Medical Endowment Fund Manager Selection

Posted on October 15, 2023 by Dr. David Edward Marcinko MBA MEd CMP™

Are External Financial Consultants Necessary?

[By Dr. David E. Marcinko MBA CMP]

http://www.CertifiedMedicalPlanner.org

John English, of the Ford Foundation, once observed that:

[T]he thing that is most interesting to me is that every one of the managers is able to give me a chart that shows me he was in the first quartile or the first decile. I have never had a prospective manager come in and say, ‘We’re in the fourth quartile or bottom decile’.

According to Wayne Firebaugh CPA, CFP® CMP™ most medical endowment funds today, even those with internal investment staff, rely heavily upon consultants and external managers.

In fact, a 2006 Commonfund Benchmarks Healthcare Study revealed that 85% of all surveyed institutions relied upon consultants with an even greater percentage of larger endowments relying upon consultants.  The common reasons given by endowments for such reliance are augmenting staff and oddly enough, cost containment.  In essence, the endowment staff’s job becomes one of managing the managers.

Manager Selection 

Even those endowments that use consultants to assist in selecting outside managers remain involved in the selection and monitoring process.  Interestingly, performance should generally not be the overriding criterion for selecting a manager.  Selecting a manager could be viewed as a two-step process in which the endowment first establishes its initial allocation and determines what classes will require an external manager.  The second part of the process is to select a manager that due diligence has indicated to have two primary characteristics: integrity and a repeatable and sustainable systematic process.  These characteristics are interrelated, as a manager who embodies integrity will also strive to follow the established investment selection process.

Of Medical-Managers

In medicine, obtaining the best care often means consulting a specialist.  As a manager of managers, the average endowment should seek specialist managers within a given asset class. Just as physicians and healthcare institutions gain additional insight and skill in their area of specialty, investment managers may be able to gain informational or system advantages within a given concentrated area of investments.

Assessment

Since most plan managers are seeking positive alpha by actively managing certain asset classes, many successful endowments will use a greater number of external managers in the concentrated segments than they will in the larger, more efficient markets.

Conclusion

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Common Physician Retirement Plan Payout Methods

Posted on August 24, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

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Targeting Portfolios and Medical Endowment Funds

[By Staff Reporters]

According to Wayne Firebaugh CPA, CFP® CMP™ recognizing the risk that market volatility represents to long-term portfolio portfolios or medical endowments utilize a variety of methods to calculate periodic payouts. These include the following:

  • Investment Yield: A portfolio/endowment using this method spends only its dividends and interest and re-invests any unrealized and realized gains. There would appear to be two primary disadvantages of this method. First, the payout amount will be extremely volatile as yields on equity and fixed income investments fluctuate. Second, the endowment manager could be encouraged to adopt a short-term focus on yield to the detriment of purchasing power preservation.
  • Percentage of the Prior Year’s Ending Market Value: An endowment/portfolio using this method would withdraw some fixed percentage of the prior year’s market value. As with the Investment Yield method, disbursements from the endowment can be somewhat volatile under this method.
  • Moving Average: This approach, which is most common among educational institutions, generally involves taking a percentage of a moving average of the endowment market value. The percentage commonly approximates 5% over a 3-year period.
  • Inflation Adjusted: This method simply adds some factor to the applicable rate of inflation for the institution/portfolio.
  • Banded Inflation or Corridor: This method is similar to the Inflation Adjusted method except that it establishes a corridor or band of minimum and maximum increases in an attempt to limit the volatility of disbursement amounts for the portfolio/endowment.

Mature Woman

Assessment

How does the above compare to the typical 4% withdrawal rate suggested by many FAs today … too much or too little?

Does a private MD “spend-down” or “conserve” principle like an endowment fund make sense?

Conclusion

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Medical Endowment Fund Contingency Planning

Posted on August 6, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

Understanding Stock Market Volatility?

Source: www.HealthcareFinancials.com

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According to Wayne Firebaugh CPA, CFP®, CMP™ the many quantitative methods of stock, bond, derivatives, alternative assets and mutual fund investing would have suggested that the October 1987 crash was impossible; yet the flash-crash of 2008 still occurred.

The Improbable Happens

For example, Mark Rubenstein, a professor at University of California at Berkeley, noted that if annualized stock market volatility was assumed to be approximately 20% “(the historical average since 1928), the probability that the stock market could fall 29% in a single day is 10–160. So improbable is such an event that it would not be anticipated to occur even if the stock market were to last for 20 billion years. Indeed, such an event should not occur even if the stock market were to enjoy a rebirth for 20 billion years in each of 20 billion big bangs.”

Statistically Impossible

Although it was statistically impossible for it to happen, it did happen in 1987 and again 2008. The nature of crises is such that many will be unanticipated events with unexpected precipitators. As such, a medical endowment or physician’s portfolio contingency plan cannot address every conceivable event. What a contingency plan should address is the process for confronting these events. Most importantly, the plan should assign responsibility for actions and contain provisions to limit the ability of panic to impair long-term decisions.

Donor Trust is Core

Healthcare and all endowments have at their core donor trust. As such, it is important for an endowment’s contingency plan to include provisions for communicating promptly and forthrightly with the public. One only has to look at the Red Cross’ performance during the aftermath of the 9/11 tragedy to receive a lesson on an inappropriate approach. After donating more than $550 million to the Liberty Fund, donors learned that less than $175 million had been spent on direct aid for victims and that the Red Cross was allocating a large portion of the funds to other programs. After public outcry and congressional hearings, the Red Cross announced that all donations would be spent on direct victim relief.

Unfortunately, Dr. Bernadine Healy, the president of the Red Cross, resigned at least in part because of this controversy. These alleged violations of public confidence can have long-term impacts on an endowment’s donor base. Consider also the United Way whose national leader, William V. Aramony, was accused of fraud, embezzlement, and other charges in 1992. Even a decade later, inflation-adjusted contributions are lower than they were before the scandal even though charitable giving in general has doubled.

Assessment

The very nature of crises is such that pre-determined contingency plans generally allow more rapid and appropriate reaction. For an endowment, a well-considered contingency plan will include both an action (or standstill) plan and a public relations plan.

Note: Red Cross defends handling of September 11 donations on November 6, 2001: see: www.cnn.com

Conclusion

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