Smarter Giving for Private Foundations
A New Approach to Align Spending Policy with Mission
September 20, 2010
Practical Advice for Private Foundations
Private foundations have always faced a balancing act between investing for perpetuity and spending to meet their beneficiaries’ needs. Investing the majority of their assets in the stock market can help them achieve the capital growth they require for greater longevity, but a large stock allocation introduces volatile investment returns, with a potentially negative impact on grant-making. This research report provides practical advice for foundation directors and trustees grappling with this balancing act
In our research, we have explored the trade-offs between various spending policies using historical analysis and proprietary quantitative modeling tools. The research arrives at important and possibly surprising conclusions: First, most foundations should not assume that the legally required 5% spending minimum is their optimal policy—spending policy and asset allocation is best aligned with a foundation’s mission. Second, many foundations can benefit from using multi-year smoothing formulas to limit fluctuations in spending—despite the fact that foundation directors often don’t believe smoothing formulas are viable. Third, foundations can adopt a “stable giving” approach—always giving away the same amount, or more, as they gave away in the previous year—without substantially shortening their longevity.
The “DNA” of Endowments and Foundations