Information about http://www.tiff.org/TEF/articles/Much_Ado_About_Bonds.pdf
MUCH ADO ABOUT BONDS The…
Tags: asset management, assets, board meeting, bond portfolio, bonds, colloquy, companion piece, dead horse, dialogue, equity index, handful, index fund, institutions, mindset, mothe, one mother, own foundation, passive management, private foundation, protagonists,Pages: 8
Language: english
Created: Tue Feb 6 11:15:03 2001
Display cached document
Page 1
Page 2
Page 3
Page 4
Page 5
Page 6
Page 7
Page 8
MUCH ADO ABOUT BONDS
The dialogue that follows focuses on the proper size and structure of an endowed institution's bond portfolio. The dialogue is
intended to serve as a companion piece to an even lengthier dialogue on related policy issues entitled Why Not 100% Stocks?
As was true in the earlier dialogue, the two protagonists in the colloquy that follows are trustees of a private foundation. One
(Mother) is the foundation's founder and chair; the other (Daughter) is a successful investor who loves her mother dearly but
doesn't necessarily agree with Mom's views on foundation asset management.
Framing the Issue Mother: And I think it would be imprudent to invest
less than a quarter of our assets in bonds.
Daughter: I hate to beat a dead horse, but I can't let When I was your age, there were just a handful
another board meeting end without saying of institutions that had more than 25% of their
once again that we ought to consider shifting assets invested in equities, broadly defined.
from active to passive management. Today, the mindset is reversed, and most
Mother: An index fund? No way: indexing is endowed institutions have only 25% or so of
unAmerican. their assets in bonds, including our own
foundation. How low do you want to go?
Daughter: That may be true for your generation, but it's
not for mine. Besides, I'm not talking about Daughter: How about half that much?
an equity index fund. I'm talking about a Mother: Just twelve-and-a-half percent in bonds?
bond index fund, or rather a passive bond That's not nearly enough protection against a
portfolio that would replicate only a portion rainy day in the stock market. Besides, how
of the overall bond market. If you give me a would we generate the income we need to
few minutes, I think I can prove to you that it make grant payments if we cut our bond
would be anything but unAmerican. portfolio in half?
Mother: My time is yours, but before you tell me what Daughter: With all due respect, Mom, that's a red herring,
you want to do with our bond portfolio, tell and you know it. Even with 25% of our assets
me what's wrong with the one we've got. in bonds, our overall portfolio is generating a
Daughter: As I've said before, the foundation's bond yield well below the mandatory payout rate
strategy makes no sense. of 5%, so cutting our bond exposure to just
12.5% won't create any problems we're not
Mother: And as I've said before, this board doesn't already wrestling with. Besides, I haven't
involve itself with strategy issues. If there's said where the proceeds from the bond sale
one thing I've learned in my many years as a should go. Maybe we should invest them in
trustee, it's that governing boards are ill- assets that generate an even higher current
equipped to make strategic decisions. yield -- like real estate, or oil and gas.
Daughter: And if there's one thing I've learned in my Mother: Higher current yield? What a hoot! The only
many years as your daughter, it's that I should reason those investments generate a higher
choose my words more carefully. Let me yield is because they're wasting assets:
start over: the foundation's bond policies buildings wear out, wells run dry, and the so-
make no sense. called higher yields that real estate or energy
properties generate merely compensate their
Mother: Why do you say that? owners for the depreciation they suffer each
Daughter: Because we have too much in bonds, and the and every day. I suppose the next thing
wrong bonds at that. you're going to tell me is that we can boost the
foundation's current income by selling off
Mother: Don't tell me you want to put 100% of the our Treasuries and buying emerging market
foundation's assets into stocks. bonds!
Daughter: Not at all. In fact, I think that would be wildly Daughter: Funny you should mention that, because I
imprudent. was going to suggest precisely the opposite.
