developing an effective spending policy & sustainability - Philanthropy ...
9/26/2016
CAPITAL MARKETS OVERVIEW DEVELOPING AN
EFFECTIVE SPENDING POLICY & SUSTAINABILITY
October 26, 2016 W. Quincy Brown, Vice President
WHY DO WE CARE ABOUT SPENDING POLICY?
•
Subtle change can have a major impact on the value of your portfolio and meeting your mission
•
Fiduciary responsibility
•
Balance the needs of today with those of the future
•
It is something we have control over
2
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
SPENDING POLICY CONSIDERATIONS ENTERPRISE MANAGEMENT
Spending Policy
Governance/ Structure
Foundation & Development Support
MISSION
Foundation Support of Budgets
Foundation Management
©2016 Fund Evaluation Group, LLC
3
Confidential. Not for Redistribution.
1
9/26/2016
FEG‐CF SURVEY: SPENDING DISTRIBUTIONS OPERATING BUDGET % SUPPORTED BY FOUNDATION DISTRIBUTIONS 40
Number of Responses
35 30 25 Average – 24% 20
Median – 7%
38
15 10
17
5 6
7
6
50% ‐ 74%
75% ‐ 99%
100%
6 0 0%
1% ‐ 24%
25% ‐ 49%
Percent of Budget Source: FEG 2016 Community Foundation Survey 1 Answers were grouped into ranges.
N= 80 4
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
CONSIDERATIONS FOR COMMUNITY FOUNDATIONS TOPICS ORDER OF IMPORTANCE CATEGORY
VERY IMPORTANT
TOP TWO1
Asset Allocation
84%
99%
Spending Policy
77%
96%
Donor Advised Funds
66%
91%
Fundraising
55%
83%
Rebalancing
38%
90%
PRI / MRI
11%
22%
ESG / SRI
2%
18%
Source: FEG 2016 Community Foundation Survey Asset Allocation N=86; Spending Policy N=86; Donor Advised Funds N=53; Fundraising N=88; Rebalancing N=88; PRI/MRI N=88; ESG/SRI N=77 1 Top two includes if a participant selected Very Important or Important ©2016 Fund Evaluation Group, LLC
5
Confidential. Not for Redistribution.
FEG‐CF SURVEY: NOT A LOT OF CHANGE DID YOUR ORGANIZATION CHANGE THE SPENDING POLICY IN THE PAST THREE YEARS?
For those that changed the spending policy,~60% reduced spending The remaining ~40% changed calculation method or increased fees
N= 87
Source: FEG 2016 Community Foundation Survey ©2016 Fund Evaluation Group, LLC
6
Confidential. Not for Redistribution.
2
9/26/2016
FEG‐CF SURVEY: FUTURE CHANGES? DO YOU FORESEE CHANGING YOUR SPENDING POLICY IN THE NEAR FUTURE?
~75% said they plan to reduce the spending rate; ~5% plan to increase
No 75%
Yes 25%
What is prompting the future change?1 • • • •
Performance Returns Lowered Projected Returns Ability to Attain Targets / Hurdle Rate Volatile Market Conditions
Source: FEG 2016 Community Foundation Survey 1 Answers were grouped
N= 85 7
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
SPENDING IS ONLY PART OF THE EQUATION Long‐Term Return > Target Spending Rate + Administrative Costs + Inflation
4.5% + 1.5% + 2.0% = 8.0% Spending Fees Inflation Primary Objective
CONSIDERATIONS • Spending needs should not unduly influence asset allocation decisions • Higher spending needs could lead to overly aggressive asset allocation • Lower spending needs could lead to overly conservative asset allocation
8
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
SPENDING AND ASSET ALLOCATION POLICY SHOULD ALIGN RETURNS VS. OBJECTIVE 65/35 Equity/Bond Portfolio, 10‐Year Rolling Return 18%
65/35 achieved an 8% return ~54% of the time
16% 14% 12% 10% 8% 6% 4% 2% 0% 1935
1945
1955
1965
1975
1985
1995
2005
2015
Data Sources: Ibbotson Associates and Lipper; Data as of 12/31/2015. ©2016 Fund Evaluation Group, LLC
9
Confidential. Not for Redistribution.
