Non Profit Organizations

Foundations and endowment funds face a unique set of challenges. However, while the specific challenges may be unique, the path to success is not. The path begins with the establishment of a well-defined set of goals. These goals are then translated into a well-articulated investment strategy, formalized through the adoption of a well-designed investment policy, and implemented through the construction of a well-diversified portfolio.

Spending Rates

Private foundations are required to spend a minimum of 5% of endowment assets annually in combined grants and administrative expenses. Recent studies show the vast majority of foundations stay very close to this 5% rate. While spending less than 5% is not an option, should some foundations be spending more? Depending on the goals of the organization, the answer may be yes.

Mission Statement

Foundations and endowment funds can often be pulled in many directions. With numerous constituencies promoting their vision and objectives on one end, and sometimes fierce competition for funding on the other, it is very important to have a plan in place. The mission statement articulates the foundation’s reason for being. It specifies the goals of the organization, and defines the particular means by which these will be achieved.

Investment Policy

Adopting an investment policy that is consistent with the goals of the foundation is crucial. While a conservative, income producing policy may provide much of the needed annual cash flow, it may do so at the expense of the long-term goals of the foundation. On the other hand, an overly aggressive investment strategy may result in cash flow shortfalls which threaten short-term funding needs. In light of this, it is important to focus on total return when developing investment policy, and to formalize this policy in a written Investment Policy Statement.

Asset Allocation

Asset allocation is the most important decision in the investment management process. Perhaps nowhere is this decision more important than the world of foundations. The tug-of-war between long-term goals and short-term needs can appear to be irreconcilable, seeming to call for diametrically opposed investment strategies. A well-designed asset allocation study, utilizing a broad range of asset classes, can help strike the right balance between current funding needs and long-term capital appreciation.

Diversification

While the merits of diversification are widely accepted, its importance to the long-term success of foundations and endowment funds cannot be overstated. Diversification across a broad range of asset classes serves to smooth out portfolio returns. Periodic rebalancing of the portfolio enhances the benefits of diversification, and can be coordinated with the targeted spending rate to provide the required cash flow with no unnecessary disruption to the portfolio.

Whether your organization is a newly formed private foundation, a well-established fund with a long record of success, or something in between, Prism Capital can help you achieve your goals.