Endowments1 seek to earn a real return in the neighborhood of at least 5%. For decades, both stocks and bonds produced returns that were comfortably, if not consistently, above a real 5% return, especially on a 10-year rolling basis. However, about seven years ago, 10-year rolling nominal returns from fixed income dropped below 5%, and that declining trend has not just continued but is likely to get worse.

 

How have the roles of fixed income in endowment and endowment-like portfolios changed due to the decline in experienced and expected returns? How should investors implement portfolios using fixed income? This paper attempts to address these issues using both historical data and a skeptical eye toward the future.

 

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1 We use the term “endowment” in this paper to refer to perpetual portfolios — those with very long investment time horizons or those intended to exist in perpetuity. 

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