Much has been written of high market returns over the past few years, and the COVID-19 pandemic will certainly lead to higher volatility going forward. What hasn’t been written is that these data points have created a precarious situation for endowments and the organizations they support: Spend rates are up or at unsustainable levels, often beyond realistic expectations for real returns.
If real returns for most portfolios are unlikely to meet these increased spending goals, what should endowments do to adjust to this new market reality?
The resolution is not simply an exercise in math, in providing guidance for expected returns from a given portfolio, then backing out a realistic spend rate. Such an approach may avoid disaster, but it does not resolve a common issue connected to spend rates and to portfolio construction: a communication disconnect between the investment and operational sides of an organization. This is not to say that the investment committee and operational management are necessarily at odds, but that they are often both working toward the best interests of their organization — using differing definitions for “best interests.”