Endowments and Foundations Risk Jeopardizing Their Mission
Despite low expected returns and the risk of jeopardizing their mission, many endowments and foundations will still spend 5 percent of their assets each year.
By Seth Masters
Many U.S. endowments and foundations (E&Fs) still plan to spend 5 percent of their assets each year, despite unusually low expected returns. We think few understand how likely that is to limit their ability to fulfill their missions in perpetuity.
Given current economic and capital market conditions, we now project that global bonds will have very low annualized returns of 1.9 percent over 10 years in the median case, far below our estimate of 5.8 percent under what we deem to be normal conditions. We also project that under todays conditions global equities will have annualized returns of 7.2 percent in the median case, somewhat below our normal estimate of 8.8 percent.
The green line in the first display (below) shows our current estimates of the median impact of various net annual spending rates over 30 years on the inflation-adjusted value of a portfolio with a starting value of $100 million. The blue line shows our estimates under what we deem to be normal economic and capital market conditions. We project 10,000 plausible outcomes for each spending rate under both current and normal conditions; the median is the point where....