NORTHFIELD, MINN. (March 25, 2019) – The second quarter 2019 edition of the Financial Analysts Journal, published by the CFA Institute, includes a research paper written by James Yaworski, CFA, Senior Investment Strategist at Carlson Capital Management.

Through this research, Yaworski sets out to provide institutional investors with a more robust way of constructing spending policies. He shows how current practices create poor long-term outcomes, resulting in declining support for beneficiaries over time. He also demonstrates how current methods expose trustees to significant fiduciary risk, and how small errors in implementation can have significant long-term ramifications on portfolio growth.

In the paper, Yaworski lays out the framework for the construction of more efficient spending policies, which enhances an organization’s ability to achieve long-term goals while greatly reducing the fiduciary risk to which trustees are exposed. James’ in-depth and thoughtful research stems from his genuine interest in providing university, public and private foundations, and endowment trustees with an approach that not only optimizes the outcomes of their portfolio’s performance, but also addresses their fiduciary responsibility with regard to spending policies. The paper should be of interest to trustees, beneficiaries, and donors who wish to ensure the sustainable management of endowed gifts.

“My hope is that this paper will have a significant positive impact on the non-profit community, providing guidance to trustees of endowments and foundations on how they can improve the stewardship of endowed assets,” stated Yaworski.

Carlson Capital Management President, Justin Stets, AIF®, said, “This research breaks new ground as James has created a new seat at the endowment table–that of the donor. The voice of the donor is honored when institutions fulfill their obligation to do everything in their power to ensure that an endowment gift retains its inflation-adjusted purchasing power. James’ work attends to that obligation, which is borne by the fiduciary status of board members. Every trustee in the country who is responsible for the stewardship of endowment dollars should read and act upon this research.”

Stets continued, “The voice of the donor shines through in this paper. Foundations and non-profits now have an ability to stand before both their donors and their trustees to announce that they have a better tool to track the true growth of donor contributions.”

The paper is available in the most current issue of the Financial Analysts Journal.

The Financial Analysts Journal, a publication of the CFA Institute, aims to be the leading practitioner journal in the investment management community by advancing the knowledge and understanding of the practice of investment management through the publication of rigorous, peer-reviewed, practitioner-relevant research from leading academics and practitioners.

Highlights of Spending Policy Customization for Institutional Preferences, by James Yaworski, CFA

  • Institutional investors, such as university endowments and foundations, rely upon mathematical formulas known as spending rules to determine how much they can distribute each year. This research builds upon thirty years of work by both academics and practitioners that shows poor long-term outcomes for institutions that use current methods. This paper looks at historical performance, as well as simulations, to find that current methods create a 1% annual portfolio drag, which over time has a significant impact on portfolio values. The result is that many institutions are likely failing to fulfill their promise to donors that they’ll steward these assets in a sustainable manner and preserve the purchasing power of the original gift.
  • Current spending methods place considerable fiduciary risk on trustees. These rules require trustees to determine a proper spending rate by forecasting future portfolio returns and inflation. Any error in this process can have a significant negative impact on portfolio growth, not just during the trustee’s tenure, but for decades into the future. Given the difficulty of forecasting future returns and inflation in a precise manner, trustees should question why they’re utilizing a tool which provides so little margin for error.
  • Spending methods are currently one size fits all, despite a wide range of institutional needs and preferences. Institutions should customize spending policies to reflect their short-term spending needs as well as long-term organizational goals, in order to optimize outcomes. Small foundations and large endowments have very different needs and goals, yet spending policies are not currently reflecting these differences.

In this short video, author James Yaworski explains how university, public, and private foundations can benefit from more efficient spending policies.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.