In fact, the reason I raised a question about
our bond portfolio is because it contains too
1
few Treasuries, and too much higher yielding worth owning in a major deflation are long-
paper. term, high quality, non-callable ones. I have
no problem with our owning other types of
Mother: Talk about the pot calling the kettle black! If bonds from time to time -- in fact, I favor
memory serves, you were the one who bonds over stocks in the current environment
pounded the table not too many years ago in -- but our so-called permanent bond portfolio
favor of high yield bonds! should hold high grade paper only, and it
Daughter: True, but if you review the minutes from should be non-callable, to boot.
those meetings you'll see that I never Mother: Why is that?
suggested high yield bonds deserved a
permanent place in our bond portfolio. In Daughter: Because that's the only kind of paper that will
fact, I went out of my way to emphasize that hold its value in a major deflation. If deflation
if we invested in junk bonds at all, it should be strikes, all the other securities that our bond
as a so-called equity substitute. At the time, manager currently owns will prove about as
which was 1991 if I'm not mistaken, junk useful as last year's Christmas tree.
bonds were priced so low that they offered
equity-like potential returns, whatever label Mother: Isn't that overstating the point quite a bit?
you cared to attach to them. The last time I looked, at least half of our
bond portfolio was invested in mortgage-
Mother: I have to admit, your timing was good. We backed issues, which are triple A rated. In
made a lot of money with those high yield fact, if I'm not mistaken, most of them are
bonds, and I'm proud that as a Depression backed by the full faith and credit of the
baby I had the good sense to listen to my Baby United States.
Boom daughter when you suggested we make
that move. A lot of my contemporaries thought Daughter: Not exactly. In fact, one reason the portfolio
I was nuts to go along with you, and we've is invested so heavily in mortgage-backed
proven them wrong. securities is because they yield a tad more
than Treasuries on an options-adjusted basis.
Daughter: Yes and no. We were right to move into junk And the reason they yield more on an OAS
bonds when the market for them collapsed in basis is because, with the exception of so-
the early `90s, but your friends who lived called Ginnie Maes [securities issued by the
through the Depression have a point when Government National Mortgage Association]
they scold you for forgetting the lessons of the government guarantee they seemingly
the past. provide isn't a guarantee at all -- it's more of
an unwritten promise that Uncle Sam will
Mother: Lessons of the past? That's precisely what step in if the ultimate borrowers [i.e.,
you're forgetting when you make the homeowners] default.
ridiculous suggestion to cut our normal
allocation to bonds to just 12.5%. There's Mother: Excuse me for interrupting, but what in the
simply no way that an umbrella that small is world does OAS mean?
going to keep us from getting drenched if a
storm breaks out in the equity market. Daughter: Sorry. OAS means Options-Adjusted Spread,
which is simply a fancy term for the
Daughter: That depends on how soundly the umbrella is incremental yield that mortgages provide over
constructed. I have to admit, if it's built like Treasuries when you adjust for the fact that
our existing bond portfolio, you're right. mortgage bonds display what's known as
negative convexity. When interest rates fall,
bond prices rise -- they're opposite sides of
Rainy Day Blues the same coin, after all -- but price gains on
mortgage-backed bonds are hampered by the
Mother: What's wrong with our existing bond fact that the underlying borrowers have
portfolio? heightened incentives to refinance their debts.
The "option" in OAS refers to the fact that
Daughter: It's got too many securities that will perform mortgages are typically prepayable at the
well when we need bonds the least, and too borrowers' option.
few securities that will perform well when we
need bonds the most. Mother: You don't have to tell me about mortgage
prepayments. One of the reasons we have so
Mother: Come again? much money in the foundation is because I
Daughter: The only reason to hold bonds on a truly refinanced all of the family company's debt
permanent basis is to hedge against a major when long-term bond yields plummeted in
deflation like the 1930s. And the only bonds the mid-'80s.
2
Daughter: That simply reinforces my point, which is incremental prepayment and credit risk that
that most of the bonds our foundation holds we're bearing.
today are inherently callable -- not only the
mortgage-backed ones, but most of the Daughter: I'm not sure the foundation is being adequately
corporates also. compensated for the risks it's taking, but I'm
sure about one thing: our bond managers are
Mother: Wait just a minute: a lot of corporate bonds being well compensated for their work.
are non-callable, so there's no reason why
they shouldn't hold up pretty well if the Mother: Nothing wrong with that: they've
economy undergoes a major deflation. outperformed their benchmarks, haven't they?
