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Compass Tool-Kit

The Compass service includes access to the Compass Tool-Kit. The Tool-Kit is a collection of sophisticated financial models developed by the Compass team to address unique investment and financial issues. The Tool- Kit is comprised of Excel-based risk analysis programs using advanced Monte Carlo simulation techniques to forecast different financial variables. The Tool-Kit currently contains four models, two of which address issues unique to non-profit institutions, and two which address issues facing taxable investors.

Endowment Spending Model

The Endowment Spending model allows users to "pre-experience" the impact of different capital market assumptions and asset allocation policies on terminal portfolio values and spending levels. Specifically, the Endowment Spending model generates simulated returns for each asset class and then combines those asset class returns with a specific endowment spending policy. The model uses this information to construct both short- and long-term (up to 25 year) forecasts of portfolio market value and spending levels in both nominal and real dollars.

Probability distributions of projected market values and spending levels in real (inflation adjusted) dollars calculated by the Tool-Kit Spending Model are shown below.

The spending model improves decision making by allowing side-by-side comparisons of alternative portfolios given user-defined spending policies and time horizons.

Life Income Fund Evaluation

The Life Income Fund Evaluation (LIFE) model focuses on a unique fund raising vehicle used by non-profit organizations known as life income funds. The generic term "life income fund" refers to several gift vehicles, each with the common feature of providing donors or their designee with an income stream during their lifetime, after which the "residuum" (the amount remaining) is used to provide support based on donor designation. Given the increased popularity of life income funds, it is important that institutions have the tools to carefully evaluate the impact of the various terms of each life income fund.

The LIFE model gives users the ability to forecast residuum values based on the user's assumptions pertaining to expected investment earnings, the donor's life expectancy, and the specific terms of the annuity. By identifying the distribution of potential residuum values, financial officers can help their institutions avoid unnecessary financial loss while, at the same time, increase the probability that donors fulfill their philanthropic intent.

For a more detailed analysis of how this model can be used to evaluate life income gifts, please see our research paper published in the February 1999 edition of the NACUBO Business Officer.

After-Tax Models

The final two models in the Compass Tool-Kit, the Corporate and Personal After-Tax models, explore the effects taxes have on investment returns and risk levels. The tax models allow users to develop after-tax risk and return forecasts for individual asset classes. After-tax return and risk forecasts are based on before-tax capital market assumptions, asset class yields, portfolio turnover, active vs. passive investment style, and the individual's or corporation's effective tax rates.

As a general rule, taxes not only reduce returns, but they also reduce the dispersion or volatility of returns. More importantly, the impact taxes have on risk and return varies by asset class, which potentially changes the relative risk and return relationship between asset classes. These changes can have significant implications for strategic asset allocation.

 

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