Philosophy of Endurance During this era of Muted Returns

Our foundation uses an investment consultant who we pay on a fee for services basis and we use specialized managers to do the investing.  For some years now, they have been advising us that the years of investment returns being at least 10% or higher are a thing of the past.  We have maintained an investment philosophy that is very diversified.  Although we may occasionally be the “loser” in comparison to our peers, our goal is to be in the top quartile over the long haul which we identify as 10 years or more.  To accomplish that we believe we must find and invest with the best managers.

But how can we endure as a perpetual foundation which was designated by our founder, if we earn only 5% or less in net returns and are required as a private foundation to pay out a minimum of 5% to our beneficiaries? What about the cost of living that continues to reduce the true value of our assets and our grants, even at a historical low percentage of 1% to 3% per year?  Our goal during the past 25 years of our existence has been to earn an average annual return that would be sufficient to pay out our required 5% in grants, cover the cost of inflation at say 3% and grow our assets a few points at say 2% for a total of 10% average which would include periodic dips in the world economy.

That goal was easier to achieve in the past than it is today and we are told for the foreseeable future.  So, what do we do in the face of this dilemma?  We have chosen to keep on moving forward by looking for the very best investment managers, by weeding out the poor performing managers, by keeping our assets well diversified, by questioning our investment consultants on every proposal they bring before us and by optimistically waiting for some better years when returns will return at a higher level.

We are constantly looking at the mix of Foundation assets with a view toward increasing returns while maintaining an adequate level of liquidity.  Given its perpetual mandate the Foundation can probably tolerate greater volatility in returns from year to year if over the long term this strategy produces higher overall returns.  With these thoughts in mind the Foundation is currently considering moderately reducing its weighting in hedge funds and fixed income in favor of equities and equivalents.

We know that the best and brightest economists, investment consultants and even political pollsters cannot always accurately forecast the future.  As optimists, we plan to endure as a foundation and continue our work during this era of muted returns, realizing that although our asset base may be declining now, a brighter day is over the horizon when 10%+ investment yields will return.  We will just keep going.