Investment Policy for Private Foundations: Seeking Compliance and Survival in the New Normal

Abstract

In order to ensure long-term viability and impact, many private foundations have three basic investment policy objectives: 1) distribute 5% of the net fair value of their assets per year, 2) maintain at least a constant level of real (inflation-adjusted) charitable giving per year, and 3) do so in perpetuity. The investment hurdle rate for a private foundation, defined as the return in excess of short-term nominal interest rates necessary to meet the above objectives, is therefore a function of the 5% distribution requirement, nominal interest rates, and level of inflation. The current market environment of low nominal interest rates and negative real interest rates presents perhaps the most challenging period in the past thirty years for achieving these goals. The author uses a simulation analysis based on market-derived capital market assumptions to estimate probabilities of success for three portfolios of various estimated risk levels over the next two decades. Notably, the analysis implies that most foundations will be unlikely to maintain the inflation-adjusted value of their corpus—in addition to meeting the 5% distribution requirement—over the next 10–20 years.