3
9/26/2016
2016 FEG 10‐YEAR (STRATEGIC) CAPITAL MARKET ASSUMPTIONS FEG 10‐YEAR CAPITAL MARKET ASSUMPTIONS 12% Private Equity
MLPs
10%
Expected Return
Emerging Markets
8% High Yield Diversifying Strategies
6% 4%
Public Real Estate U.S. Equity
Commodities
Global Hedged Equity
Core (Investment Grade)
2%
Large Cap Developed
U.S. Inflation
0% 0%
5%
10%
15% 20% 25% Expected Standard Deviation
30%
35%
40%
Source: FEG Data as of 12/31/2015. FEG Capital Market Assumptions are hypothetical based on asset category. Please refer to the Appendix for full disclosures. 10
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
LOWERING SPENDING RATE AVERAGE ANNUAL EFFECTIVE SPENDING RATE 2006‐2014
Higher Education
Community Foundations
7.0% 6.4%
6.5% 6.0%
5.9%
6.5% 5.9%
6.1%
5.5%
5.5% 5.0% 4.5%
4.6% 4.7%
4.6%
4.0%
4.3%
4.4%
4.5%
2008
2009
2010
4.8% 4.9% 4.2%
4.8% 4.4%
4.4%
2013
2014
3.5% 2006
2007
2011
2012
Data Source: NACUBO‐Commonfund Study of Endowments 2014; 2014 Council on Foundations – Commonfund Study of Investment of Endowments for Private and Community Foundations 11
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
FEG‐CF SURVEY: SPENDING POLICIES A BACTRIAN CAMEL SPENDING POLICY RATE1 30
Number of Responses
25
20 Average – 4.5% Median – 4.5%
15
30
25 10
12
5
4
2
0
CAPITAL MARKETS OVERVIEW DEVELOPING AN
EFFECTIVE SPENDING POLICY & SUSTAINABILITY
October 26, 2016 W. Quincy Brown, Vice President
WHY DO WE CARE ABOUT SPENDING POLICY?
•
Subtle change can have a major impact on the value of your portfolio and meeting your mission
•
Fiduciary responsibility
•
Balance the needs of today with those of the future
•
It is something we have control over
2
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
SPENDING POLICY CONSIDERATIONS ENTERPRISE MANAGEMENT
Spending Policy
Governance/ Structure
Foundation & Development Support
MISSION
Foundation Support of Budgets
Foundation Management
©2016 Fund Evaluation Group, LLC
3
Confidential. Not for Redistribution.
1
9/26/2016
FEG‐CF SURVEY: SPENDING DISTRIBUTIONS OPERATING BUDGET % SUPPORTED BY FOUNDATION DISTRIBUTIONS 40
Number of Responses
35 30 25 Average – 24% 20
Median – 7%
38
15 10
17
5 6
7
6
50% ‐ 74%
75% ‐ 99%
100%
6 0 0%
1% ‐ 24%
25% ‐ 49%
Percent of Budget Source: FEG 2016 Community Foundation Survey 1 Answers were grouped into ranges.
N= 80 4
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
CONSIDERATIONS FOR COMMUNITY FOUNDATIONS TOPICS ORDER OF IMPORTANCE CATEGORY
VERY IMPORTANT
TOP TWO1
Asset Allocation
84%
99%
Spending Policy
77%
96%
Donor Advised Funds
66%
91%
Fundraising
55%
83%
Rebalancing
38%
90%
PRI / MRI
11%
22%
ESG / SRI
2%
18%
Source: FEG 2016 Community Foundation Survey Asset Allocation N=86; Spending Policy N=86; Donor Advised Funds N=53; Fundraising N=88; Rebalancing N=88; PRI/MRI N=88; ESG/SRI N=77 1 Top two includes if a participant selected Very Important or Important ©2016 Fund Evaluation Group, LLC
5
Confidential. Not for Redistribution.
