer Three
Layer Four
*Annual Fund
*Class Funds
*Traditional Endowment Program
Layer Two – AF Added
Layer Two - Recap
Layer 1 Only
Layers 1 and 2
 $500K initial funds
 Same assumptions as Layer 1
 Maintain $500K principal
 Added $25,000/year, growing
 No draw
at inflation
 In other words: 10% of $250K
Annual Fund, growing at
inflation
 0.5% management fee
 3.75% inflation
 6.0% return on assets
RESULT
$17.4 million
RESULT
$90.6 million
Layer Three – CF Added (“Super 50” Funds)
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Layer Three is a medium-term endowment strategy
Term endowment
50 years in length = “Super 50 Funds” or “Class Funds”
Class Funds – each graduating class engages in philanthropic effort to
raise $5,000, to be matched 1:1 by trustees, equaling $10K
Development Office uses Class Fund to keep class in touch with school;
in addition to Annual Fund gifts, office asks for gifts to Class Fund
At every 5-year reunion, special solicitation for Class Fund and Annual
Fund
In 50 years’ time, class members will be retiring. They will be close to
your school, thanks to the Class Fund effort over the years. Class votes
how money should be deployed: restricted endowment or unrestricted
endowment.
Layer Three - Perspective
Layer Three - Recap
 $10K initial funds (“Class of 2011” Fund)
 Maintain $10K principal
 $500/year recurring gifts from annual appeal to Class of 2011, over life of
fund
 Reunion year gifts, starting at 10th Reunion, every 5 years; dollar
amount equal to reunion year (i.e., 10th reunion = $10K; 40th = $40K)
 No draw
 0.5% management fee
 3.75% inflation
 6.0% return on assets
RESULT
$388,000
Don’t forget: You’ll follow this formula for every class…it adds up!
You will see the result of “Layer 3: CF Added” in a few minutes
Layer Four – Traditional Endowment Program (TEP)
TEP = meeting current needs through current endowment spending
In many schools, TEP looks something like this:
 We have a modest endowment
 We are spending circa 5.0% per annum
 We sometimes receive bequests, or a family starts a scholarship fund
 Development office is a small shop = focus on Annual Fund and grants
How can we grow our endowment sooner rather than (in addition to!) later?
Layer Four: Simple Steps to “Sooner”
1.
2.
3.
4.
5.
6.
Stop drawing 5% per annum. You can’t afford it.
Be realistic. You won’t grow a mega-endowment in three years!
Use your strength: designate 10% of unrestricted Annual Fund gifts to
unrestricted endowment
Institute a minimal planned giving program that focuses on bequests
only. Identify and close 25 people in five years; start with the current
and past Board.
Plan and launch an endowment campaign that serves to heighten the
community’s awareness of the importance of endowment. Highlight
your long-term endowment strategy, but also highlight need for
current endowment dollars. Planned gifts are encouraged!
Don’t forget that your “Super 50” Class Fund gifts begin to arrive at 50
year mark!
Layer Four – First Scenario
Layer Four – First Scenario - Stats
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Model: Assumptions
Corpus: $1.5 million
Maintain principal
4.5% annual draw
3.75% inflation
6.0% return on investments
0.5% management fee
Model: Inflows to Endowment
 $25K from Annual Fund (10%),
adjusted for inflation
 Planned Gifts: starting in tenth
year (2020), $25K in PG every
five years, adjusted for inflation
 Endowment Campaign: raise
$1.5 million in year five (2015)
 Class Funds enter in 2060
RESULTS
--You lose money for first three years!
--Ending corpus: $31.2 million
Layer Four – Second Scenario at 3.0% Draw
RESULT: $50.3 million
Four Layers – In Full Concert
$49 MM @ 6/30/2108, but $129 MM @ 6/30/2109
Closing Thoughts
 Layered endowment strategy is effective
 Low time-preference is key
 Concerted, focused, long-term effort
 Model allows for multiple variables:
 adjust the draw
 long-term endowment fund: take 1/3 at 25 years, 1/2 at 50 years
 make class funds shorter (target the 25th reunion)
 ramp up development efforts: AF, PG, MG
Q&A
Presentation found at
introit.typepad.com
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