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Interview: “Endowment Funds Aren’t Rocket Science”

By Markus Hill, Independent Asset Management Consultant

(Published in German on 21.08.2013; www.die-stiftung.de - “The Endowment”, Germany)

Talking with Markus Hill, MH Services, about the nature of endowment funds and what selection

criteria foundations should consider.

THE FOUNDATION: What is an endowment fund?

Markus Hill: In contrast to the official, narrow definition that exists in the foundation sector,

everyday use of the term typically refers to a mutual fund whose payout, for example, provides

financial assistance to the foundation’s purpose. Foundation-specific achievements are listed in the

investment policies. Often, this term is also associated with distributing blended funds or the phrase

asset management approaches.

THE FOUNDATION: What is the difference between an endowment fund and other funds or

fund categories?

Markus Hill: Investment policies and fund information refer specifically to the workings of

foundations. Security, risk distribution, and payouts are particularly emphasized, clearly addressing

the target group foundation in a focus manner. Obviously, there are other mutual funds that meet

similar needs. However, these are initially harder to identify for foundation decision makers.

THE FOUNDATION: What category would be the best fit for endowment funds?

Markus Hill: Officially, the areas of asset managing or defensive are targeted. Sometimes, this can

be misleading because second-tier stock equity funds with smart risk management and thought-out

distribution also exhibit an asset managing or defensive character and may generate payouts for

foundations. But selection isn’t an easy task. The decision maker who focuses too much on pensions

or rather defensive concepts during the selection phase may potentially overlooking interesting

portfolio building blocks with good diversification effect.

THE FOUNDATION: Let’s talk some more about selection. What approaches are there in

terms of endowment funds?

Markus Hill: You will find rough approaches with a focus on bonds, convertible bonds, and stocks.

Yet, concepts that focus, for example, more strongly on the money market in combination with

sustainability aspects can also become of long-term interest to foundations. Whether foundation

aptness exists for every fund should be questioned. Something foundations should do, however, is to

think outside the box. In some cases, international providers do a good job and offer foundations

funds for their respective profiles. A natural likeness does exist between the interests of foundations

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and independent asset managers. Accordingly, their so-called private label funds could be one way to

approach fund building blocks outside the endowment fund universe.

THE FOUNDATION: Are endowment funds always set up for payouts?

Markus Hill: Ideally, they should. The majority of them are payout distributing. Anything that eases

decisions of those in charge at foundations or dismantles complex processes can be helpful. Frequent

payouts in the endowment sector can be considered a “hygiene factor.”

THE FOUNDATION: Is an endowment fund cheaper than a conventional fund?

Markus Hill: The expected return rate of distributing but rather defensively structured funds is

typically conservatively calculated and with little wiggle room in terms of capital markets, these

funds should indeed offer a cheaper alternative to individual investments. Price structures should be

viewed as moderate. Whereas one must emphasize here that the duties of a good asset manager, for

instance, should rather be to work out a one percent additional performance above market gain than

to present his fund with a 0.1% cost advantage for fund selectors.

THE FOUNDATION: Where do I find information about endowment funds?

Markus Hill: A good start would be the websites of capital investment companies; in addition to

other funds, they also offer particular kinds of endowment products (e.g., Universal Investment and

others). There are internet platforms such as your own (www.die –stiftung.de), websites such as

www.fondsweb.de or providers such as MMD that render general fund characteristics and

endowment funds in particular visible. Intensive studying of industry press publications and their

partially included fund data overviews can also offer great advice. One must consider though the

clear categorization between expert information and “advertisement prose.” Larger foundations have

specialists or utilize consulting firms for the pre-selection—not only for mutual funds but also for the

designation of special fund mandates. This, however, is an approach not suitable for “small”

foundations. A cost efficient, creative plan is thus a must-have for the fund selection (“information

procurement”). Associations such as the German Association of Independent Asset Managers with

special interest groups and member products can be a first point of contact.

THE FOUNDATION: How do I recognize a good endowment fund?

Markus Hill: It is a rather broad range of functions that foundations should consider. Technical

criteria with measurement traits could be low drawdown, steady and risk-adjusted satisfactory

performance, volatility, low recovery periods, and costs. These factors actually play an equally

important role in regular fund selection. For foundations in particular, fund management quality,

processes, and staff fluctuation of the provider are also important factors. Foundations should pay

special attention to the matter of stability here. It can be quite noticeable if an endowment fund is

managed by a firm that in itself has distinctive experience with foundations or foundation like

investment types. This could be a corporation that manages pension funds, an independent asset

manager, or a family office that grapples with the tense area of rate of return and capital preservation.

What is most important though is that the performance is right over time. Pure foundation expertise

in combination with mediocre to bad value development does also lead to argumentative distress for

the investment decision maker of foundations during panel discussion.

THE FOUNDATION: What else should decision makers of smaller foundations consider

during endowment fund selection?

Markus Hill: Of course, other investors can also be attracted to the defensive concepts of

endowment funds. Foundation decision makers without large budgets for specialists and consultants

may find solid basis for their decisions regarding endowment funds in publicly available,

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independent and dependent information sources. In my opinion, they can fulfill their duty to careful

selection, assuming they have in-depth subject matter interest and ability. It becomes difficult,

however, when the decision maker has to wear too many hats. Some people then use extreme

measures to achieve support. By the way, this is also an interesting field for volunteer workers with a

background in banking. Professionalization with budget and external consultants for the selection of

mutual funds (“Whip or transparency!”) is only applicable for a small number of foundations. It thus

calls for conducting research, examining databanks, and doing homework. Regardless of the size of

the task, my opinion stays the same: For many foundation decision makers, selection of applicable

funds doesn’t have to mean rocket science!

THE FOUNDATION: You are absolutely right. Thank you very much for your candid words.

The interview was conducted by Tobias Karow. Markus Hill is an independent asset management

consultant. He is considered an insightful expert in the fund industry. His expertise, particularly in

the area of private label funds, is widely used by professional investors, family offices, insurances,

pension funds and increasingly also by foundations: www.markus-hill.com

Feedback, additional thoughts, experience or any kind of dialogue on such context is most

welcome; please contact info@markus-hill.com or Mary Daute (Asst. Manager). Phone: + 49

17 66 33 66 094

Markus Hill

Markus Hill (MSc in Economics) is an independent asset management consultant based in Frankfurt,

Germany Professional experience includes SEB Bank and Credit Suisse Asset Management. In

addition, he worked as head of sales and PR for a German fund boutique. Since 2005 he specialized

in the management of mandates, sales, marketing, and PR (consulting, "introducing"). Markus is also

involved in selecting themes in the specialist areas of target funds with a multi-management aspect,

fund boutiques and mutual funds for institutional investors (product scouting, fund selection).

Furthermore he is actively engaged in cooperation with the market-leading Private Label

Funds/Master KAG in Germany (Universal-Investment) promoting the idea of independent asset

management and was the Co-Initiator of the first all-German Consultant survey in 2005 and the first

"UCITS-survey" in 2003. Market entry into Germany, behavior of fund selectors and fund providers

in German asset management industry are often discussed by him, e.g. in his asset-management-

publication MH-Focus. Through many articles, columns and presentations (national and

international) he has become a highly recognized expert in the German asset management industry.

"Industry multiplier" is a term often used by journalists and clients to describe his style and

personality. (Markus Hill/ MH Services assigned in the role of Media Partner for: UCITS

Alternatives Conference in Zürich, September 2011)

Markus Hill MH Services

email: info@markus-hill.com

website: www.markus-hill.com

phone: 0049 (0) 69 280 714 mobile: 0049 (0) 163 4616 179