Comparing Foundation Investment Funds: What to Look For

Many foundations require regular distributions to finance the projects they support and meet ongoing obligations. A clear distribution focus can therefore be an important selection criterion.

However, the amount of a distribution says little about the quality of a fund on its own. What matters is how the distribution is financed and whether it is consistent with the portfolio's earning capacity.

Income may arise, for example, from interest, dividends and realised capital gains. Depending on the fund structure, however, a distribution may also draw on the fund's capital base. Income, distributions and performance should therefore not be treated as the same thing.

A good foundation investment fund should clearly explain its distribution policy. This includes specifying whether the fund provides for a fixed, targeted or variable distribution. It is equally important to state that distributions are not guaranteed.

For the foundation, the decisive factor is not the highest possible distribution, but its long-term sustainability. A distribution that appears attractive in the short term may become problematic if it can only be maintained by progressively drawing on the capital base.

Conversely, a foundation should not focus solely on the amount distributed. If the value of the foundation's assets increases over the long term, an unchanged distribution rate may result in a higher absolute amount in the future. This requires performance and distributions to be assessed together.

A foundation investment fund should provide stability, but should not be designed exclusively to avoid short-term fluctuations. Excessive caution may make it more difficult to preserve the real value of the foundation's assets.

A fund with a very high bond allocation may display relatively low fluctuations in certain market environments. At the same time, it may be exposed to interest rate, credit and inflation risks. The label "defensive" is therefore not sufficient as a basis for assessment.

An appropriate equity allocation may provide long-term growth opportunities. There is no universally applicable answer as to how high this allocation should be. The decisive factors are the foundation's investment horizon, distribution requirements, risk budget and total asset structure.

A comparison of foundation investment funds should therefore consider more than returns. Volatility, interim losses and the fund's behaviour during difficult market periods are equally important.

Past results should be assessed across several market environments. A high return over a short period may have resulted from a strong concentration in individual markets or asset classes. It is not evidence of a strategy that will remain sustainable over the long term.

Quantitative metrics do not replace a qualitative assessment either. An apparently favourable risk/return profile may be shaped by a short observation period or unusual market conditions. What ultimately matters is whether the fund's risks are understandable and compatible with the foundation's objectives.

A good foundation investment fund should access several sources of return and limit its dependence on individual securities, sectors or markets. Diversification is more than simply the number of holdings in a portfolio.

A fund may hold a large number of individual securities and still be highly concentrated. This may be the case, for example, if many positions depend on the same economic factors or if a large proportion of the overall risk originates from a single asset class.

Both capital weights and contributions to risk are therefore important when assessing the portfolio. The foundation should be able to understand which factors drive the fund's performance.

A pure stock-picking approach may provide attractive opportunities, but it also increases individual-security risk in concentrated portfolios. The fund's success then depends more heavily on a small number of investment decisions made by the fund manager. For foundations with a strong need for stability, this dependency may be problematic.

This does not mean that active security selection is unsuitable in principle. What matters is whether concentrations are entered into deliberately, appropriately limited and explained transparently.

Fund-of-funds structures can also combine different sources of return. They make it possible to integrate actively managed funds and passive building blocks within a Multi Asset concept. It should, however, be assessed whether additional layers of costs arise and whether these costs are disclosed with sufficient transparency.

A good fund does not merely explain what it invests in. It also makes clear why the individual building blocks are combined and what function each one performs within the portfolio.

Foundations require liquidity to finance supported projects and meet ongoing expenses. A foundation investment fund should therefore be compatible with the foundation's liquidity requirements in terms of redemption options, distribution dates and the instruments used.

The fact that fund units can be redeemed daily does not automatically mean that every underlying investment can be sold at any time without a price discount. If a fund contains less liquid securities or complex strategies, it should explain how the resulting risks are managed.

A good foundation investment fund presents its portfolio positioning, material risks and results in a clear and understandable manner. The Key Information Document, prospectus, factsheets and annual and semi-annual reports should provide a consistent overall picture.

