Over a period of more than twenty years Chris Russell managed money for some of the largest Endowments, Foundations and Pension Plan sponsors in the US, the UK and Asia. Currently he is a director of the management company of a 600 year old not-for-profit Foundation in the City of London. He is an associate of the macro economic and asset strategy research boutique, GaveKal, and a non-executive director of one of the largest dedicated pensions investment management companies in the UK and of a number of closed and open ended investment companies. These include listed companies on the New York and London Stock Exchanges investing in European and Asian public and private equity and unlisted companies involved in hedge fund strategies. He is a Fellow of the Institute of Chartered Accountants in England and Wales, a Fellow of the UK Society of Investment Professionals and a Fellow of the Royal Society for the encouragement of Arts, Manufactures and Commerce.

• Foreword ixPreface xiAcknowledgments xvii1 Introduction 11.1 Endowment fund characteristics 21.2 Constraints on endowments 41.3 History rhymes 61.4 The US endowment experience 81.5 Structure of the book 122 Language of Return 172.1 Economic return 172.2 Investment return 182.3 ‘Other income’ not return 202.4 Income, capital and ‘total return’ 212.5 Real and nominal return 232.6 Absolute and relative return 262.7 Arithmetic and geometric return 282.8 Time-weighted return and money-weighted return 313 Elements of Return 353.1 Deriving return 353.2 Risk-free return 373.3 Premium for risk 383.4 Equity risk premium 413.5 The eighth wonder of the world 433.6 Valuation change 443.7 Drivers of return 483.8 Scenario analysis 494 Understanding Risk 534.1 Description of risk 534.2 Pascal’s Wager 544.3 Chance 564.4 Co-movement and common factors 584.5 The Greek alphabet 624.6 Confidence 634.7 Consequences 644.8 Endowment fund risk 655 Spending Rules 695.1 The endowment dilemma 695.2 Micawber’s rule 715.3 Pattern of flows 735.4 More scenario analysis 755.5 Determining an operating rule 766 Assets for Strategy 796.1 Back to the future 796.2 Investment approach 816.3 Classification of assets 826.3.1 Operational assets 846.3.2 Intergenerational assets 856.4 Asset categories 866.4.1 Cash 876.4.2 Short-dated and intermediate-term bonds 886.4.3 Long-dated bonds 896.4.4 High-yield bonds 906.4.5 Inflation-indexed bonds 916.4.6 Convertible bonds 926.5 Equities 936.6 Private equity 956.7 Real estate 966.8 Commodities 986.9 Hedge funds 997 Legal, Social and Ethical 1037.1 Quis custodiet ipses custodies? 1037.2 Tax matters 1067.3 Extra-financial issues 1067.4 Corporate governance 1077.5 Corporate social responsibility 1097.6 Socially responsible investment 1117.7 Program-related investment 1137.8 Global view 1147.9 Reality check 1158 Understanding Strategy 1178.1 Resource assessment 1188.2 Defining needs 1198.3 Quantifying needs 1228.4 Spending rule 1238.5 Operational assets 1248.6 Intergenerational assets 1268.7 Review 1349 Implementing Strategy 1379.1 Investment policy statement 1379.2 Trustees of an endowment 1399.3 Investment committee 1419.4 Investment staff 1449.5 Risk tolerance and control 1469.6 Operational asset management 1479.7 Intergenerational asset allocation 1489.8 Benchmarks and performance 1509.9 Consultants 1529.10 Selection of asset managers 1539.11 Costs 1569.12 Custody 15910 Synopsis 161References and Reading Matter 165Glossary 171Index 221

Over a period of more than twenty years Chris Russell managed money for some of the largest Endowments, Foundations and Pension Plan sponsors in the US, the UK and Asia. Currently he is a director of the management company of a 600 year old not-for-profit Foundation in the City of London. He is an associate of the macro economic and asset strategy research boutique, GaveKal, and a non-executive director of one of the largest dedicated pensions investment management companies in the UK and of a number of closed and open ended investment companies. These include listed companies on the New York and London Stock Exchanges investing in European and Asian public and private equity and unlisted companies involved in hedge fund strategies. He is a Fellow of the Institute of Chartered Accountants in England and Wales, a Fellow of the UK Society of Investment Professionals and a Fellow of the Royal Society for the encouragement of Arts, Manufactures and Commerce.

