Mission Impossible: Foundation Investment Policy in the Post-COVID World

Abstract

This article focuses on the management of endowments that are associated with private and community charitable foundations. Endowment portfolio managers face a difficult environment due to low interest rates and high inflation. We construct a novel return hurdle for foundations that is forward-looking and market based. This return hurdle indicates that the total and excess returns necessary to meet typical foundation portfolio objectives are near all-time highs. There are no riskless spending policies available for foundations that desire to operate in perpetuity. While some investment committees and portfolio managers will be compelled to “risk up” to try to meet their return and distribution objectives, doing so creates a nuanced set of trade-offs that impact the broader objectives that most foundations consider when determining success or failure. We illustrate the tradeoffs and offer some suggestions for improving outcomes in the post-COVID environment.