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Where’s Tobin? Protecting Intergenerational Equity for Endowments: A New Benchmarking Approach

M. Barton Waring and Laurence B. Siegel
The Journal of Portfolio Management November 2022, 49 (1) 47-80; DOI: https://doi.org/10.3905/jpm.2022.1.424
M. Barton Waring
is the retired former chief investment officer for investment policy and strategy, emeritus, at Barclays Global Investors in Anacortes, WA
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Laurence B. Siegel
is the Gary P. Brinson Director of Research at the CFA Institute Research Foundation and the investment thought leader at the Foundation Financial Officers Group in Wilmette, IL
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Abstract

Tobin’s thoughtful admonition that the trustees of an endowed institution should guard the future against the spending needs of the present cannot be perfectly implemented in practice given today’s aggressive investment policies. The authors introduce an understandable toolkit for benchmarking and evaluating any given spending rule so that it protects future spending at some engineered level of probability. They use basic tools of finance—perpetuity math, budget constraints, economic balance sheets, well-supported assumptions for expected return, the discount rate and the growth rate, and multiperiod distribution charts—to assist the institution in achieving its desired probability of maintaining spending power in the long run. The authors address the common practice of smoothing and the problems it creates, and set forth a rule of conservation of risk: Spending risk is set by the risk of the investments used to fund the spending, not by the spending policy itself. Smoothing does not make risk go away; it just hides it for a while, deferring it to a later generation.

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The Journal of Portfolio Management: 49 (1)
The Journal of Portfolio Management
Vol. 49, Issue 1
November 2022
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Where’s Tobin? Protecting Intergenerational Equity for Endowments: A New Benchmarking Approach
M. Barton Waring, Laurence B. Siegel
The Journal of Portfolio Management Oct 2022, 49 (1) 47-80; DOI: 10.3905/jpm.2022.1.424

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Where’s Tobin? Protecting Intergenerational Equity for Endowments: A New Benchmarking Approach
M. Barton Waring, Laurence B. Siegel
The Journal of Portfolio Management Oct 2022, 49 (1) 47-80; DOI: 10.3905/jpm.2022.1.424
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  • Article
    • Abstract
    • SPENDING RULES AND SPENDING RULE BENCHMARKS
    • STRICT TOBIN: FULLY HEDGE THE SPENDING PLAN TO PROTECT FUTURE SPENDING?
    • EXPECTED TOBIN: BENCHMARKING WITH AN AGGRESSIVE INVESTMENT STRATEGY
    • TOBIN—WHO’S TOBIN? APPLYING A BENCHMARK IN A CASE STUDY
    • SMOOTHING AND A LAW OF CONSERVATION OF RISK
    • AH, THERE’S TOBIN! MANAGING THE PROBABILITY OF PROTECTING SPENDING POWER
    • A SHORT ASIDE: TWO QUESTIONS THAT SEEM TO ALWAYS COME UP
    • SUMMARY AND CONCLUSIONS
    • ACKNOWLEDGMENTS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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