Wk5 Flashcards
Endowment vs Foundation
What is an endowment and where do you see an endowment fund?
An endowment is a fund, often established by a foundation or institution, that is invested to generate income over time. The principal amount of the endowment is generally preserved, while the investment income is used to support the organization’s ongoing operations, programs, or specific projects. Endowments provide a long-term financial foundation to ensure sustainability and support for the organization’s goals. Helps generate income for an organisation.
for ex. educational institutions such as colleges and universities, common example as chaired professor of a course at uni, museums, cultural institutions, hospitals, art galleries, scholarships and major gifts
What is a foundation?
A foundation is a non-profit organization established to provide financial support for charitable activities, grants, or initiatives. Foundations can be private, funded by an individual or family, or public, supported by donations from the public. They typically operate with a mission to support specific causes or sectors, such as education, health, or the arts.
What are some types of endowments?
- Unrestricted (fairly rare)
- Term (where principle can only be accessed after some kind of limit)
- Structured (bespoke with some conditionality)
- Restricted (most common) where income is available for the underlying purpose, but principal is not ever spent
- Dependency ratio: measures the proportion of an organization’s budget or financial needs that is met by endowment income compared to other revenue sources.
- What becomes clear from the nature of endowments and foundations in relation to investment style ?
- Are these funds risk averse ?
Investment Style: Endowments and foundations often adopt a conservative investment style focused on long-term stability and income generation to support their ongoing operations and goals.
Risk Aversion: These funds are generally risk-averse due to the need for capital preservation and consistent income, though they may still invest in a diversified range of assets.
- Does only being able to access income make capital preservation a different dynamic ?
- What about ESG ? Is this a more important dynamic for these types of institutions
Capital Preservation: With income being the primary accessible resource, capital preservation becomes crucial. The focus is on maintaining the principal to ensure sustainable support over the long term.
ESG Considerations: ESG factors are increasingly significant, as many endowments and foundations incorporate environmental, social, and governance criteria into their investment strategies to align with their values and mission.
What is absolute return investing?
What is impact investing?
Absolute return investing targets positive returns regardless of market performance by employing various strategies such as long/short equity, arbitrage, and derivatives. This approach is designed to achieve returns independent of market indices, focusing on generating profit in both rising and falling markets.
Impact investing aims to generate measurable social or environmental benefits alongside financial returns. It involves investing in ventures or projects that address issues like climate change, poverty, or healthcare while seeking to deliver competitive financial gains. Impact investors prioritize both the positive impact and financial performance of their investments.
What are the investment objectives? Who does the Yale Endowment support?
What is the primary objective of the Yale Endowment?
Is it maximization of return?
A: Investment objectives typically include:
Capital Preservation: Protecting the original investment amount.
Income Generation: Providing a steady income stream.
Capital Appreciation: Growing the investment’s value over time.
Liquidity: Ensuring access to funds when needed.
Risk Management: Balancing risk to achieve desired returns.
A: The Yale Endowment supports Yale University, funding educational programs, research, faculty salaries, and campus development.
A: The primary objective of the Yale Endowment is to achieve high long-term returns with a focus on alternative asset classes rather than solely maximizing short-term returns.
Q: How would you compare the investment models of Harvard, MIT, and Yale Endowments? Discuss their investment model vs investment strategy.
Harvard’s investment model: Harvard uses a hybrid model driven by mean-variance analysis, employing both internal and external managers.
Harvard’s investment strategy: Harvard balances various asset classes to optimize returns and manage risk.
MIT’s investment model: A: MIT follows a value investing approach, focusing on selecting top-performing managers rather than specific asset classes.
What is MIT’s investment strategy: MIT emphasizes finding high-quality investment managers.
Yale’s investment model: Yale manages fixed income internally and uses external managers for other asset classes.
Yale’s asset allocation: Yale has only 16% of its portfolio in traditional asset classes, with the majority invested in alternative investments.
Yale’s investment strategy: A: Yale seeks high returns through significant exposure to non-traditional investments.
What does a traditional asset allocation model contain? What is the most important decision Lan can make in this model? Is it strategic asset allocation?
- Diversification - achieved through investing in multiple asset classes
- Equities - empirically these provide a long-term risk premium (literally, the equity risk premium)
- Asset class silos - separation of management skills
- Alpha and beta separation
- Active management (is supposed to) add alpha
- Alpha can be diversified by using multiple active managers
Yes, the most important decision is strategic asset allocation, which involves determining the optimal mix of asset classes to achieve long-term investment goals while managing risk. This decision sets the foundation for the overall investment strategy and influences both risk and return outcomes.
What is the standard endowment ‘recipe’?
Asset Allocation: Diversify investments across various asset classes; benchmarks can be local or offshore.
Liquidity vs. Illiquidity: Manage liquidity needs considering the high dependency ratio on income.
Managers: Decide between using external managers or building an internal team.
Real Estate: Assess relevance based on regional factors (e.g., importance in India).
Time Horizons: Focus on long-term investment goals.
Risk Concentration: Manage risks including sovereign, country, and currency risks.
What is this ‘mean variance’ and can it predict the future?
A framework for optimizing asset allocation based on long-term assumptions about risk, return, and correlation among different asset classes. It defines a set of optimal portfolios that offer the maximum expected return for a given level of risk, or the minimum risk for a desired return. Involves testing historical data to evaluate how well the model performs. Mean-variance analysis relies on historical data and assumptions, so while it provides valuable insights, it cannot accurately predict future market conditions.
What determines portfolio performance? Based on academic insight…
Brinson, Hood & Beebower (1991), highlights key factors influencing portfolio performance:
91%: Strategic Asset Allocation - The choice of asset classes and their proportions in the portfolio.
5%: Manager Selection - The impact of choosing specific fund managers.
2%: Asset Class Timing - Timing decisions for entering or exiting asset classes.
2%: Unexplained - Factors not accounted for by the above components.
What is the Yale model?
The Yale Model refers to the investment strategy developed and implemented by David Swensen, the Chief Investment Officer at Yale University. Been influential in shaping the endowment investment strategies. The model focuses on the following key principles:
Diversification: Emphasizes a highly diversified portfolio across various asset classes, including equities, fixed income, real estate, private equity, and hedge funds, to reduce risk and achieve higher returns.
Alternative Investments: Advocates for a significant allocation to alternative investments (e.g., private equity, hedge funds) to capture higher returns and reduce correlation with traditional asset classes like stocks and bonds.
Long-Term Horizon: Targets long-term investment horizons and illiquid assets to achieve superior returns, leveraging the university’s endowment’s ability to commit capital for extended periods.
Active Management: Employs active management strategies to identify and capitalize on investment opportunities, rather than relying solely on passive investment approaches.
Risk Management: Focuses on understanding and managing risk by diversifying investments and carefully selecting asset managers.
