CALLAN

INVESTMENTS
INSTITUTE

July 2015

Research
Spotlight

Beating the Heat

Five Best Practices for Endowments and Foundations
Have you found yourself defending your diversified asset allocation strategy in light of U.S. public markets
strong performance? Here are five ways to keep your cool when asset allocation conversations heat up:

1 Emphasize quality in manager selection. Hire managers to be long-term partners and try to minimize turnover. Determine your access to first- and second-quartile alternatives managers and also
your resources to source those managers. When thinking about management fees, look at the big
picture. What is the long-term goal? What does it cost to get there? What are the risks?

Manage resources efficiently and effectively. Think long-term across the entire program, including
staffing. Hire people who understand managers and manager selection. Look for people who are not
only investment-savvy, knowledgeable, and experienced, but also those who fit with the culture and
who buy into the investment process. Low staff turnover is correlated with higher returns. If you are
considering a boost to your alternatives allocation, do you have the appropriate legal and accounting
staff to handle the additional work? Is your custodian able to handle alternatives?

Cody, a member of

Successful organizations take a long-term view. They

Callans Research

think about current spending needs versus future

Oversight Committee,

spending goals. Decide if you are going to spend more

works with endowments,

on the current generation at the expense of future

foundations, and other

institutional investors
on strategic planning,
manager review and
special requests.

generations, or if you will spend less on the current

generation to benefit future generations.
Cody Chapman, CFA, CAIA
Vice President, Fund Sponsor Consulting

Knowledge. Experience. Integrity.

Invest for the long term. Consider current spending needs versus future spending goals. Develop an
investment policy that will take you through good and bad times. Factor in board turnover. Evaluate the
role of asset classes in your portfolio. Look at sector, geographic, and risk exposure across all asset
classes. Assess your liquidity needs and access to cash in the event of a worst-case scenario. Create
an asset allocation for a full market cycle and have the courage to stick with it when times get tough.

Average Annual

5.0%

The overwhelming majority of

4.9%

Spending Rates*
as a Percentage of

institutions employ some form

4.7%

Endowments Value

4.6%

4.7%

of market value-based spend-

4.6%

ing formula. Studies of historical

4.5%

4.5%

4.4%
4.4%

than 5% almost guarantees the

4.2%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total
institutions

738

736

769

776

772

private foundations conclude

that a spending rate greater

4.3%
4.0%

performance and spending for

842

850

823

831

835

erosion of a foundations grantmaking capacity in constant dollars over the long term.

* equal weighted
Source: Fiscal Years 2004-2013, NACUBO Endowment Study

Note: The rise in spending rates during FY 20092011 reflects poor investment
returns in 2008 and 2009. The fall in spending rates in FY 2012 is attributed to
strong investment returns in the prior two years.

Establish an appropriate governance structure. There are typically three types of structures for
decision making: a board with an investment committee that makes all investment decisions, a board
with an investment committee that oversees a CIO and approves all investment decisions, or a structure where much of the investment responsibility is delegated to the CIO and investment office staff,
who are able to make real-time investment decisions, and who report to the investment committee.
The third option is the most agile and best-equipped to react
to rapidly changing market conditions or manager situations,
but it requires an experienced and knowledgeable staff.

5 Create

and sustain a thoughtful and appealing culture.

Promote learning, independent research, and having informed

opinions. Look with a cautious but open mind at new asset
classes and opportunities. Emphasize continuity, institutional
memory, and stability.
Each institution is unique. Callan recommends focusing on your

For Further Reading

Callans 2015 Capital Market
Projections
Endowments and
Foundations: Thinking Big
Callan National Conference
Workshop, 2015
Commonfund white papers
NACUBO research

own program versus trying to replicate the headline-grabbing

returns of some endowments.

One cool judgment is worth a thousand hasty counsels. The thing to do is to supply light and
not heat. Woodrow Wilson

We service over 50 endowment-and-foundation plans that have more than $32 billion in assets under management. For more information please visit our website, www.callan.com or email institute@callan.com.
About Callan Associates
Callan was founded as an employee-owned investment consulting firm in 1973. Ever since, we have
empowered institutional clients with creative, customized investment solutions that are uniquely backed
by proprietary research, exclusive data, ongoing education and decision support. Today, Callan advises
on more than $1.8 trillion in total assets, which makes us among the largest independently owned investment consulting firms in the U.S. We use a client-focused consulting model to serve public and private
pension plan sponsors, endowments, foundations, operating funds, smaller investment consulting firms,
investment managers, and financial intermediaries. For more information, please visit www.callan.com.
About the Callan Investments Institute
The Callan Investments Institute, established in 1980, is a source of continuing education for those in
the institutional investment community. The Institute conducts conferences and workshops and provides
published research, surveys, and newsletters. The Institute strives to present the most timely and relevant
research and education available so our clients and our associates stay abreast of important trends in the
investments industry.

2015 Callan Associates Inc.

Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be
reliable for which Callan has not necessarily verified the accuracy or completeness of or updated. This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of this
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