Foundations and endowments are non-profit entities that rely on their investment portfolios to fund operations and donations. Their investing strategies are unique due to long time horizons, high risk tolerance, and need to preserve capital. Key strategies include diversification across asset classes and alternative investments.
For diversification, foundations may allocate funds across equities, fixed income, real estate, private equity, hedge funds and more. This spreads risk and enhances returns. Alternative investments like private equity, venture capital and hedge funds are riskier but offer higher growth potential over the long run.
Other common tactics are investing in undervalued assets, avoiding overvalued investments, and patient holding periods. Foundations also emphasize sustainable and socially responsible investing aligned with organizational missions. Tactical shifts in allocations and opportunistic investments may also occur. The focus is maximizing returns to fulfill spending needs on an ongoing basis.
Diversification across wide range of asset classes
Foundations and endowments invest across a wide variety of asset classes to diversify and enhance risk-adjusted returns. Typical asset classes include domestic and international stocks across market caps, investment grade and high yield fixed income, real estate, commodities, private equity, venture capital, hedge funds and more. Correlations between these assets may be low or negative, allowing foundations to reduce portfolio risk through diversification.
Higher returning assets like equities and alternative investments comprise a significant portion of endowment portfolios, often 50% or greater. More conservative assets like cash, Treasuries and investment grade bonds are also included for stability and liquidity needs. Tactical tilts between classes allow capitalizing on market opportunities while maintaining a long-term strategic asset allocation.
Alternative investments offering higher returns
Many foundations and endowments dedicate over 20% of their portfolio towards alternative investments like private equity, venture capital, hedge funds, managed futures and more. These come with higher complexity, fees and illiquidity but can generate returns exceeding public markets over long periods. Private equity funds invest in non-public companies and aim to profitably sell them later on. Venture capital provides funding for startups with exceptional growth potential. Hedge funds utilize tools like short selling, leverage and derivatives across diverse markets and asset classes. While riskier, their returns and diversification benefits may be compelling for foundations over 5, 10 or 20 year horizons as major market drawdowns can be endured.
Patience and holding power
Unlike individuals or corporations, foundations and endowments have extraordinarily long investment horizons stemming from their perpetual existence. Major market declines may pressure others to sell, but endowments are able to patiently hold assets until values recover, sometimes for years. This permitless avoiding sales at market bottoms and riding out volatility. Their structure and lack of liquidity needs empower them to focus on long-term total returns rather than short-term price fluctuations. Warren Buffet has stated “Our favorite holding period is forever” – endowments similarly emphasize patience and conviction when investing.
Socially responsible investing
Many endowments emphasize socially responsible investing and assets aligned with their organizational missions. This may translate into stocks and bonds issued by companies deemed to have ethical environmental, social and governance practices. It can also include impact investments designed to generate social or environmental benefits alongside financial gains. Shareholder advocacy and proxy voting to positively influence corporate policies also occur. While financially driven, endowment investing incorporates social objectives and values to make a difference.
Dynamic strategy allows capitalizing on opportunities
Endowment investment strategies remain dynamic to capitalize on new opportunities as they emerge. As market conditions evolve, tactical asset allocation shifts may tilt portfolios towards relatively undervalued sectors expected to outperform. Some alternative investments come with short lock-up periods allowing entrance and exit as prospects change. Opportunistic purchases of individual securities compliment strategic allocations when prices become compelling. While maintaining diversified asset classes as a core portfolio, endowments make moves around the edges to enhance risk-adjusted returns over time.
In summary, foundation and endowment investing centers on diversification across varied asset classes, inclusion of higher returning alternative investments, patience to ride out volatility, social responsibility, and flexibility to capitalize on market opportunities. Their structure and perpetual existence empower them to endure risk and boost returns in support of their spending needs and missions.