• Foreword ixPreface xiAcknowledgments xvii1 Introduction 11.1 Endowment fund characteristics 21.2 Constraints on endowments 41.3 History rhymes 61.4 The US endowment experience 81.5 Structure of the book 122 Language of Return 172.1 Economic return 172.2 Investment return 182.3 ‘Other income’ not return 202.4 Income, capital and ‘total return’ 212.5 Real and nominal return 232.6 Absolute and relative return 262.7 Arithmetic and geometric return 282.8 Time-weighted return and money-weighted return 313 Elements of Return 353.1 Deriving return 353.2 Risk-free return 373.3 Premium for risk 383.4 Equity risk premium 413.5 The eighth wonder of the world 433.6 Valuation change 443.7 Drivers of return 483.8 Scenario analysis 494 Understanding Risk 534.1 Description of risk 534.2 Pascal’s Wager 544.3 Chance 564.4 Co-movement and common factors 584.5 The Greek alphabet 624.6 Confidence 634.7 Consequences 644.8 Endowment fund risk 655 Spending Rules 695.1 The endowment dilemma 695.2 Micawber’s rule 715.3 Pattern of flows 735.4 More scenario analysis 755.5 Determining an operating rule 766 Assets for Strategy 796.1 Back to the future 796.2 Investment approach 816.3 Classification of assets 826.3.1 Operational assets 846.3.2 Intergenerational assets 856.4 Asset categories 866.4.1 Cash 876.4.2 Short-dated and intermediate-term bonds 886.4.3 Long-dated bonds 896.4.4 High-yield bonds 906.4.5 Inflation-indexed bonds 916.4.6 Convertible bonds 926.5 Equities 936.6 Private equity 956.7 Real estate 966.8 Commodities 986.9 Hedge funds 997 Legal, Social and Ethical 1037.1 Quis custodiet ipses custodies? 1037.2 Tax matters 1067.3 Extra-financial issues 1067.4 Corporate governance 1077.5 Corporate social responsibility 1097.6 Socially responsible investment 1117.7 Program-related investment 1137.8 Global view 1147.9 Reality check 1158 Understanding Strategy 1178.1 Resource assessment 1188.2 Defining needs 1198.3 Quantifying needs 1228.4 Spending rule 1238.5 Operational assets 1248.6 Intergenerational assets 1268.7 Review 1349 Implementing Strategy 1379.1 Investment policy statement 1379.2 Trustees of an endowment 1399.3 Investment committee 1419.4 Investment staff 1449.5 Risk tolerance and control 1469.6 Operational asset management 1479.7 Intergenerational asset allocation 1489.8 Benchmarks and performance 1509.9 Consultants 1529.10 Selection of asset managers 1539.11 Costs 1569.12 Custody 15910 Synopsis 161References and Reading Matter 165Glossary 171Index 221

Over a period of more than twenty years Chris Russell managed money for some of the largest Endowments, Foundations and Pension Plan sponsors in the US, the UK and Asia. Currently he is a director of the management company of a 600 year old not-for-profit Foundation in the City of London. He is an associate of the macro economic and asset strategy research boutique, GaveKal, and a non-executive director of one of the largest dedicated pensions investment management companies in the UK and of a number of closed and open ended investment companies. These include listed companies on the New York and London Stock Exchanges investing in European and Asian public and private equity and unlisted companies involved in hedge fund strategies. He is a Fellow of the Institute of Chartered Accountants in England and Wales, a Fellow of the UK Society of Investment Professionals and a Fellow of the Royal Society for the encouragement of Arts, Manufactures and Commerce.

• Foreword ixPreface xiAcknowledgments xvii1 Introduction 11.1 Endowment fund characteristics 21.2 Constraints on endowments 41.3 History rhymes 61.4 The US endowment experience 81.5 Structure of the book 122 Language of Return 172.1 Economic return 172.2 Investment return 182.3 ‘Other income’ not return 202.4 Income, capital and ‘total return’ 212.5 Real and nominal return 232.6 Absolute and relative return 262.7 Arithmetic and geometric return 282.8 Time-weighted return and money-weighted return 313 Elements of Return 353.1 Deriving return 353.2 Risk-free return 373.3 Premium for risk 383.4 Equity risk premium 413.5 The eighth wonder of the world 433.6 Valuation change 443.7 Drivers of return 483.8 Scenario analysis 494 Understanding Risk 534.1 Description of risk 534.2 Pascal’s Wager 544.3 Chance 564.4 Co-movement and common factors 584.5 The Greek alphabet 624.6 Confidence 634.7 Consequences 644.8 Endowment fund risk 655 Spending Rules 695.1 The endowment dilemma 695.2 Micawber’s rule 715.3 Pattern of flows 735.4 More scenario analysis 755.5 Determining an operating rule 766 Assets for Strategy 796.1 Back to the future 796.2 Investment approach 816.3 Classification of assets 826.3.1 Operational assets 846.3.2 Intergenerational assets 856.4 Asset categories 866.4.1 Cash 876.4.2 Short-dated and intermediate-term bonds 886.4.3 Long-dated bonds 896.4.4 High-yield bonds 906.4.5 Inflation-indexed bonds 916.4.6 Convertible bonds 926.5 Equities 936.6 Private equity 956.7 Real estate 966.8 Commodities 986.9 Hedge funds 997 Legal, Social and Ethical 1037.1 Quis custodiet ipses custodies? 1037.2 Tax matters 1067.3 Extra-financial issues 1067.4 Corporate governance 1077.5 Corporate social responsibility 1097.6 Socially responsible investment 1117.7 Program-related investment 1137.8 Global view 1147.9 Reality check 1158 Understanding Strategy 1178.1 Resource assessment 1188.2 Defining needs 1198.3 Quantifying needs 1228.4 Spending rule 1238.5 Operational assets 1248.6 Intergenerational assets 1268.7 Review 1349 Implementing Strategy 1379.1 Investment policy statement 1379.2 Trustees of an endowment 1399.3 Investment committee 1419.4 Investment staff 1449.5 Risk tolerance and control 1469.6 Operational asset management 1479.7 Intergenerational asset allocation 1489.8 Benchmarks and performance 1509.9 Consultants 1529.10 Selection of asset managers 1539.11 Costs 1569.12 Custody 15910 Synopsis 161References and Reading Matter 165Glossary 171Index 221