No. 5/2016:Investing it, Spending it: Interactions between Spending and Investment Decisions with a Sovereign Wealth Fund

Abstract

We analyze spending and investment decisions for endowments, with a special fo cus on Sovereign Wealth Funds. The preferred spending pattern has implications for the investment decision and the two decisions should not be separated. When interest rates deviate from their long-term mean level, this a?ects both the draw rate on the fund and asset allocation. The speed at which the interest rates revert back to their mean level is important. We show that short-term smoothing of the spending sup ported by the funds immediately increases endowment volatility because it a?ects the funds principal value. Furthermore, it also tends to increase future spending volatility