I have the audacity to believe that people everywhere can have three meals a day for their bodies, education and culture for their minds, and dignity, quality and freedom for their spirits.
– Martin Luther King, Jr.

Frequently Asked Questions

Who is Hammond Associates?

Founded in 1985, Hammond Associates Institutional Fund Consultants, Inc. provides investment advice and consulting services to over $56 billion in total assets. At the heart of its business are Foundations and Institutions of Higher Education. Its founder, David Hammond, a United Methodist began the firm with two United Methodist accounts, Central Methodist University and the Missouri United Methodist Foundation. Its staff of 120 employees is headquartered in St. Louis, Missouri. The firm has more than 20 full time research staff, 25 staff dedicated to performance analysis and reporting and more than 30 full time consultants.

What is Hammond’s investment performance track record?

Hammond Associates’ institutional clients have fared well versus the Wilshire Total Fund Universe over the past 1-, 3-, 5- and 10- year periods. For example, more than 90% of Hammond clients rank in the top half compared to Wilshire’s Total Fund Universe. Client returns, net of investment fees are described in the table below.

Hammond Associates’ Client Returns (Annualized) – All Institutional Portfolios1

As of 12/31/2007	1 Yr (%)	3 Yrs (%)	5 Yrs (%)	10 Yrs (%)
Median	9.9	11.0	14.8	8.9
Low	2.7	4.8	4.9	5.0
High	15.5	15.2	19.9	11.1
Benchmark2	6.1	7.5	10.4	6.2

¹Past performance is no guarantee of future results.
²70% S&P 500/30% Lehman Aggregate Bond

What are the major differences in Hammond Associates’ investment recommendations compared to the Foundation’s previous Investment Program?

There are three major changes in the Foundation’s new Investment Program:

• Because asset allocation is the most important variable in investment performance, the new program gives investors a choice of three Investment Fund models – Conservative Fund, Moderate Fund and Aggressive Fund. Based on the objectives of each fund, Hammond has set a target allocation for each asset class in the portfolios. For more information on asset allocation and the Investment Fund models, click here.
• The three Investment Funds will be more broadly diversified than in the past, using additional asset classes.
• Lower cost passive index managers will be prevalent in all three funds, reflecting a high level of efficiency in traditional investment markets. Previously the Foundation’s portfolios were all actively managed. The use of index funds will result in a savings in investment fees of 10 – 20 basis points (.01% - .02%). For more about the Foundation’s investment fees, click here.

Where are the assets of the Foundation’s Investment Program held?

The Foundation contracts with Charles Schwab & Company, Inc. for custodial services. Hammond Associates has developed an agreement with Charles Schwab resulting in free custodial services for Hammond clients.

What about socially responsible investing?

The Foundation remains committed to using the socially responsible investment (SRI) practices, reflecting the values of The United Methodist Church as described in The Book of Discipline of The United Methodist Church and The Book of Resolutions of The United Methodist Church. Informing all positions are 160-165, “The Social Principles”, from The Book of Discipline, and Resolution 312, “Investment Ethics”, from The Book of Resolutions. The Foundation uses the portfolio screening standards and restrictions established by the Board of Pensions of the United Methodist Church. In asset classes where the Investment Funds will use index funds, investment managers have been identified that can offer customized index products, with specific market sectors and/or individual companies screened out of the index. For more information on SRI standards and practices of the Board of Pensions, click here.

How does socially responsible investing affect investment performance?

Socially responsible investing (SRI) spans a wide and growing range of products and investments, with estimates of $1 in $9 invested now participating in socially responsible practices. Like all investors, socially responsible investors seek a competitive financial return on their investments, and the good news is that it is possible to consistently achieve this. A growing number of academic studies have demonstrated that SRI mutual funds perform competitively with non-SRI funds over time. Click here for a link to several studies and more information on this topic.

What additional asset classes will be used in the Foundation’s investment program beginning June 1, 2008?

All the Investment Funds will include positions in international emerging market stocks, global and inflation protected bonds and real assets (primarily real estate Investment trusts – REITs - and energy). Though not in the initial portfolio mix, small- and mid-cap domestic stocks are asset classes that will likely be used in the future as market conditions change. The Foundation’s Investment Policy Statement describes those asset classes approved for use in its Investment Funds. The policies are under review by the Investment Committee and the Board may approve revisions to the policy statement at its September 2008 meeting.

What are the definitions of the various asset classes?

Click here for a glossary that defines each asset class.

Why are Index Managers being used in some asset classes?

In certain asset classes, the markets respond almost immediately to any changes in the investment environment. For example, when information is announced about US economic indicators that is especially disappointing or exceeding previous estimates, the domestic markets have adjusted for that news within a very short time frame, perhaps within hours. It is very difficult for investment managers to outperform the market after investment fees and transaction costs in efficient markets, except by luck. And the cost advantage in using index managers is significant. For example the costs to index the S&P 500 are typically one-tenth the cost of active large-cap management (including trading costs). For details on the investment fees for the Foundation’s Investment Program, click here.

What are the fees for the Foundation’s Investment Program?

As the Foundation conducted its evaluation of the Investment Program, it became apparent that there was opportunity to realize modest savings in total fees for investment management and administrative services. Savings are being realized by the use of index fund managers in several asset classes. For a detailed breakdown of fees, click here.

How can I get more information on Hammond Associates’ investment research and forecasts and their best ideas for investment of institutional funds?

Hammond Associates’ Research Department publishes a quarterly Research Report. The Executive Summary of the report will be available on our website. For a copy of the complete report, contact us.

Which Investment Fund will maximize income for our account(s)?

The projected yield for the Conservative Fund is 3.7%. This estimate represents earnings from only dividends and interest and includes no capital appreciation. For investors with a goal to maximize current income and who are limited to withdrawals of interest and dividends only, the Conservative Fund offers the highest potential yield.

However, for those funds that are permanent investments, such as endowment funds, an investment strategy that spends only earnings from dividends and interest and invests the funds to maximize current income ignores another important issue: the cost of inflation over time. To discuss the possibility of using a total return approach for investment contact us.

What is a Total Return Investment Strategy?

The total return on an investment includes income from dividends and interest, as well as appreciation or depreciation in the value of the investment, over a given time period. Investments that are considered permanent funds, such as endowment funds, are charged with protecting the corpus (principal) of the fund and spending only the earnings. In order to preserve the purchasing power of the permanent fund, inflation must be taken into account. An investment strategy for such funds balances both current and future income as well as maintaining the purchasing power of the fund. Thus one of these investment objectives may be most appropriate for permanent funds:

• Balancing long-term growth of the fund and current income, or
• Maximizing long-term growth of the fund

A Total Return investment strategy may be accompanied by a Total Return Spending Policy.

What is a Total Return Spending Policy?

Rather than setting spending from the fund at the amount of interest and dividends received for a period of time, a Total Return Spending Policy establishes a percentage of the total fund as the amount available for spending. Generally the percentage is 3.5% -5% of the 3-year (or 5 –year) rolling average market value of the fund. The market value of the fund includes principal, interest earned, capital appreciation and/or capital depreciation over the period. For more information on Total Return and how it might be appropriate for one or more of your funds, contact us.