FEG‐CF SURVEY: NOT A LOT OF CHANGE DID YOUR ORGANIZATION CHANGE THE SPENDING POLICY IN THE PAST THREE YEARS?
For those that changed the spending policy,~60% reduced spending The remaining ~40% changed calculation method or increased fees
N= 87
Source: FEG 2016 Community Foundation Survey ©2016 Fund Evaluation Group, LLC
6
Confidential. Not for Redistribution.
2
9/26/2016
FEG‐CF SURVEY: FUTURE CHANGES? DO YOU FORESEE CHANGING YOUR SPENDING POLICY IN THE NEAR FUTURE?
~75% said they plan to reduce the spending rate; ~5% plan to increase
No 75%
Yes 25%
What is prompting the future change?1 • • • •
Performance Returns Lowered Projected Returns Ability to Attain Targets / Hurdle Rate Volatile Market Conditions
Source: FEG 2016 Community Foundation Survey 1 Answers were grouped
N= 85 7
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
SPENDING IS ONLY PART OF THE EQUATION Long‐Term Return > Target Spending Rate + Administrative Costs + Inflation
4.5% + 1.5% + 2.0% = 8.0% Spending Fees Inflation Primary Objective
CONSIDERATIONS • Spending needs should not unduly influence asset allocation decisions • Higher spending needs could lead to overly aggressive asset allocation • Lower spending needs could lead to overly conservative asset allocation
8
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
SPENDING AND ASSET ALLOCATION POLICY SHOULD ALIGN RETURNS VS. OBJECTIVE 65/35 Equity/Bond Portfolio, 10‐Year Rolling Return 18%
65/35 achieved an 8% return ~54% of the time
16% 14% 12% 10% 8% 6% 4% 2% 0% 1935
1945
1955
1965
1975
1985
1995
2005
2015
Data Sources: Ibbotson Associates and Lipper; Data as of 12/31/2015. ©2016 Fund Evaluation Group, LLC
9
Confidential. Not for Redistribution.
3
9/26/2016
2016 FEG 10‐YEAR (STRATEGIC) CAPITAL MARKET ASSUMPTIONS FEG 10‐YEAR CAPITAL MARKET ASSUMPTIONS 12% Private Equity
MLPs
10%
Expected Return
Emerging Markets
8% High Yield Diversifying Strategies
6% 4%
Public Real Estate U.S. Equity
Commodities
Global Hedged Equity
Core (Investment Grade)
2%
Large Cap Developed
U.S. Inflation
0% 0%
5%
10%
15% 20% 25% Expected Standard Deviation
30%
35%
40%
Source: FEG Data as of 12/31/2015. FEG Capital Market Assumptions are hypothetical based on asset category. Please refer to the Appendix for full disclosures. 10
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
LOWERING SPENDING RATE AVERAGE ANNUAL EFFECTIVE SPENDING RATE 2006‐2014
Higher Education
Community Foundations
7.0% 6.4%
6.5% 6.0%
5.9%
6.5% 5.9%
6.1%
5.5%
5.5% 5.0% 4.5%
4.6% 4.7%
4.6%
4.0%
4.3%
4.4%
4.5%
2008
2009
2010
4.8% 4.9% 4.2%
4.8% 4.4%
4.4%
2013
2014
3.5% 2006
2007
2011
2012
Data Source: NACUBO‐Commonfund Study of Endowments 2014; 2014 Council on Foundations – Commonfund Study of Investment of Endowments for Private and Community Foundations 11
©2016 Fund Evaluation Group, LLC
Confidential. Not for Redistribution.
FEG‐CF SURVEY: SPENDING POLICIES A BACTRIAN CAMEL SPENDING POLICY RATE1 30
Number of Responses
25
20 Average – 4.5% Median – 4.5%
15
30
25 10
12
5
4
2
0
