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What is the typical
minimum spending requirement for an endowment fund, and how should the
investment manager treat the investment portfolio to cover these needs?- A. 2%; this part of the portfolio should be invested in moderately liquid
assets. - B. 5%; this part of the portfolio should be invested in a homogeneous mix
of assets focusing on short-term assets. - C. 5%; this part of the portfolio should be invested in very liquid assets.
- A. 2%; this part of the portfolio should be invested in moderately liquid
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The correct answer is C.
Endowment funds have minimum spend requirements, typically 5% of assets, to prevent them from taking in contributions but not spending anything on the charitable or educational purpose.
In the case of such a requirement, the investment manager should invest this portion of the portfolio in assets quite liquid – easily convertible to cash. This would all be part of the liquidity constraint within the IPS.
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