Investment Policy for Private Foundations: Seeking Compliance and Survival in the New Normal

The Journal of Wealth Management, Spring 2012, Vol. 14, No. 4: pp. 41-50, DOI: 10.3905/jwm.2012.14.4.041

https://doi.org/10.3905/jwm.2012.14.4.041

Posted: 20 May 2019

Date Written: November 1, 2011

Abstract

In order to ensure long-term viability and impact, many private foundations have three basic investment policy objectives: 1) Distribute 5% of the net fair value of their assets per year; 2) Maintain at least a constant level of real (inflation-adjusted) charitable giving per year; and 3) Do so in perpetuity.

The investment hurdle rate for a private foundation, defined as the return in excess of short term nominal interest rates necessary meet the above objectives, is therefore a function of the 5% distribution requirement, nominal interest rates, and the level of inflation. The current market environment of low nominal interest rates and negative real interest rates presents perhaps the most challenging period in the last thirty years for achieving these goals. We use a simulation analysis based on market-derived capital market assumptions to estimate probabilities of success for three portfolios of various estimated risk levels over the next two decades. Notably, our analysis implies that most foundations are unlikely to maintain the inflation-adjusted value of their corpus in addition to meeting the 5% distribution requirement over the next 10-20 years.

Keywords: Private Foundations, Investment Policy, Asset Allocation

JEL Classification: G11, G23, G29

Suggested Citation

Crook, Michael, Investment Policy for Private Foundations: Seeking Compliance and Survival in the New Normal (November 1, 2011). The Journal of Wealth Management, Spring 2012, Vol. 14, No. 4: pp. 41-50, DOI: 10.3905/jwm.2012.14.4.041. Available at SSRN: https://ssrn.com/abstract=2170718

Michael Crook (Contact Author)

UBS ( email )

New York, NY
United States

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