Alternative Investments. Black Keith H.
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Название: Alternative Investments
Автор: Black Keith H.
Издательство: Автор
Жанр: Зарубежная образовательная литература
isbn: 9781119016380
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Foundations are similar to endowments but tend to differ in a number of ways: (1) foundations are grant-making institutions, whereas endowments tend to be funds established by educational, health-care, or religious organizations; (2) foundations tend to be finite lived, whereas endowments tend to be perpetual; (3) foundations are more subject to minimum spending requirements; and (4) foundations are less likely to be funded from ongoing donations.
Foundations located in the United States have even greater assets than college and university endowments. At the end of 2012, the Foundation Center estimated that U.S. foundations controlled more than $715 billion in assets, the vast majority of which were held by independent, individual, and family foundations (see Exhibit 3.2). The Foundation Center estimates that 22 % of the grants made by the top 1,000 foundations in 2012 were awarded to educational charities, 38 % to health and human services, 10 % to arts and cultural programs, 7 % to the environment and animals, and the remaining 23 % to charities with various other purposes.
There are a number of different structures for foundations (see Exhibit 3.3). Some are similar to endowments, whereas others differ notably. Operating foundations have the greatest similarity to endowments, as the income generated by an endowment is used to fund the operations of the charitable organization. Some of the largest operating foundations are sponsored by global pharmaceutical companies with the goal of distributing medicine to patients who cannot afford to purchase these lifesaving remedies.
EXHIBIT 3.2 Assets of the Largest U.S. Foundations
Source: The Foundation Center, 2014.
Community foundations are based in a specific geographical area, concentrating the charitable giving of the region's residents. The gifts and investment returns received by the community foundation are distributed in the form of grants to other charities in the community. In contrast to endowments and operating foundations, community foundations do not operate their own programs. A single community foundation may partially fund the operations of dozens of charities within a specific region, typically making grants to organizations with a variety of purposes.
Corporate foundations are sponsored by corporations, with gifts provided by the corporation and its employees. Like community foundations, corporate foundations frequently concentrate their financial donations to charities located in the communities where the firm has the greatest number of employees or customers.
Unlike endowments, many foundations find it difficult to survive in perpetuity. In fact, some foundations are designed to last for only a designated period of time. The ability of endowments, operating foundations, and community foundations to solicit gifts greatly increases the probability of the organization's assets lasting into perpetuity.
Most independent foundations are funded by an individual or a family. These foundations may be founded by a single gift, often by the senior executive of a large corporation who donates wealth in the form of stock. Donating stock to any charity may provide significant tax benefits. The charitable donation may be tax deductible at the current market value, while capital gains on the appreciated stock position are eliminated for tax purposes by the donation. When tax law allows for this structure, the donors reduce their tax burden in two ways: (1) from the forgiven capital gains taxes on the stock's appreciation, and (2) from the tax deduction on the current market value of the charitable donation.
EXHIBIT 3.3 Assets, Gifts, and Giving at U.S. Foundations ($ billion)
Source: The Foundation Center, 2014.
Independent foundations may present an exceptional challenge for a portfolio manager. First, the wealth of the foundation is often concentrated in a single stock, which increases the idiosyncratic risk of the portfolio. Maintaining this undiversified portfolio can lead to spectacular wealth or gut-wrenching drawdowns, so foundations may wish to reduce the size of the single stock position either rapidly or on a specific schedule. Second, independent foundations do not typically receive gifts from external donors. Once the foundation has been established by the individual or the family donation, many independent foundations do not receive subsequent gifts.
3.2 Intergenerational Equity, Inflation, and Spending Challenges
James Tobin stated that the key task in managing an endowment is to preserve equity among generations. The investment goal of an endowment manager should be to maintain intergenerational equity, balancing the need for spending on the current generation of beneficiaries with the goal of maintaining a perpetual pool of assets that can fund the operations of the organization to benefit future generations. Stated quantitatively, intergenerational equity may be expressed by a 50 % probability of maintaining the real, or inflation-adjusted, value of the endowment in perpetuity. When the probability of the endowment surviving perpetually is low, such as 25 %, the current generation has an advantage due to the high spending rate of the endowment. Conversely, a high probability of perpetuity, such as 75 %, gives an advantage to future generations, as the endowment would likely survive indefinitely even if the current rate of spending were increased.
The challenge of the endowment manager is to maintain the long-term, inflation-adjusted value of the endowment's corpus, or principal value. The value of the endowment is constantly changing: growing with gifts, falling with spending to fund the organization's mission, and changing with the net returns to the investment portfolio. External forces can also impact the assets and spending of an institution, as gifts, research grants, and governmental funding may change substantially from one year to the next:
In fiscal year 2014, NACUBO estimated that the average endowment spent 4.4 % of assets, with endowments having assets either above $1 billion or below $25 million spending at an average rate of 4.6 %. Although endowment spending funded 10.5 % of the budget of the average university, 35 % of the budgets of Harvard and Yale were recently funded by endowment spending. In contrast to endowments, which typically have flexibility in their spending rate (which is the fraction of asset value spent each year), U.S. law requires that foundations spend a minimum of 5 % per year on operating expenses and charitable activities. Should charitable contributions received by endowments and foundations decline during times of weak investment returns or rising inflation, the real value of an endowment can fall substantially in a short period of time. Given that foundations have a minimum spending requirement of 5 %, while endowments have flexibility in their spending rate, it is easier for endowments to operate in perpetuity than it is for foundations to do so. This is because endowments can reduce their spending rate below 5 % of the endowment value during times of crisis.
EXHIBIT 3.4 Returns of North American University Endowments
Source: Bloomberg, 2014 NACUBO-Commonfund Study of Endowments.
For an endowment or a foundation to last in perpetuity and provide grants of growing value to its beneficiaries, the returns to its portfolio must exceed the rate of inflation by a wide margin. Exhibit 3.4 shows that the Consumer Price Index (CPI) measure of inflation rose by an annual average of 2.3 % in the 10 years ending June 2014. (As of January 2015, the CPI was weighted 32.7 % on housing prices, 12.4 % on medical and educational expenditures, 22.3 % on commodities, and 32.6 % on other goods and services.) During the same 10-year period, the Higher Education Price Index (HEPI), a measure of price inflation most relevant to U.S. colleges and universities, rose by an annual average of 3.3 %. Salaries СКАЧАТЬ