Trustee Investment Strategy for Endowments and Foundations (The Wiley Finance Series)

Trustees are responsible for the stewardship of assets and for implementing the mission of their endowment or foundation. Almost invariably trustees delegate the management of those assets to agents who are investment professionals. In this increasingly sophisticated and litigious financial world there can be a growing gap of comprehension, exacerbated by mathematics and jargon, between trustees who are responsible and agents who are accountable. This book aims to fill that gap. The book draws on the author's own experience and research and that of generations of investment professionals and academics to explain the fundamentals of investment strategy. Key features are therefore: Foreword by George Keane (founder and former president of Commonfund, won the first ever Lifetime Achievement Award from Foundation & Endowment Money Management) one of the icons of endowment fund management in the US Aimed at professional trustees An holistic approach to strategy Avoidance of jargon and mathematics Focus on principles underlying asset strategy Trustee Investment Strategy for Endowments and Foundations......Page 4 Contents......Page 8 Foreword......Page 12 Preface......Page 14 Acknowledgments......Page 20 1 Introduction......Page 22 1.1 Endowment fund characteristics......Page 23 1.2 Constraints on endowments......Page 25 1.3 History rhymes......Page 27 1.4 The US endowment experience......Page 29 1.5 Structure of the book......Page 33 2.1 Economic return......Page 38 2.2 Investment return......Page 39 2.3 ‘Other income’ not return......Page 41 2.4 Income, capital and ‘total return’......Page 42 2.5 Real and nominal return......Page 44 2.6 Absolute and relative return......Page 47 2.7 Arithmetic and geometric return......Page 49 2.8 Time-weighted return and money-weighted return......Page 52 3.1 Deriving return......Page 56 3.2 Risk-free return......Page 58 3.3 Premium for risk......Page 59 3.4 Equity risk premium......Page 62 3.5 The eighth wonder of the world......Page 64 3.6 Valuation change......Page 65 3.7 Drivers of return......Page 69 3.8 Scenario analysis......Page 70 4.1 Description of risk......Page 74 4.2 Pascal’s Wager......Page 75 4.3 Chance......Page 77 4.4 Co-movement and common factors......Page 79 4.5 The Greek alphabet......Page 83 4.6 Confidence......Page 84 4.7 Consequences......Page 85 4.8 Endowment fund risk......Page 86 5.1 The endowment dilemma......Page 90 5.2 Micawber’s rule......Page 92 5.3 Pattern of flows......Page 94 5.4 More scenario analysis......Page 96 5.5 Determining an operating rule......Page 97 6.1 Back to the future......Page 100 6.2 Investment approach......Page 102 6.3 Classification of assets......Page 103 6.3.1 Operational assets......Page 105 6.3.2 Intergenerational assets......Page 106 6.4 Asset categories......Page 107 6.4.1 Cash......Page 108 6.4.2 Short-dated and intermediate-term bonds......Page 109 6.4.3 Long-dated bonds......Page 110 6.4.4 High-yield bonds......Page 111 6.4.5 Inflation-indexed bonds......Page 112 6.4.6 Convertible bonds......Page 113 6.5 Equities......Page 114 6.6 Private equity......Page 116 6.7 Real estate......Page 117 6.8 Commodities......Page 119 6.9 Hedge funds......Page 120 7.1 Quis custodiet ipses custodies?......Page 124 7.3 Extra-financial issues......Page 127 7.4 Corporate governance......Page 128 7.5 Corporate social responsibility......Page 130 7.6 Socially responsible investment......Page 132 7.7 Program-related investment......Page 134 7.8 Global view......Page 135 7.9 Reality check......Page 136 8 Understanding Strategy......Page 138 8.1 Resource assessment......Page 139 8.2 Defining needs......Page 140 8.3 Quantifying needs......Page 143 8.4 Spending rule......Page 144 8.5 Operational assets......Page 145 8.6 Intergenerational assets......Page 147 8.7 Review......Page 155 9.1 Investment policy statement......Page 158 9.2 Trustees of an endowment......Page 160 9.3 Investment committee......Page 162 9.4 Investment staff......Page 165 9.5 Risk tolerance and control......Page 167 9.6 Operational asset management......Page 168 9.7 Intergenerational asset allocation......Page 169 9.8 Benchmarks and performance......Page 171 9.9 Consultants......Page 173 9.10 Selection of asset managers......Page 174 9.11 Costs......Page 177 9.12 Custody......Page 180 10 Synopsis......Page 182 References and Reading Matter......Page 186 Glossary......Page 192 Index......Page 242 "In this increasingly sophisticated and litigious financial world there can be a growing gap of comprehension, exacerbated by mathematics and jargon, between trustees who are responsible and agents who are accountable. This book aims to fill that gap. The book draws on the author's own experience and research and that of generations of investment professionals and academics to explain the fundamentals of investment strategy."--Jacket