foundations question, 2011, correct, investor, 2010

LBriscoe

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.

Unforseen

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.

Valores

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