Spending Policy Forum 2013 JFNA Investment Institute Palm Beach Gardens, Florida Policy Development Example | Spending Policy Approaches Approach Description Traditional Pre-specified percentage of moving average of market value – typically 5% of a three year moving average of beginning market values Inflation Based Increase spending each year based on rate of inflation Income Based Spend all current income Banded Inflation Last year’s spending plus an inflation rate, but bound by ranges, e.g. – no more than 6.5% nor less than 3.5% Spending Reserve Segregation of 5-10% of market value in separate account, invested in 90 day treasury bills. Reserve is drawn down when endowment performance is less than policy target Stabilization Fund A fund created from endowment returns in excess of the target spending rate which is used to control the long run growth of the total endowment. The stabilization fund is invested alongside the endowment, but with a different (higher) spending rate. “Yale Rule” The amount released under the spending rule is based on a weighted average of prior spending adjusted for inflation (80 percent weight) and the amount that would have been spent using 5 percent of current Endowment market value (20 percent weight). “Stanford Rule” 2 February 12, 2013 The calculation is an average weighted 60% on the actual payout from the current year and 40% on the target payout rate. This policy results in a “smoothing” of the payout amount, and it is designed to cushion the university from swings in the yearly endowment value due to market fluctuations. 2013 JFNA Investment Institute | Palm Beach Gardens, FL Effective Spending Rate By Fiscal Year Education Foundations Spending Rate (%) Operating Charities 5.9% 5.8% 5.8% 5.6% 5.5% 5.5% 5.5% 5.5% 5.5% 5.1% 4.7% 5.1% 4.9% 4.8% 4.7% 4.6% 4.6% 4.4% 4.3% FY 2005 FY 2006 FY 2007 FY 2008 4.6% 4.5% FY 2009 FY 2010 4.2% FY 2011 FY 2012 NOTE: All performance information reflects net total returns. Fiscal year end for the majority of educational institutions is June 30th. For the foundations and operating charities sectors fiscal year end is typically December 31st. Information for educational endowments is drawn from the NACUBOCommonfund Study of Endowments. Information for other sectors is drawn from the Benchmarks Study for the respective sectors. Copyright 2013 The Common Fund for Nonprofit Organizations and the National Association of College and University Business Officers. All rights reserved. 3 February 12, 2013 2013 JFNA Investment Institute | Palm Beach Gardens, FL Spending Policy Educational Endowments Foundations Top Quartile Total Top Quartile Total Top Quartile 66% 47% 42% 72% 50% 8% 6% 5% 6% 6% 4.7% 5.1% 5.1% 5.1% 5.0% 11% 14% 20% 19% 19% 25% * 0% 1% 0% 3% 0% 4% 6% 6% 12% 1% 0% 4.7% 5.0% 4.9% 1.0% * Total Percentage of a moving average 75% Spend all current income 4% Average percentage 4.7% Decide on an appropriate rate each year Grow distribution at a predetermined inflation rate Spend a pre-specified percentage of beginning market rate Operating Charities Average pre-specified percentage spent 4.8% Last year's spending plus inflation with upper and lower bands 4% 5% 1% 2% 6% 6% Weighted average or hybrid method (Yale/Stanford Rule) 7% 8% 2% 2% 9% 13% * * 50% 56% 0% 0% 8% 11% 9% 12% 9% 6% Meet IRS minimum of 5 percent Other * Less than 1 percent, results not meaningful or not applicable. NOTE: All performance information reflects net total returns. Fiscal year end for the majority of educational institutions is June 30th. For the foundations, operating charities and healthcare sectors fiscal year end is typically December 31st. Information for educational endowments is drawn from the NACUBO-Commonfund Study of Endowments. Information for other sectors is drawn from the Benchmarks Study for the respective sectors. Copyright 2013 The Common Fund for Nonprofit Organizations and the National Association of College and University Business Officers. All rights reserved. 4 February 12, 2013 2013 JFNA Investment Institute | Palm Beach Gardens, FL Important Notes | Market Commentary Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-todate, market or economic conditions. 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In addition, you are not permitted to alter, obscure, or remove any copyright, trademark or any other notices that are provided to you in connection with this presentation 6 February 12, 2013 2013 JFNA Investment Institute | Palm Beach Gardens, FL Controlled Growth Distribution Policy • Jewish Federation of Metropolitan Chicago Unrestricted Endowment Distribution Policy o Target distribution = 2.5% more than prior year o Adjustments will be made to ensure that … • … distribution equals 4% to 7% of assets … • … this notwithstanding, year-over-year change must fall within range of +8% to –4% o Additional risk controls: • No increase – in dollars or as % of assets – allowed in year following a distribution cut CGDP Flowchart Under “normal” conditions … For existing endowments baseline is previous year’s distribution For new endowments baseline is set at 5.5% of assets … distribute 2.5% more than previous year as long as distribution falls within 4-7% of assets If the normal increase would cause the distribution to fall above or below 4-7% of assets … … raise distribution to 4% of assets, unless: … reduce distribution to 7% of assets, unless: If distributing 4% of assets would require raising the distribution by +8% or more from the prior year … … increase distribution by +8% above previous year … that the distribution cannot go up (in dollars or % of assets) in any year following a cut If distributing 7% of assets would require cutting the distribution by -4% or more from the prior year … Subject to the requirement … … reduce distribution by -4% below previous year … CGDP Objectives • Greatly improve payout consistency o Budget focused distribution policy based on dollar amount, not percentage o Greatly reduced market dependence – eliminates “feast or famine” reliance on market performance o Distributions grow steadily in real terms - targeted annual increases with limits o Limits frequency and severity of distribution cuts • Balance tensions between long- and short-term objectives o Growing endowment assets is a long-term process o Managing budgetary needs is a short-term process • Key Benefits: o More predictable distributions o Less year-to-year variability o Endowment assets growing in real terms rather than shrinking o Larger distributions over very long run Joseph in Egypt Revisited Navigating Fat Years and Lean Years Pro Forma Distributions and Assets 5% Moving Average vs. CGDP (Hypothetical 60/40 Portfolio) $250 $10 $9 $8 $150 $6 $5 $100 $4 $3 $50 $2 $1 MovAve Distribution CGDP Distribution MovAve Assets CGDP Assets 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 $0 1980 $0 1979 Assets ($million) $7 Distribution ($million) $200 ‘Steady State’ (Smooth Spend-Down) Endowment Outlays Barriers to ‘Replacement’ Funding ‘Branding’ Lack of Alternatives Grantee Dependency ‘Big Finish’ (Large Terminal Grants) Endowment Outlays ‘Big Start’ (Major Initial Grants) Endowment Outlays From the Beginning, Think About Ending Can the Mission Be Completed? If Not, Can It Be Carried On When You’re Gone? What Resources Will You Need at the End to Ensure Success?