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.Endowment investment policy deals with issues related to how the invest-ments are made, and spending policy addresses how much of the endowmentincome or return can be spent to support programs on an annual basis.Spendingpolicy deals with issues such as:" How should the current needs of the institution be weighed against itsfuture needs?" How much of the return from endowment funds should be spent and howmuch saved?Examples of spending policy rates are:" Spend income only.Spend only the current income (dividends and interest)earned on the endowed investment." Spend total return.The total return of a portfolio is the combination ofinterest, dividends, and other current earnings, plus capital appreciation 370 Ch.8 Investing Principles and Procedures for Endowment, Self-Insurance, and Pensions(or less capital depreciation) for the period.Thus, a fund utilizing thetotal-return approach may spend not only current investment income butalso may use a portion of capital appreciation over time as part of itsspending rate.(a) ENDOWMENT INVESTMENT STRATEGY: A DISCUSSION.The determina-tion of investment strategy for endowment funds can be viewed as the resolutionof creative tension existing between the demand for immediate income and theneed for a growing stream of income to meet future needs.Investment policy deals with issues such as: How to diversify? What levelof risk is to be assumed in the investment portfolio? How can the investmentEquity" DJIA" DJ Global-U.S." DJ Global-World" S&P 500" NASDAQ Comp." London (FT 100)" Tokyo (Nikkei 225)" Small-Co: Index Fund" Lipper Index: Europe" Barra" Russell 1000, 2000, 3000" Morgan Stanley World Index" MSCI EAFE (Europe, Asia, and the Far East)Fixed Income" Lehman Brothers Universal Bond Index, Aggregate Bond Index" Salomon Mortgage-Backed" Bond Buyer Municipal (tax-exempt clients)" Merrill Lynch Corporate and Government Bond Indices" Lipper L-T Government" iMoneyNet s First-Tier Institutional-Only Rated Money Fund ReportAverages-Index (MFR Index)" Consumer Price Index (Inflation measure to compare or measure objectiveof preserving purchasing power)Others" Commodity Research Bureau (CRB) Index" Goldman Sachs Commodity IndexSource: Reproduced, with permission, 1996 NES Executive Summary, 1996by National Association of College and University Business Officers.EXHIBIT 8.14 INDICES USED AS BENCHMARKS FOR COMPARING INVESTMENTPERFORMANCE EQUITY 8.6 Endowment Spending Policy 371focus change from income to total return? How can the focus be shifted from theperformance of the individual investment to the performance of the total portfolio?How can new investment opportunities, such as venture capital and emergingmarkets, be incorporated into the portfolio? How can new delegations of authorityand responsibility be used in managing the endowment investment portfolio?Spending policy deals with issues such as: How should the current needs ofthe nonprofit organization be weighed against its needs in the future? How muchof the return from endowment funds should be spent and how much saved?(b) INVESTMENT POLICY.The current investment policy of some nonprofitorganizations is one of total return; specifically, to maximize real, long-term totalreturn and to preserve capital and the purchasing power of endowed projects.Thespending policy, however, is to spend income only.Thus, the investment policyis to invest for total return (income plus capital appreciation), with the spendingpolicy being to pay only current income earned (excluding any realized capitalgain) during the period.The investment management world has changed dramatically in the past fewdecades.The UMIFA and UPMIFA allow governing boards to operate accordingto principles that take full advantage of available investment vehicles.Impor-tant developments in the field include expansion of the prudent man rule,introduction of portfolio theory, new investment opportunities, and delegationof investment decisions
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