Investment Management & Endowments Flashcards

What is the primary purpose of an Investment Policy Statement (IPS) for a charitable foundation?

Answer: To document investment objectives, constraints, and guidelines for managing assets

An IPS establishes the framework for investment decision-making by documenting the foundation's objectives, risk tolerance, liquidity needs, and asset allocation guidelines.

Under the Uniform Prudent Investor Act, foundation trustees are required to:

Answer: Manage investments with reasonable care, skill, and caution evaluated at the portfolio level

The prudent investor standard requires fiduciaries to manage the entire portfolio with reasonable care and skill, considering diversification and the overall risk-return tradeoff rather than evaluating individual securities in isolation.

Which spending rate range is generally considered sustainable for a permanent endowment seeking to preserve purchasing power over the long term?

Answer: 4–6% annually

A 4–6% spending rate balances current grantmaking needs with long-term purchasing power preservation, accounting for investment returns net of inflation and management fees.

Which investment vehicle allows a foundation to align portfolio holdings with its philanthropic mission while still seeking market-rate financial returns?

Answer: Mission-related investments (MRIs)

Mission-related investments (MRIs) are market-rate investments designed to advance a foundation's philanthropic mission while generating competitive financial returns.

Private foundations must distribute what minimum percentage of their net investment assets annually to maintain tax-exempt status?

Answer: 5% of net investment assets

IRC Section 4942 requires private foundations to distribute at least 5% of their net investment assets each year for qualifying charitable purposes.

In endowment management, 'asset allocation' refers to:

Answer: Dividing a portfolio among different asset classes such as equities, fixed income, and alternatives

Asset allocation is the process of dividing a portfolio among different asset classes to achieve the desired balance of risk and return as specified in the investment policy statement.

Socially responsible investing (SRI) as applied by philanthropic advisors is best described as:

Answer: Screening and selecting investments based on environmental, social, and governance (ESG) criteria

SRI uses ESG screening criteria to select investments that align with the donor's or foundation's values, allowing the portfolio itself to reflect philanthropic principles.