INSTITUTIONAL ASSET MANAGEMENT — CHEAT SHEET

ENDOWMENTS & FOUNDATIONS

Required Return Formula

Required Return (Nominal) = Spending Rate + Inflation + Management Fees |-----------|---------------|-------|

Endowment vs. Foundation

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Yale Endowment Model (David Swensen)

Characteristics:

• 50–70% illiquid alternatives (private equity, venture, real assets, hedge funds)

• Limited public equities & minimal fixed income

• Justification: illiquidity premium + long time horizon

• Risk: Requires top-quartile manager skill (hard to replicate); liquidity crises in downturns

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PENSION FUND PORTFOLIO MANAGEMENT (DB)

Funded Status & Strategy Pivot

|--------------|-------------------------|---------------| Funded Status = Assets / PBO (Projected Benefit Obligation)

Duration Management (LDI Core)

• PBO duration: 12–18+ years (long-dated liability)

• Asset duration mismatch → funded status volatility when rates move

- Rate ↓ → PBO ↑ more than assets → funded status ↓ - Rate ↑ → PBO ↓ more than assets → funded status ↑

• LDI solution: Match asset duration to liability duration to reduce funded status risk

DB Pension IPS — Key Differences from Individual/Endowment

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Sponsor Risk Tolerance Drivers

Plan size vs. sponsor market cap → Large relative size = "corporate risk" to sponsor

Correlation with sponsor's business cycle → Correlated risk amplifies sponsor stress

Sponsor financial health & credit quality → Weak sponsors cannot absorb shortfalls

Regulatory Constraints (US)

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HIGH-YIELD DECISION RULES

Liquidity Crisis Risk (Endowment): Heavy illiquid allocation → Forced to sell liquid assets at distressed prices during downturn + simultaneous budget pressure = vulnerability (2008-2009 case study). ESG Exclusions: Must be documented in IPS; apply to direct holdings and pooled vehicles where feasible; no IRS pre-approval required. Pension Underfunded? → Increase RSP (growth-seeking), accept volatility, extend time horizon. Pension Overfunded? → Increase LMP (bonds, liability-matching), de-risk, lock in gains. Rate Rise Impact:

• Pension funded status → Improves (assets & liabilities both ↓, but liabilities ↓ more due to longer duration)

• Endowment real return → Worsens (required return fixed, but nominal returns needed ↑)

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EASILY CONFUSED

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Component	Typical Range	Notes
Spending Rate	4–5%	Smoothed via 3–5 yr trailing average
Inflation Protection	2–2.5%	Target CPI
Management Fees	0.5–1%	Alternatives mgmt typically higher
Total Required Return	7–8.5%	Minimum to preserve real corpus
Feature	Endowment	Private Foundation
Purpose	Support institution (university, hospital)	Grant-making for charitable causes
Distribution Min.	None (but typically ~5%)	5% mandatory (IRS requirement)
Time Horizon	Perpetual	Perpetual (often founder-linked)
ESG/Exclusions	Document in IPS	Document in IPS
Funded Ratio	Asset Allocation Posture	Risk Approach
<90%	Higher RSP (Growth)	Risk-seeking (close gap)
90–110%	Balanced	Moderate risk
>110%	Higher LMP (De-risk)	Liability-matching
IPS Element	DB Pension	Endowment
Return Objective	≥ liability discount rate	Spending + inflation + fees
Risk Objective	Minimize funded status volatility	Minimize portfolio volatility
Time Horizon	Duration of workforce (often 15–25 yr)	Perpetual
Liquidity	Near-term benefit payments (retirees)	Minimal
Tax	Tax-exempt (N/A)	Tax-exempt (N/A)
Standard	Impact
ERISA	Fiduciary duty, prudent investor, diversification, prohibited transactions
Discount Rate	Set by actuary; tied to investment-grade corporate bond yields (conservative)
Actuarial Assumptions	Mortality, salary growth, retirement age — affects PBO calculation
Pair	Distinction
Endowment Spending Rule	% of trailing avg assets (smooths volatility)
Foundation Distribution	Legal minimum 5% (IRS mandate)
LDI vs. RSP	LDI = bond-heavy, liability match; RSP = equity-heavy, growth
5% Rule	Private foundation minimum; endowments target ~5% but not required