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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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