Endowment Investment TV


The general view of investing in Endowment Policy

Endowment Policy

The endowment policy is a type of life insurance policy that designed to pay a lump sum at a certain time or if the person dies an endowment policy may mature at ten, fifteen, or twenty years and some of these policies may also provide money if there is a serious illness. Endowment policies are generally the traditional with-profits or unit-linked and with unitised with-profits funds.

Surrender Value and Adjusted Market Value

Endowments can sometimes be chased early or surrendered early and the policy holder receives the amount of the surrender value determined by the insurance company. How much is received is going to depend on how long the endowment policy has been in effect and the amount paid in to it. Under bad investment conditions the encashment or surrender value may be reduced by a market value adjuster to squeeze out some cash during the time when investment conditions are not good and this means the investor will received only the surrender value minus the adjusted market value.

Stanford to Purge $18 Billion Endowment of Coal Stock

Posted on MAY 6, 2014
Article from http://www.nytimes.com/

Stanford University announced Tuesday that it would divest its $18.7 billion endowment of stock in coal-mining companies, becoming the first major university to lend support to a nationwide campaign to purge endowments and pension funds of fossil fuel investments.

The university said it acted in accordance with internal guidelines that allow its trustees to consider whether “corporate policies or practices create substantial social injury” when choosing investments. Coal’s status as a major source of carbon pollution linked to climate change persuaded the trustees to remove companies “whose principal business is coal” from their investment portfolio, the university said. 

Stanford’s associate vice president for communications, Lisa Lapin, said the decision covers about 100 companies worldwide that derive the majority of their revenue from coal extraction. Not all of those companies are in the university’s investment portfolio, whose structure is private, she said. Over all, the university’s coal holdings are a small fraction of its endowment.

“But a small percentage is still a substantial amount of money,” she added. 

The trustees’ decision carries more symbolic than financial weight, but it is a major victory for a rapidly growing student-led divestment movement that is now active at roughly 300 universities. 

At least 11 small universities have elected to remove fossil-fuel stocks from their endowments, but none approaches Stanford’s prestige or national influence.  Tuesday’s decision seems likely to increase the pressure on other major universities to follow suit.

Among other universities, Harvard has resisted student pressure for divestment, and one student was arrested on Thursday after pro-divestment activists blockaded the entrance to the school’s administrative offices.

Stanford’s trustees acted after Fossil Free Stanford, the campus branch of the movement, petitioned the board to re-evaluate the university’s holdings in energy companies, Ms. Lapin said.

Yari Greaney, 20, a Fossil Free Stanford organizer, said the group was “very proud of Stanford taking this leadership position.” Nationally, leaders of the divestment movement praised the school for its decision. 

As a global institution, Stanford “knows the havoc that climate change creates around our planet,” Bill McKibben, the president and co-founder of the environmental group 350.org, said in a statement. “Other forward-looking and internationally minded institutions will follow, I’m sure.”

Maura Cowley, the executive director of Energy Action Coalition, an assemblage of groups active on climate change issues, called the decision “a huge, huge victory.” 

“Their decision, coming from such a major university and from such a huge endowment, shows that the coal industry and other fossil fuel industries are quickly becoming relics of the past,” she said in an interview.

The trustees began studying divestment after Fossil Free Stanford petitioned them to re-evaluate their holdings of energy companies. An advisory panel that included students, faculty, staff and alumni spent roughly five months studying the issue before recommending that coal stocks be sold, Deborah DeCotis, the chairwoman of the board’s special committee on investment responsibility, said in an interview.

Among other deciding factors, Ms. DeCotis said, the panel noted that coal produces the most carbon per British thermal unit of any widely used fossil fuel, that practical alternatives to burning coal are available, and that the university was not dependent on coal or coal-derived products.

Other fossil fuels did not meet some of those criteria, but “this is not the ending point. It’s a process,” she said. “We’re a research institute, and as the technology develops to make other forms of alternative energy sources available, we will continue to review and make decisions about things we should not be invested in. Don’t interpret this as a pass on other things.”

Ms. Lapin said the school is already asking its investment advisers to review endowment holdings and sell stocks of coal companies. The order covers mutual funds with coal stocks as well as investments in individual companies, she said. 