Cost transparency is particularly important. Relevant costs include ongoing management charges, possible subscription or redemption charges, performance fees and the costs of underlying funds held within the portfolio.

Costs are incurred regardless of whether the fund generates positive returns. They should therefore always be assessed in relation to the expected added value of the investment concept.

A low-cost fund is not automatically a good foundation investment fund. Conversely, a complex or actively managed strategy does not automatically justify higher costs. What matters is whether portfolio management, risk management and reporting provide an identifiable benefit.

Transparency also includes communication during difficult market periods. A robust fund concept should be able to explain more than positive results. It should also clearly describe which risks have materialised and what measures follow from them.

Risk management does not mean avoiding every fluctuation in value. A good foundation investment fund defines which risks it deliberately accepts, which risks it limits and how it can respond to changing market conditions.

Static allocations may be easy to understand, but they offer only limited flexibility. An active or systematic approach can adjust the weighting of individual asset classes within predefined limits.

The decision-making framework must remain transparent. The foundation should be able to understand which decisions are rule-based, which are made at the discretion of the fund management team and which limits apply.

Derivatives may be used for hedging or efficient portfolio management. They do not, however, eliminate risks. The fund should clearly disclose the purposes for which derivatives are used and which additional risks may arise from their use.

Stress tests and scenario analyses may also provide an indication of how the portfolio could behave under exceptional market conditions. Such models are not forecasts. They merely support the assessment of potential loss and liquidity risks.

For actively managed funds, the stability of the investment process is also relevant. The foundation should assess whether the approach depends on individual people or is supported by a sufficiently resourced team and clear decision-making structures.

A change in the fund management team is not automatically negative. It should, however, prompt a fresh review of the investment process, responsibilities and continuity of the strategy.in. Er sollte jedoch Anlass geben, Prozess, Verantwortlichkeiten und Fortführung der Strategie erneut zu prüfen. 

Even a well-designed foundation investment fund may be unsuitable for a particular foundation. The selection should therefore not be made in isolation from the foundation's purpose and its existing assets.

The foundation should assess whether the fund is compatible with its governing documents and investment policy. Relevant considerations include the risk budget, permitted asset classes, liquidity requirements and any applicable sustainability criteria.

Where ESG requirements apply, a general sustainability label is not sufficient. What matters is the methodology used, the exclusions and selection criteria applied, and the quality of the reporting. A regulatory classification alone is not a guarantee of quality.

The foundation's total asset structure also plays a central role. If a foundation already owns substantial real estate assets, the fund should not unintentionally add further real estate or liquidity risks. If the foundation's other assets consist predominantly of bonds, an additional bond-heavy fund may increase the existing concentration.

A foundation investment fund may be used as a core investment, as a complementary Multi Asset building block or as a specialised component. Its quality can only be assessed in relation to the function it is intended to perform.

The foundation's organisational resources are also relevant. A complex fund with extensive reporting may be appropriate if the foundation is able to analyse and use that information. If the necessary time or expertise is lacking, a more straightforward concept may be easier to oversee.

The final question is therefore not: "Is this the best foundation investment fund?" It is: "Does this fund fulfil the role for which we intend to use it within our overall asset structure?"

A good foundation investment fund combines a clear distribution policy with a balanced risk/return profile. It is broadly diversified, sufficiently liquid and transparent about its costs and risks.

Neither an especially high distribution nor a particularly low equity allocation is automatically a mark of quality. Good historical performance alone is also insufficient to assess a fund's future suitability.

What matters is the long-term sustainability of the investment concept, a clear and understandable risk management approach, and alignment with the foundation's purpose, investment policy and total assets.

There is therefore no single foundation investment fund that can universally be described as the best. A fund is suitable when it performs the intended role within the foundation's investment strategy and when its risks can be understood and borne by the responsible governing bodies.

• What Are Foundation Investment Funds and Who Are They Suitable For?
• How Should a Foundation Invest Its Assets?
• Does a Foundation Need an Investment Policy and What Should It Include?
• How Can a Foundation Generate Income and Preserve Its Assets Over the Long Term?

¹Distributions are not guaranteed.