June 30, 2010 marked the end of the first fiscal year of my portfolio challenge. As a reminder, my fictitious endowment for Independent Academy is based on holdings of 2,500 troy ounces of gold. My figures from the past year are as follows:
Starting Dollar Value as of 6/30/2009: $2,321,250 (New York close of $928.50/oz.)
Dollar Value as of 12/31/2009: $2,741,250 (New York close of $1,096.50) +18.1% from 6/30/09
Dollar Value as of 3/31/2010: $2,781,500 (New York close of $1,112.60) +19.8% from 6/30/09
Dollar Value as of 6/30/2010: $3,106,000 (New York close of $1,242.40) +33.8% from 6/30/09
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A return of 34% is pretty good, given the state of the economy! Independent Academy has done well. Now, two matters remain before we launch into the second fiscal year of an endowment based entirely on gold bullion.
1. Annual Draw. As promised we will take 4.5% of the US Dollar value of the corpus and sell that many ounces of gold. Based on a New York Spot close on 6/30 of $1,242.40, our endowment was valued at $3,106,000.
SOLD: 112.5 oz = $139,770
Endowment Balance = $2,966,230 [2,387.5 oz. of gold bullion]
2. Annual Purchase, based on 15% of Annual Fund donations. Our Annual Fund brought in $500,000, 15% of which equals $75,000.
BOUGHT: 60.4 oz. of gold
Endowment Balance = $3,041,230 [2,447.9 oz. of gold bullion]
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Some Thoughts (Obvious or Otherwise)
When I announced the portfolio challenge, I knew that the sell-buy strategy (1x/fiscal year) was not balanced. However, I wanted to wait for the full set of data to allow me to point out the obvious issues that Independent Academy now needs to study and act on, as does any independent school with an endowment. My point is that most independent schools are not doing enough for/with their endowments in terms of replenishment and building. I have chosen not to allow new gifts to the Independent School endowment, only replenishment. Permit me some thoughts below, which are meant to prompt those of you reading this blog to follow suit.
1. Sustainability. Although Independent Academy's endowment is exceedingly healthy, and although our draw was not immediately deleterious to the Academy, my concern now is that we bought 60 ounces of gold after selling 112 ounces. Over the long term, that inverse relationship could be deleterious, as we must plan for the natural volatility of gold prices. If gold moves downward in the future, we would have to sell more ounces in order to meet our draw. If it continues to rise, we will benefit from the good fortune.
2. Risk. This category is tied into the first, as my last sentence (above) demonstrates. Independent Academy must carefully assess and manage its risk with the endowment; just because it is based on gold--a rising asset over the past ten years--does not mean that it will continue to benefit from increases, despite continued economic instability domestically and internationally.
3. Complexity. Independent Academy wishes to avoid a complex endowment, and it has done so, successfully. However, risk assessment will call for some data modeling. Nevertheless, the Academy's trustees will insist that this data modeling be kept focused on a gold-only endowment.
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Fiscal Year '11
In this new fiscal year, Independent Academy will begin to track a separate data point: the synchronous full replenishment model. This model would have the Academy sell X ounces at 6/30, then simultaneously buy the same number of ounces. The funds to purchase these ounces will, as always, come from the Annual Fund. This approach will cause the Board to reconsider the flexibility of the Annual Fund and how those resources might be better allocated within the operating budget. When we look at the final data on FY 11, it will be interesting to see what the Board thinks at that time.
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