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Asset Allocation for Foundation and Endowment Asset Allocation
Foundations, Endowments and other Not-for-Profit organizations come in all shapes and sizes. The assets that they control and manage for the benefit of countless projects, charities, and causes is staggering in total and it has become a primary market for the vast array of investment products developed by Wall Street financial institutions. One can only speculate about how much "Bubble Paper" finds its way into the these portfolios, but nearly all of them are managed by the major brokerage firms, and all such firms bonus their brokers on the basis of product sales.
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If you were to look back at your foundation/endowment/not-for-profit portfolio of the late 90's, how much was invested in NASDAQ issues, either directly or in the form of mutual funds? Dot.coms? Don't be at all surprised if your more recent reports (2006 thru 2008) are replete with CMOs, CDOs, Index Funds, Foreign Investments, asterisks, footnotes, etc. This is the type of investing that is standard fare on Wall Street and it is certainly something that you need to be concerned about. Wall Street Pros always move the money toward whatever is most popular at the moment.
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From what I've been reading, it seems that the disbursement-budget determination process in some organizations is based on information that has absolutely nothing to do with a portfolio's ability to generate the money being disbursed. Similarly, it appears as though all investments are expected to grow in market value all of the time, irrespective of where mother nature's investment twin is in developing her various cycles. Somehow, a higher market value translates into higher availability of disbursable funds, when, in fact, no such relationship exists.
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Lower valuations are always opportunities to add to holdings; higher ones should provide profit-taking opportunities. Similarly, a portfolio invested in equities with an average dividend yield of 1.5% just will not cover a 4% disbursement nut unless something is sold... a sale that could well be a losing transaction. (Wall Street pros take losses quickly, but rarely take profits in the same manner.) The amount of base income produced by a portfolio is very predictable. In the case of most foundation and endowment portfolios, the rate of annual additions from contributors can also be safely, and conservatively, estimated.
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A properly designed portfolio will constantly generate increasing levels of base income at varying market value levels, and that is the stuff from which disbursements are made. If the payout rate to beneficiaries is 4% (of Working Capital, perhaps) and we want to increase the dollar amount of the 4%, we need simply to increase the assets that are producing the cash flow... by reinvesting some of the income and contributions appropriately. Increasing the market value of the securities looks good but generates no additional regular spending money. In fact, higher yields are always more readily available when prices are down than when they are up... go figure. Really, go figure.
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