What more could you ask for?
Daughter: I couldn't disagree more. Bankruptcy has
become far less stigmatized than it was the Daughter: Nothing, except that you consider firing our
last time the economy had a protracted active bond managers while we're still ahead
downturn, and I suspect default rates on in the game.
corporate debt would be shockingly high if
disinflation gave way to deflation.
Gambling with Others' Money
Mother: Get real. The odds of that happening are
pretty low, don't you think? Mother: People say that "the apple doesn't fall far
from the tree," but I have my doubts about
Daughter: Ironically, the lower the probability people you! If our active bond managers have all
attach to a deflationary crack-up, the more outperformed their benchmarks since
likely one is to ensue. inception, why on earth would you consider
Mother: Why? firing them? More to the point, why aren't
you proposing the same approach on the
Daughter: Because people will arrange their affairs as if equity side, where some of our managers are
deflation were an impossibility: the marginal actually lagging the market?
borrower and the marginal lender will
combine forces to build the marginal project, Daughter: Because the two situations are completely
and when enough useless or redundant different. Unless you believe all that nonsense
capacity has been added to the economy the about so-called high beta stocks
downturn will begin. To my way of thinking, outperforming the market over the long-term,
investing an endowed institution's assets on there's no more or less automatic way for an
the assumption that deflation has been equity manager to outperform the market, at
abolished is like playing a single round of least under normal market conditions. But
Russian Roulette. The odds are actually in the opposite is true for bond managers: under
your favor, but the consequences of losing normal market conditions, all a bond manager
are so severe that one would have to be under needs to do to outperform the market is to buy
extreme duress to play such a game. lower rated paper.
Mother: True, but I don't see where you're headed. Mother: Or buy longer maturities.
You were the one who suggested a few minutes Daughter: True -- if the yield curve is positively sloped,
ago that we ought to reduce our policy as it normally is.1 But bond managers
commitment to bonds, not increase it. Now recognize that the typical client won't tolerate
you're suggesting that we're underinsured underperformance caused by an above-market
against an extended deflation. Which is it? duration -- duration bets are just too darn
Daughter: Unfortunately, the answer is both. If I can use visible. So they attempt to hang on to their
an analogy, it doesn't make sense to buy well-paying jobs by putting their clients'
$20,000 of collision insurance on a $10,000 money into lower quality paper, or callable
car, especially if the policy becomes void if bonds, or both. Mind you, we're not talking
the car is totaled in a wreck. Why bother with about really low quality bonds -- we're
insurance at all if it won't protect you when talking about fairly strong credits that generate
you need it the most? just enough incremental yield to enable the
manager to outperform his or her benchmark,
Mother: I can't disagree with you on that, but I'm not net of fees.
sure your analogy holds. With 25% of our
assets in bonds, a lot of them could get called Mother: What's wrong with that? If the manager
at par or even default without jeopardizing outperforms his or her benchmark net of fees,
the foundation's capacity to weather an isn't that a good deal for us?
extended deflation. In the meantime, we're 1The yield curve or term structure of interest rates is positively sloped
presumably being well compensated for the when long-term rates exceed short term rates.
3
Daughter: No, it's not. If I pay someone who's headed Mother: You already tipped your hand on that one.
to Las Vegas $100 to take $1,000 of my You said earlier that you favor a permanent
money and play the slot machines with it, am bond commitment of just 12.5% of our assets,
I going to label them a genius if they comeback which is half of our current policy
with $1,200? commitment. Assuming that I'm foolish
enough to go along with such a hare-brained
Mother: Maybe not, but a quick $100 profit on a scheme, what would our bond portfolio's
$1,100 investment is nothing to sneeze at, benchmark be?
especially if you annualize the return!
Daughter: A pure Treasury index.
