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Podcast & Paper: Preserving Intergenerational Equity


By Laurie Bagley, Senior Vice President and Investment Manager, SunTrust Foundations & Endowments Specialty Practice

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[Host] Preserving intergenerational equity is central to the mission of many endowments; yet it can be difficult for boards to plan for an unlimited time horizon. Laurie Bagley, Senior Vice President and Investment Manager for the Foundations & Endowments Specialty Practice with SunTrust Bank, explains why this is often a challenge—along with strategies to preserve intergenerational equity.


[Laurie Bagley] Maintaining intergenerational equity for educational institutions basically means that you're trying to preserve the purchasing power of the endowment. And what that means is that the level of benefits that you're paying today, that you maintain that same level of benefits in the future. 


[Host] According to Bagley, a good investment policy is the key to maintaining intergenerational equity.


[Bagley] Trustees today can maybe sometimes struggle with the fact that the decisions they make today, some of them they may not see the benefits paid off until after they are long gone from the institution.


So having that imagination about what you're doing now and how it will benefit in the future is sometimes kind of hard to think about. One of the most important things that a board can do is set their asset allocation and the investment policy for the endowment. Investment policy is so important because it really is truly your roadmap and your guidepost on making decisions for the endowment. And it also helps you with both shorter term tactical decisions that you may need to make in your investment strategy based on current, you know, economic conditions. 


[Host] With that in mind, Bagley says it’s important to consider the Modern Portfolio Theory from Harry Markowitz as you determine asset allocation.


[Bagley] If you've got an asset allocation or two asset allocations that might have the same investment results but differing levels of volatility, they'll probably choose the asset allocation with the lower volatility. And vice versa, if you've got an asset allocation or two when you compare them that may have the same levels of volatility, investors are likely to go for that mix that has the higher return.


And so really what it comes down to is, you know, he had sort of measured that over 90 percent of investment volatility and results can be attributed to that asset allocation decision. So it is very important to what you can expect from your portfolio going forward is to be sure of making that asset allocation decision that's most appropriate for your risk tolerance.

[Host] As your organization determines the right asset allocation, Bagley suggests taking these considerations into account:


[Bagley] You really need to sort of step back and ask yourself first and foremost: what is our investment objective for this endowment?


Our investment objective is our spending rate, plus our measure of inflation, plus maybe some kind of growth factor, even if it's  just an additional one percent over the sum of the other two.


That will ensure that we are indeed preserving intergenerational equity for the endowment. So once you've defined that objective, now you think about, okay, "What combination of asset classes and investment strategies will have the most likely ability to achieve that number, that return?"


[Host] Beyond issues related to volatility, Bagley says you need to account for inflation. It starts with determining the right inflation index. The Higher Education Price Index and the Higher Education Cost Adjustment Index are two gauges endowments can use as part of their overall investment strategy.


[Bagley] So once you've determined which benchmark is most appropriate for your institution, you know, for spending, you would tie that measure of inflation to your spending policy. For your investment results, you know, then you want to think about index benchmarks or some comparison therefore and tie that to your investment objective too. 


[Host] In addition to inflation, Bagley says endowments should monitor how much of their portfolio is liquid versus illiquid.


[Bagley] A private capital investment, which might include either a venture capital commitment or private equity or even a private real estate holding for a portfolio is not something that is, what we call, daily traded or traded on a public exchange.


And since it can't do that or it can't be traded there, it's not really readily, you can't readily exchange it for cash in your portfolio like you could if you needed to sell a block of stock or a series of bonds. So that illiquidity risk traditionally should carry a higher rate or a higher expected rate of return over stocks and bonds because if they didn't, if they potentially would just return the same as stocks and bonds, then why take that risk of having something in your portfolio that you can't trade in for cash? 


The problem with illiquidity is just that you can't exchange it for cash and especially during times of extreme market volatility to the downside, as we saw during the credit crisis of 2008. Fixed income markets froze, public equities were selling off and plunging in value. So you have that part of your portfolio that's declining in value, making the non-marketable piece go up and over-weighted. And for institutions that had not carefully balanced their portfolios between those sort of liquid and illiquid strategies really faced severe funding issues because their public side had decreased so much in value that, you know, there were some institutions that had really tough and very tight financial results because they could not access that part of their endowment.


[Host] For more information, read the Foundation and Endowments Specialty Practice white paper on this topic, Intergenerational Equity and the Endowment Model. You also can contact the SunTrust Foundations and Endowments team at 866-223-1499, or visit us online at



Laurie Bagley, Senior Vice President and Investment Manager, Foundations and Endowments Specialty Practice, SunTrust Bank, talks about challenges and strategies when creating an investment policy that aims to preserve intergenerational equity in perpetuity.

Endowment trustees can find it challenging to create an investment policy that is geared for an unlimited time horizon. Laurie Bagley, Senior Vice President and Investment Manager, Foundations and Endowments Specialty Practice, SunTrust Bank, explains how endowment boards can develop an investment policy that preserves intergenerational equity.

For more information about SunTrust  Foundations and Endowments specialty  practice, call 866.223.1499 or contact your Client Manager. Learn more about the SunTrust Foundations and Endowments specialty practice.


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