Is there a reason why we should not use inflation for the return objective of endowments? See question 6 on Andrei Zubov Case Scenario:
_ The return objective = spending rule + growth in operating expenses + investment management expenses _
But no inflation although it is provided in the question.
endowment funds the spending needs of an organization. the overall growth in those expenses are the driving inflation force in those return requirements. If inflation is 3% but the expenses of the hospital you cover grow at 5%, you need to earn that 5% rather than 3% to protect the real value of your assets.
Ah I see. So that means we ignore inflation in endowment fund questions.
no, inflation is still relevant, it’s just that this case scenario fails to mention that the expected expense growth already includes inflation in it,
“The university’s operating expenses are expected to grow at a rate of 2.5% annually, and the rate of inflation in the economy is expected to be 1% a year”
I think I saw a similar question in a Schweser Mock that also did not explicitly point out that inflation was part of the expected expense growth. Is it possible that somewhere in the curriculum it is stated that this is the going assumption?