Daughter: You're missing the point: paying someone
else to gamble with our money is a pretty Mother: In other words, our permanent bond portfolio
foolish thing to do -- would be very high quality, and essentially
non-callable.
Mother: -- unless we're convinced that they're not in
fact gambling. I can see why you might Daughter: Precisely, and it would be fairly long term.
regard interest rate forecasting as a form of
gambling, but what about a bond manager Mother: How long is long?
who outperforms the market without making Daughter: At least ten years -- maybe even longer. I
interest rate bets? Isn't there any room for personally like ten years because that's a
skillful active management in the bond relatively easy bogey to track: you simply
market? measure what you would have earned holding
Daughter: Of course there is, but not very much. I have a ten-year Treasury on a so-called constant
no problem with our letting bond managers maturity basis.
exploit the very modest pricing anomalies Mother: By "constant maturity," you mean that the
that crop up from time to time in, say, the benchmark simulates what you would earn if
Treasury bond market, but I have serious you bought a ten-year Treasury at the outset
doubts as to whether we should let active and then continually rolled your money into
managers muck around with other types of newly issued notes, effectively keeping the
bonds -- even if the bond sectors that we pass stated maturity at ten years.
by are less efficient in the valuation sense. I
also have doubts as to whether we as a Daughter: Correct.
governing board can distinguish truly skillful
managers from merely lucky ones. Mother: What about the Treasury's new inflation-
linked bonds? Where do they fit into the
Mother: In that sense, putting our money to work in picture?
the bond market is no different than putting
our money to work in the stock market: we Daughter: They don't -- or, rather, they don't fit into the
can simply index the portfolio and accept a permanent bond portfolio in any way.
market-like return, or we can use an active Mother: Why is that? They're Treasuries, after all,
manager and hope to do even better. and the first big slug of them that the
Daughter: Correct, but before we can intelligently decide government issued not too long ago had a
between an indexed approach or active maturity of ten years.
management, we need to choose an Daughter: True, but they're not really bonds.
appropriate benchmark for our bond portfolio.
In my view, the appropriate benchmark leaves Mother: They're not?
very little room for active management.
Daughter: Not in the sense we've been discussing bonds
Mother: What benchmark do you have in mind? here today. As we discussed earlier, the only
reason to hold bonds on a permanent basis is
Daughter: You're not going to like the answer. to hedge against deflation. The Treasury's
Mother: Try me. new inflation-linked bonds may perform well
when inflation is moving higher, but they're
Daughter: The answer is: it depends. going to perform miserably in a deflationary
environment, so in that sense they're not
Mother: It depends on what? really bonds.
Daughter: It depends on how big a slice of our overall Mother: It sounds to me like you've been spending too
assets we allocate to our permanent bond much time reading those reports that we get
portfolio. The smaller the slice, the more from TIFF!
reliable the portfolio's deflation-hedging
characteristics should be.
4
Daughter: I take it you mean the dialogue on inflation- 30% of its assets into the Fund, then its true
linked bonds that TIFF published last year. I deflation-hedging bond allocation is at least
don't know what you thought of it, but I 15%, which is slightly higher than the 12.5%
thought it laid out the pros and cons in a pretty that I, and apparently several TIFF directors,
thorough manner.2 regard as adequate.
Mother: Me too, but I'm surprised that you'd cite Mother: That's true only if the TIFF Bond Fund
TIFF as an authority on bond management. resembles the Index. What if its managers
After all, the TIFF Bond Fund looks nothing reduce the portfolio's duration way below
like the all-Treasury portfolio you've been that of the Index, or buy a lot of low quality
advocating here today. paper?
Daughter: Yes, and no. I admit that it holds way too Daughter: They can't. The Fund's guidelines state that
many corporate and mortgage-backed bonds its duration must be equal to the Index's, plus
for my taste, but that's because its aim is to or minus 15%. So if the Index has a duration
outperform the Lehman Aggregate Index, of five years, the Fund's duration must be
which includes a lot of corporates and between 4.25 years and 5.75 years.
mortgages.
