Foundation and endowment funds have very long investment horizons and high risk tolerance. Their goal is to maintain and grow the fund’s value over decades to provide stable financial support for their charitable causes. As a result, their investing strategies focus on long-term capital appreciation rather than current income. Typical strategies include investing heavily in equities, alternative investments like private equity and venture capital, and less liquid assets compared to individuals and other institutions. Diversification across asset classes, geographies, currencies and strategies is key to manage risk while capturing equity premiums over the long run.Unlike mutual funds, foundations and endowments do not need to worry about investor withdrawals. However, they still need to balance spending needs, inflation protection and growth. Finding the optimal rate to spend from the endowment each year is an important consideration. Overall, foundation and endowment investing strategies emphasize patience, reasonable risk-taking and planning over multiple generations.
High allocation to equities and alternatives targeting growth
Foundations and endowments allocate 60-80% of their portfolios to equity-oriented strategies since equities have generated the highest long-term returns. This includes public equities across styles, factors and geographies as well as private equity and venture capital funds. These less liquid alternatives can generate equity-like returns with lower volatility. Capturing illiquidity and complexity premiums justifies their higher fees. Maintaining discipline through market cycles takes skill but pays off over decades.
Investing across the risk spectrum for diversification
Within their equity allocations, foundations and endowments seek to diversify across the risk spectrum. This includes core passive strategies, factor tilts, active quantitative and fundamental approaches, concentrated bets, as well as early-stage venture bets. Such diversification provides differentiated return streams while managing portfolio volatility. Patiently investing across public and private markets over long periods can compound small return advantages into meaningful incremental endowment value.
Dynamic spending policies balancing present and future
Determining the optimal annual spending rate from endowment funds involves tradeoffs. Spending too little leaves less money for current needs while spending too much risks eroding the fund’s inflation-adjusted value. Typical endowment spending policies mandate annual payout rates of 4-5% of assets based on the average fund value over multiple years. More dynamic rules adjust the rate based on market returns – allowing more spending after years of strong returns and less after weak returns. Such policies aim to maintain intergenerational equity and a balance of present and future needs.
Governance structures enabling long-term orientation
Endowments and foundations organizationally separate portfolio management from spending decisions. Committees overseeing the endowment are focused on maximizing long-term returns while respecting risk constraints. They hire experienced chief investment officers to execute portfolio strategy rather than non-profit program staff. Governing boards approve asset allocation policy ranges but grant flexibility to tactically shift allocations. Such governance structures empower investment staff to maintain discipline amidst volatile markets and economic cycles.
In summary, foundation and endowment investing strategies target long-term capital appreciation to sustainably grow funds over generations. High equity and alternative allocations provide growth, diversification manages volatility and dynamic spending rules balance present and future needs.