The investment process starts with the quantification of the investment objective of a sustainable and reliable level of distribution. Based on long-run investment return assumptions for various asset classes, the endowment distributes income using a formula that takes into consideration the prior year’s distribution and 5% of the average endowment market value of the trailing 16 quarters.
This 5% real return objective then drives the portfolio design process. The first step of the process is to decide what kinds of assets (“asset classes”) will be included in the portfolio. At Macalester we group asset classes into three categories according to their role in the portfolio. The three categories are:
- Economic Growth – designed to drive returns in the portfolio. Included are equity-oriented and credit-related instruments. Investment strategies generally implemented via long-only mandates or hedge fund and private capital structures.
- Real Assets – designed to protect the portfolio from inflation. Included are real estate and natural resource investments (e.g., energy, timber and agriculture funds).
- Safety and Liquidity – designed to ensure adequate liquid resources to fund operations and to protect the portfolio in times of market stress and against deflation. Comprised of U. S. Treasuries and cash.
The portfolio is then diversified by asset class, geography, company size, and manager style, as well as by active and passive management. The portfolio currently has in excess of forty managers across the different asset classes. Allocations to these various strategies are made by policy, and assets are then rebalanced to the target allocations on a regular basis. The broad assetclass allocations flow from the endowment governance policies.