Mother: Which means that, in the current environment,
the Fund's average maturity is likely to fall
somewhere between eight and twelve years.
Practicing What You Preach
Daughter: Right. And the Fund's guidelines also state
Mother: If the folks running the TIFF Funds are so
that its weighted average quality must be at
smart, why don't they practice what you've
least AA. So the TIFF Bond Fund displays at
been preaching and switch to passive bond
least two of the three deflation-hedging
management?
characteristics one would want to see in a
Daughter: Funny you should ask that question, because permanent bond portfolio.
I asked the same thing myself when I chatted
Mother: What's the missing link?
with TIFF's president recently.
Daughter: Call protection. Because corporates and
Mother: What did he say?
mortgages represent roughly half of the Fund's
Daughter: He said that several members of his board benchmark, its managers tend to hold a lot of
agreed with me, and have persuaded the callable bonds.
institutions they work for to essentially index
Mother: Why doesn't the board do something about
their permanent bond portfolios to a ten year
that?
Treasury index. He also said that the board
has had several extended debates about Daughter: As I was saying a minute ago, many of the
adopting the same approach in the TIFF Bond directors believe that the typical foundation
Fund, but has decided for the time being to allocates too much to bonds in the first place,
stick with active management. so it's not a real problem if some of them are
callable.
Mother: Why?
Mother: That sounds a bit disingenuous to me, if not
Daughter: For several reasons. First, he said that most
also a bit patronizing.
foundations hold way too many bonds on a
more or less permanent basis, so they're Daughter: It's hardly disingenuous if they're so open
adequately hedged against deflation even if about it. And it's hardly patronizing for the
some of the bonds are lower quality or callable. cooperative's directors to give members what
they want. If you define patronizing as treating
Mother: I'm not sure I follow.
someone in a condescending manner, the
Daughter: Let me give you some concrete numbers. The patronizing thing for the board to do would be
benchmark for the TIFF Bond Fund is the to offer products that member foundations
Lehman Aggregate Index, which is roughly such as ours do not in fact want. At least the
50% government bonds and 50% corporates folks who run the TIFF Funds are honest
or mortgages. If the average foundation puts about what they do. A lot of bond managers
won't admit that they're essentially gambling
with their clients' money.
2 Editor's note: inflation-linked bonds were the subject of a lengthy Mother: Are you suggesting that the TIFF Bond Fund
"dialogue" published in TIP's Quarterly Report dated June 30, 1996. is gambling with its shareholders' money?
Copies are available upon request to organizations eligible to invest
through TIP.
5
Daughter: No. The Fund's guidelines are much stricter Daughter: Yes. Why hold bonds above and beyond
than what you see in the typical bond fund, what you need for deflation-hedging purposes
and the managers are carefully selected and if there are other assets that provide equal if
monitored to make sure that they don't take not more stability to the overall mix at a lower
undue risks. opportunity cost?
Mother: I'm glad to hear that, because my Mother: An opportunity cost relative to what?
understanding is that they all work for
performance-based fees. Talk about gambling Daughter: Relative to equities, which are assumedly the
with other people's money! main engine of growth for any long-term
portfolio. Unless a bond portfolio is heavily
Daughter: Incentive fees are indeed a great way to invested in junk bonds -- which are really
destroy wealth, as well as compound it, but bonds in name only -- it's almost surely
the TIFF Funds use all kinds of safeguards to going to have a lower expected return than
ensure that they work as intended. For equities broadly defined, by which I mean
example, the managers' incentives are capped common stocks as well as any number of
at a level of performance consistent with assets and strategies whose expected returns
what the directors regard as a reasonable rival those of common stocks.
level of risk.
Mother: I don't want to challenge the professor in her
Mother: Fine, but you haven't answered my central own classroom, but what you've just said
question. If the directors truly believe that sounds mighty familiar. I don't suppose
bonds should be held for deflation-hedging you've been reading the propaganda we
purposes only, why don't they convert the received not long ago promoting the TIFF
Bond Fund into an indexed portfolio of long- Multi-Asset Fund?
term Treasuries?