Posted on MAY 6, 2014
Article from http://www.nytimes.com/

Where Big Money Endowments Are Investing Now

Kenneth Rapoza, Contributor
Posted on 4/30/2014 @ 10:24AM

Even though the U.S. economy slowed to a crawl in the first quarter, managers in charge of large endowment and foundation funds are in good spirits. Their favorite portfolio investments spots this year include emerging markets, and for hard assets — real estate. And they are more bullish about alternative and foreign investments than U.S. securities.

A first quarter survey of endowment and foundation managers conducted by industry consulting firm NEPC showed that 75% of respondents feel the economy is in better shape now than a year ago. The survey gives financial advisors a sense of investor sentiment in one of the most prized clientele segments for wealth management firms.

“Overall confidence is reflected in more than half of endowments and foundations polled saying the markets will show high single-digit returns and their strong conviction that equities, both U.S. and emerging markets, will be the top performers in the year ahead,” said Cathy Konicki, a partner at NEPC in Boston.  The survey was conducted this month, so respondents were already aware of a slowdown in China, the Russia-Ukraine crisis, and a less-stunning S&P.  U.S. equities in the S&P 500 rose around 1.3% in the first quarter, beating out emerging markets, the MSCI Europe and Japan.

According to NEPC survey of endowment and foundation investment trends, allocating to emerging markets and alternative investing now trump U.S. equities.

The U.S. economy expanded just 0.1% in the first quarter due to weaker than expected exports, the Commerce Department said on Wednesday. GDP growth, while still positive, is a stark contrast from the 2.6% gain in the fourth quarter.

Economists polled by Reuters expected growth to come in at 1.2%. Commerce blamed the slowdown on consumers hibernating this cold winter, and construction crews buying less material for outdoor projects as a result.

Big money endowments have  lived through the cycle and it doesn’t phase them one bit.

One of the more interesting takeaways from the survey is the interest in emerging market equity.  Emerging markets have been getting clobbered much of the year, thanks primarily to the continued round of lackluster economic news out of China, the preferred punching bag of financial pundits.

Year-to-date, the MSCI Emerging Markets Index is down 1.62%, while the MSCI China is down 9.39%.

Nevertheless, endowment and foundation money say emerging market equities will be one of the strongest performers of 2014.  It tied for first with domestic equities when asked for this year’s top performing asset class, each earning 22% of the vote.

The poor man’s emerging markets, the so-called frontier markets, will an underweight. However, 42% of survey respondents said they are considering an allocation to frontier specialty funds in the future.

Allan Conway, head of emerging market equities at London-based investment bank Schroders told FORBES recently that investors should follow their lead and start buying emerging markets now.  ”I’m expecting a big bounce later this year into next year,” he said.

While flow data does not suggest a shift in asset allocation, NEPC’s survey said there continues to be a migration of capital from traditional equity and fixed income strategies to non-traditional assets, including specialty funds and hedge funds, limited liability corporations, and  private equity.

More importantly, only 4% of respondents said they’ll be putting more money to work in the U.S. stock market through traditional means. But 81% said they were planning to increase exposure to multi-strategy funds, credit-linked funds and specialty hedge funds.

Then there’s private equity, which continues to be the favorite “alternative investment” for endowments and foundations.  Some 38% said they’ll be investing more in private equity this year, up from 32% last quarter.

Despite overall market confidence, 50% of respondents said that a slowdown in global growth was the single greatest risk to investment performance, down from 60% who said so in the fourth quarter.

For those who demand more dour news about the U.S. market at least, there is Marc Faber of the Gloom, Boom & Doom Report. He said on CNBC today that the Nasdaq is due for a “dramatic correction” this year, especially social media stocks like LinkedIn and Facebook.  On the other hand, he likes emerging markets.

“U.S. investors have to now choose what to buy. I believe it is too late now to buy the U.S. stock market,” he said.  ”I’m not ruling out a further bond rally…but in general I think that individual investors are excessively optimistic about their future returns.”

Kenneth Rapoza, Contributor
Posted on 4/30/2014 @ 10:24AM

Endowment mortgages: Legacy of a scandal

By Kevin Peachey Personal finance reporter, BBC News
4 January 2013 Last updated at 00:01 GMT

Nearly 25 years ago, Christine Taylor took the plunge and bought the first and only house she has ever owned.

Now, more than two decades on, she admits that paying off the resulting debt has been a constant worry.

That is because she was sold an endowment mortgage - a monthly savings plan, usually invested in shares and property, which was designed to pay off the home loan at the end of the term.

