Investment Management & Endowments Flashcards

What is the 'total return' approach to endowment spending?

Answer: Spending a predetermined percentage of total portfolio value, including both income and capital appreciation

The total return approach bases spending on a percentage of total portfolio value rather than limiting distributions to income alone, providing more consistent and predictable grantmaking.

Program-related investments (PRIs) differ from mission-related investments (MRIs) primarily because PRIs:

Answer: Count toward the private foundation's mandatory 5% annual distribution requirement

PRIs count toward a private foundation's 5% distribution requirement because their primary purpose is furthering the foundation's exempt charitable purposes, not generating financial return.

What does 'rebalancing' an endowment portfolio mean?

Answer: Restoring the portfolio to its target asset allocation after market movements shift the actual mix

Rebalancing corrects drift from the target asset allocation by selling outperforming assets and purchasing underperforming ones, maintaining the intended risk/return profile over time.

Which type of endowment fund permanently restricts the principal by donor intent, allowing only investment returns to be spent?

Answer: True (permanent) endowment

A true or permanent endowment permanently restricts the original gift principal per donor intent, with only investment income and returns available for spending.

What is 'liquidity risk' in the context of endowment management?

Answer: The risk that the endowment becomes unable to meet short-term cash needs due to excessive illiquid holdings

Liquidity risk is the danger that too high a concentration in illiquid assets (private equity, real estate) prevents the foundation from meeting spending obligations or emergency cash needs.

When advising a client on a donor-advised fund (DAF) investment strategy, a key consideration is:

Answer: The investment timeline should align with the donor's philanthropic goals and anticipated grant distribution horizon

Matching the DAF investment horizon to the donor's grant distribution timeline optimizes both growth potential and asset availability for charitable giving when needed.

What does 'investment due diligence' mean in the context of foundation endowment management?

Answer: Investigating and evaluating investment managers and strategies before committing foundation assets

Investment due diligence involves thoroughly researching and evaluating potential managers, funds, and strategies—reviewing track records, fees, risk controls, and mission alignment—before making investment commitments.