Daughter: In fact, I have, although I'm not wild about
Daughter: Because it wouldn't sell. some aspects of it. I like the idea of one-stop
shopping -- of a Fund that aims to cover the
Mother: Since when did the folks who run the TIFF waterfront in terms of marketable securities
Funds start worrying about that? -- and I like the idea of including assets and
Daughter: That's not my point. My point is that the strategies that seek to dampen the Fund's
directors are trying to do the greatest good for overall volatility if the U.S. stock market in
the greatest number of foundations, and it particular encounters some rough air. But I
doesn't make sense to offer a product that think the Fund's normal 20% allocation to
appeals only to the handful of crazies like me bonds is too high. I also don't like the fact that
who want to own bonds strictly for deflation the benchmark for the Fund's bond segment
hedging purposes. includes corporates and mortgages, although
I understand why that's the case.
Mother: Why?
Paying the Bills
Daughter: For the same reason that the TIFF Bond Fund
Mother: What about income -- doesn't that count? uses the Lehman Aggregate as its benchmark:
if you're going to have too much in bonds
Daughter: It does, to a lot of people. Whether it should over the long-term -- for example, 20% as
count is another question. Excluding opposed to the 12-15% that you need for
institutions that cannot legally spend principal, strictly deflation-hedging purposes -- you
I personally don't see why income per se might as well try to earn incremental returns
matters very much. What really matters is not by taking a controlled amount of credit or
income in a formal accounting sense, but prepayment risk.
rather cash flow, which can take many forms.
Mother: What you seem to be saying is that the TIFF
Mother: True, as we discussed a few minutes ago: you Funds' directors have adopted surreptitiously
get a lot of cash flow from wasting assets such certain policies that they themselves regard
as real estate or oil wells, but a portion of it is as suboptimal.
essentially a repayment of principal, even if
it's not labeled as such. Daughter: It's not surreptitious at all: they're very open
about it. Also, whether the policies are
Daughter: I can't argue with you there. In fact, you've suboptimal or not depends on your point of
just hit on one of the chief reasons I want to view. If the goal is to do the greatest good for
reduce our so-called permanent bond ratio. the greatest number of foundations, perhaps
Mother: I have? the current policies are indeed optimal. Look
at all the non-profits in the Upper Midwest
6
that got burned investing in those godforsaken Daughter: Yes -- briefly.
Piper Jaffray bond funds a few years ago. If
people are going to use bonds for something Mother: With who?
other than deflation-hedging anyhow, then it Daughter: TIFF's president.
makes sense for the TIFF program to offer a
tightly controlled but nonetheless actively Mother: What'd he say?
managed bond product. And if the mix of
strategies and managers in the TIFF Multi- Daughter: I think he's spent too much time in politics!
Asset Fund has a higher expected return than Mother: What do you mean by that?
a conventional foundation portfolio, then I'm
not hugely troubled that the Fund's normal Daughter: I mean that he gave me a rather artful answer.
bond ratio is a bit higher than we purists He said that some of his directors agreed with
would prefer. me, while others did not, but that the issues I
raised were important ones. In fact, the board
has them under active discussion. He also
Begging the Question said that the cooperative is committed to
offering products that are responsive to its
Mother: In other words, as they say in politics, "the Members' needs.
perfect is the enemy of the good."
Mother: But that begs the most important question:
Daughter: It is indeed. In fact, investing and politics who decides what the Members need?
have at least two important things in common.
Daughter: The directors, I suppose, although ultimately
Mother: What? the Members do, because they control who
sits on the board. Also, we can always vote
Daughter: First, there is seldom if ever a "perfect" with our feet, so to speak. In the meantime,
solution to any problem in politics or investing. it's comforting to know that we have a voice
Mother: Why is that? in how the Funds are structured and also that
the directors and staff are interested in
Daughter: Because as soon as you think you've got the Members' views on such matters.
world figured out, it moves on you.
Mother: Speaking of voting with our feet, I move that
Mother: What's the second thing they have in we adjourn for today, subject to an agreement
common? that we will continue this discussion at future
board meetings.