Like millions of other home buyers, she was also told that the policy might bring her a nice lump sum when the endowment matured after 25 years. In her case, the surplus was expected to be at least £10,000 in August 2013.

"I hadn't any fancy ideas about going on a spending spree," says the 55-year-old.

"I just thought I would be comfortable, with the mortgage paid off."

As it is, Mrs Taylor is among the hundreds of thousands of people who will receive final confirmation this year of a shortfall in the expected payout of the endowment.

"I've been struggling to get my mortgage down, but I'm glad we chipped away at it," she says.

"There will be people in a lot worse situation than I am."
'Optimistic' expectations

The rise and fall of endowment mortgages has been a feature of one of the most notorious mis-selling scandals in the last few decades.
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The industry grew as a result of tax breaks, and hit its peak towards the end of the 1980s when it became the fashionable home loan for those getting on the property ladder. The estimated peak was more than a million policies sold in a single year.

The extent of the subsequent decline is clear from the fact that only 27 sales of this product were completed in 2011-12, according to the City watchdog, the Financial Services Authority (FSA)

At the end of the 1980s, there was a boom in both the housing market and stock market, prompting those selling these products to make very high predictions of investment growth in endowment savings plans.

By the middle of the 1990s, it became obvious that these expectations were overblown.

"The original growth estimates on these policies were simply way too optimistic, while the funds just didn't perform as expected," says Phillip Bray, of independent financial advisers Investment Sense.

"In the coming years we'll see just how bad the endowment mortgages mis-selling scandal is."

In the late 1990s, regulators told insurance companies to write "traffic light" warning letters to policyholders to explain the level of shortfall that might occur. A "red letter" meant there was a high risk of the policy paying out less on maturity than the target amount.

Many thousands of people cut the link between the endowment and their mortgage, making alternative plans to pay off their home loan with other savings, investments, or a tax-free lump sum from their pension. Others have switched their mortgage to a repayment model.

Switching mortgages

But Steve Wilkie, managing director of Responsible Equity Release, says his business sees many older people who have not made any plans and may need to downsize where they live.

They are receiving letters asking them how they intend to pay off their mortgage, so suddenly the poor performance of their endowment has become a critical matter.

One issue to their advantage, he says, is that the value of their property has often risen, so there is sufficient equity in the home to pay off the loan, if they choose to sell.

This, clearly, is not the scenario many of these people would have wished for. They wanted the mortgage to be paid off and the property owned outright, ready for their family to inherit in due course.
Houses There are options for homeowners who have still to address a potential shortfall

There are other options for those facing a critical point in their finances, who face a shortfall, and who have not decoupled their endowment and their mortgage, according to Danny Cox, of financial advisers Hargreaves Lansdown.

He suggests people can switch to a repayment mortgage, or part endowment and part repayment - although they should check with their lender that there are no penalties or costs for doing so.

Others may consider cashing in their endowment and using the proceeds to pay down the mortgage, before paying the rest through a repayment method. Again there might be penalties, and there is a judgement to be made here over the future performance of the endowment.

Alternatively people could switch to saving in a more tax-efficient product such as an Individual Savings Account, rather than an endowment.

While considering what to do next, many people who were sold endowment mortgages and face a shortfall might feel somebody else was to blame.

But they could face fresh disappointment because of a deadline on claiming for compensation for any apparent mis-selling.

Policyholders can make a claim to the Financial Ombudsman Service if they believe they were mis-sold the policy, and their endowment provider turns down their claim. Grounds for complaint may include:

  •     Not receiving a full explanation that there could be a shortfall at the end of the mortgage  term
  •     Being told that the endowment would definitely pay off the mortgage
  •     The fees and charges were not explained
  •     An adviser did not complete an assessment of finances and attitude to risk
  •     Sales staff failing to ensure that income was available if the policy ran into retirement years
  •     Receiving advice to cash in an endowment and being sold another
These rules led to complaints to the ombudsman about mortgage endowments totalling nearly 70,000 a year at their peak in the middle of the last decade.

The latest figures show that 2,109 complaints were made between April and September 2012.

However, about half of all the complaints received by the ombudsman are turned down because of a deadline. Claims must be made within three years of the householder realising that the policy was mis-sold.

That date is generally taken three years from the point at which policyholders received their red warning letter from their provider.

Time, it seems, has dealt these people another blow.

Kevin Peachey Personal finance reporter, BBC News
4 January 2013 Last updated at 00:01 GMT