Understanding the Role of Global Equity
Leaders of Catholic institutions face unique challenges in ensuring the vitality and durability of their organizations. Dedicated to advancing the faith and serving humanity, they must constantly fund-raise and manage spending to avoid a future financial crisis. Many such organizations create endowments and form investment committees to build a more durable financial platform that can ensure a continuing flow of resources for those who rely on them – students, communities, or disadvantaged people around the world.
Catholic endowments often invest with the goal of achieving a long-term return target of “CPI+5%” – which is the U.S. inflation rate (as measured by the Consumer Price Index, or CPI), plus 5 percent. This target is popular because, over long periods of time, achieving such returns enables institutions to provide essential aid while also growing, in real terms.
In recent years, the strategy for achieving the CPI+5% has evolved for Catholic institutions. In decades past, fiduciaries were able to rely on positive returns from the fixed income (e.g., bond) portion of their investment portfolios, which comprised roughly 40% of their overall endowment funds. The remaining 60% of these portfolios was comprised of equities (typically U.S. stocks), private equity, venture capital or other instruments. This 60/40 ratio was favored by fiduciaries because the 40% fixed income portion not only produced reasonable returns, but also helped to lend “ballast” to the portfolio to allow the 60% equity allocation to pursue higher returns, albeit with commensurately higher volatility. These two engines, taken together, often helped fiduciaries achieve the CPI+5% goal.
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