Generally we favour total return targets as a measure of performance but with a close eye on the income element of returns. This reflects not only the requirement of endowment funds for income, but also the current economic environment where future yield compression and hence capital performance, is likely to be difficult to achieve, and where income is likely to form a significant element of total return performance. One also needs to consider the quality and security of that income. We will seek to agree a realistic target for total returns over a set period following analysis of the portfolio.
Turning to performance measures, generally we believe the impact of obsessive monitoring is often not fully understood or considered. For example, quarterly measurement of value and returns is now a standard requirement for the majority of funds. This is great news for valuers and MSCI and was driven by the retail funds who sought measurement analysis to assist in fund raising and to support marketing. This results in constant pressure on fund managers not to deviate from the index. Such regular performance measurement methods in our view are not necessary for endowment funds who do not have the same ”marketing requirements’’ and indeed can be a disadvantage, creating short-termism in strategy when a long term approach would be more in line with their objectives. This can be seen with investments such as commercial ground rents or strategic land, which may offer little in terms of short term performance, but provide significant returns over a 10 or 20-year period as reversions / planning comes through in a time frame that is more in line with an endowment’s long term investment horizon.
We find that half yearly or yearly valuations and returns analysis are sufficient for most endowment funds, with a more regular review of income and more beneficial income risk. An annual review of progress in achieving the overall investment strategy is also recommended.