Daughter: The second thing that politics and investing
have in common is this: while effective Daughter: On that we can both agree. I second the
marketing is by no means a necessary motion.
condition for success in either field, it is a
sufficient condition for success in both! * * * * *
Mother: That may be true, but that doesn't mean that
you and I should vote for the smoothest-
talking politician who comes along. And it
emphatically does not mean that we should
have our foundation's assets managed by
folks whose reach exceeds their grasp.
Daughter: I agree, which is why I'm proposing that we
adopt a passive or semi-passive approach to
bonds. Even if a bond manager has beaten its
benchmark, you can never be sure whether
the outperformance is due to skill or excessive
risk-taking. If I had my druthers, I'd keep our
permanent bond holdings to an absolute
minimum; I'd have them passively managed;
and I'd spend as much time and energy as
possible optimizing the return on the rest of
the portfolio.
Mother: I'd be curious to know what the folks at TIFF
say about such an approach. Have you
discussed it with them?
7
Much Ado about Bonds - The Sequel
Daughter: Did I tell you about my trip to Charlottesville? Mother: You mean a vehicle that would mimic the
Equity Substitutes or absolute return segment
Mother: What on earth were you doing in that cultural of TIFF's Multi-Asset Fund?
backwater?
Daughter: Exactly. That's a logical place for money
Daughter: Some backwater. The Man of the Millennium removed from the bond market to flow, but
made his home there, and there are lots of TIFF wants to beef up its staff before it adds
interesting things to do. You'll see for yourself any more products. My understanding is that
when we go there for the TIFF Members' this process will be completed this fall.
meeting next spring.
Mother: What about TIFF's so-called Private
Mother: Now I remember: you got invited to TIFF's Investment Program? Why can't the board
May board meeting. How was it? tell foundations to shift bond proceeds into it?
Daughter: It reminded me of what a veteran soldier once Daughter: For several reasons. First, PI's don't provide
said about war: endless periods of inactivity nearly as much diversification against stock
punctuated by moments of sheer terror. market declines as their fans allege. In fact,
the risk reduction they theoretically provide is
Mother: Very funny. Was it really that bad? attributable mostly to the fact that they're not
marked to market very often. If you marked
Daughter: I was teasing. Actually, it was quite interesting, PI's to market with the same periodicity as
although I hit the wall a bit sooner than most marketable assets, many of them would be
of the directors. I joined the proceedings at just as volatile. Second, the directors are
mid-morning on a Monday and they didn't concerned about how much institutional
adjourn until late on Tuesday. money is flowing into PI's these days, and
they don't want the pressure of having to put
Mother: What took so long? large sums of money to work in an overheated
PI market. In fact, the PI market is so
Daughter: Lots of complex issues to discuss, plus multiple overheated that the board had to wine and dine
manager presentations. several PI managers at dinner after the first
day of meetings.
Mother: Where did the board come out on the questions
about bond investing that you and I have been Mother: I thought managers are supposed to treat
discussing? clients, not the other way around.
Daughter: The directors basically agreed to disagree. A Daughter: The managers I'm talking about are forming
few of them wanted to make the changes that partnerships that are vastly oversubscribed,
I advocated in my talk with you -- cut the so the shoe's on the other foot, so to speak.
normal allocation to bonds, tighten up the
quality and callability constraints, and invest Mother: Were the managers impressive?
the proceeds in higher-returning assets -- but
the majority favored maintenance of the status Daughter: Very -- not only the PI types but also the
quo. Evidently, the policies I favored are too marketable securities managers that made
radical for most of the organizations that TIFF presentations to the board.
aims to serve.
Mother: What about the directors? Were they equally
Mother: Was that the only reason your side didn't impressive?
prevail?
Daughter: No comment. You can judge that for yourself
Daughter: No, the board also decided that it would be when TIFF holds its first Members' meeting
unseemly for the cooperative to suggest that next May in Charlottesville.
foundations shift money out of bonds and into
strategies with a higher expected return until
TIFF's absolute return fund is up and running.
8