With the development of economy, foundation and endowment funds have become an important way for the wealthy to give back to the society. However, there are some key differences between foundation and endowment in terms of investment objectives, spending policies, and risk preferences. This article will analyze their similarities and differences in investment management through multiple perspectives.
The key similarities between foundation and endowment investment management
Although foundation and endowment have some significant differences, they also share some key similarities in investment management: 1) Both enjoy tax exemptions and aim to create long-term social impact; 2) Professional investment managers are hired to generate stable returns from the funds; 3) Diversified asset allocation strategies are implemented to balance risk and return; 4) Ongoing donations and reinvestment of returns allow the funds to grow over time.
The differences in spending policies and risk preferences
Endowments focus more on preserving capital and can cut spending in market downturns. Foundations have mandatory minimum payout rates each year regardless of market conditions. This forces foundations to have lower risk tolerances. Endowments have more flexibility to take on equities and alternatives to maximize long-term growth. Foundations rely more heavily on investment income and have fewer new donations, necessitating a more conservative asset allocation.
Endowments attract more donations and have larger AUM
Endowments like college funds receive steady donations year after year from alumni and other benefactors. The constant inflow allows endowments to achieve larger AUM over time. Foundations depend primarily on returns from an original donation, and don’t always receive significant new donations. This also contributes to endowments taking more risk to pursue higher returns.
In summary, endowments and foundations have some core similarities in utilizing professional investment management to grow charitable funds. But endowments are perpetual, care more about capital preservation, receive more donations, and thus can afford higher risk tolerances. Foundations distribute more income annually and rely on a single donation, necessitating a more conservative approach.