i have the schweser 2010 exams so if they're like the 2011 exams, SPOILER ALERT.
there's a question that says state correct/incorrect and why. here's the statement:
"for bond investors such as foundations who desire a stable stream of income, long-term bond benchmarks should be used".
so the answer is CORRECT, says LT bonds offer the investor a longer and more certain income stream. investors desiring a stable, LT cash flow should invest in longer term bonds and utilize long-term benchmarks.
not saying I disagree with any of this, but it did strike me as interesting. foundations have to generate typically the 5% spending plus mgmt plus expenses. they go for mostly a total return sort of approach and usually it's a long term to infinite time horizon, pretty high risk tolerance.
i would think given that for risk/return, that perhaps an equity type benchmark would be more appropriate or some sort of balanced index. again, i am not arguing that you couldn't benchmark a foundation to some sort of LT bond index, but at least doing this problem, it felt a little funny to me and maybe too conservative or a bit mismatched since you'd figure a foundation typically would have equities and/or other things beyond FI.
dunno, not going to dwell on it, but if anyone has thoughts or input, fire away.作者: Valores 时间: 2011-7-11 19:09
I don't have the question in front of me, but if I had a choice between a FI portfolio or an equity portfolio that could fulfill my spending requirements, inflation, etc., I rather have the FI portfolio. Bonds are assumed to be less risky and have a stable income stream, whereas equity prices fluctuate and companies can cut/raise dividends at will.
NO EXCUSES作者: Unforseen 时间: 2011-7-11 19:09
ok, cool. thx guys. that sort of was my take reading this question. i was like, ok, i won't fight you if you want to use a LT FI index, but with literally the 1 sentence i wrote you up there and no more details about the foundation, i think i could make a fairly compelling argument to have the same foundation benchmark to the S&P or something more equity oriented, especially if it were a fairly large one or had donors that continue to contribute, etc. i guess with the 5% rule, perhaps you go for a bit more of the stable income approach than an endowment... both are similar in a lot of ways, but still the books say "total return" approach for both foundations and endowments mostly with a longer time frame. yeah, i guess given the 5% + mgmt + inflation, maybe thinking about a FI benchmark would make sense esp given you have to have that 5% as liquid so managing liabilities and cash is a bit more important.
