Foundation Investment Funds: What Are They and Who Are They Suitable For?

A foundation investment fund is, simply put, an investment fund whose investment concept takes the typical requirements of foundations into account. Its central objective is to invest foundation assets in a way that enables the foundation to fulfil its purpose over the long term and finance the projects it supports.

In the German foundation sector, the term may also be used in a different context, for example for an earmarked additional endowment administered under the umbrella of an existing foundation. In an investment context, however, "foundation investment fund" refers to a fund designed for investing foundation assets or one that is suitable for this purpose because of its characteristics.

Foundation investment funds do not have to be specialised solutions launched exclusively for foundations. A broadly diversified multi asset concept can also meet a foundation's requirements. To do so, it should, for example, offer a transparent distribution policy, a risk/return profile that is appropriate for the foundation and sufficient liquidity.

The designation "foundation investment fund" is not, in itself, a mark of quality. A fund may sound defensive and still be unsuitable for a particular foundation. Conversely, a fund without the word "foundation" in its name may be appropriate if its investment objectives and portfolio positioning match the foundation's needs.

The decisive question is therefore what role the fund plays within the foundation's overall assets. It may serve as the foundation's core investment, form a significant portfolio building block or complement an existing asset structure.

A foundation investment fund generally aims to combine three objectives: preserving the foundation's assets over the long term, generating regular and, where possible, predictable income, and maintaining portfolio stability. These objectives should not be viewed in isolation, but considered together.

Capital preservation is an investment objective, not a guarantee. Even a defensively positioned foundation investment fund may experience fluctuations in value and losses. Depending on its composition, it may be exposed to equity market, interest rate, credit and liquidity risks, among others.

A distinction must also be made between nominal and real capital preservation. With nominal capital preservation, the monetary amount remains unchanged. Real capital preservation also takes inflation into account and therefore the purchasing power of the assets. Assets that remain unchanged in nominal terms may still lose value in real terms.

Regular income is important because many foundations use it to finance the activities set out in their governing documents and the projects they support. However, investment returns and distributions are not the same. Returns are generated within the portfolio, while a distribution is the amount paid to the foundation. Distributions should therefore be underpinned by a sustainable long-term source of returns.

The highest possible distribution is not automatically beneficial. If a portfolio consistently distributes more than it can sustainably generate, this may erode the asset base. Conversely, an overly cautious investment approach may struggle to generate sufficient returns and offset the loss of purchasing power.

Long-term stability therefore does not mean that a foundation investment fund will deliver an even performance path at all times. Rather, it refers to robust portfolio positioning that takes different market environments into account and aims to balance return, risk and predictability. Maximum return is not the sole measure of success. The priority is to support the foundation's purpose on a lasting basis.

Many foundation investment funds combine several asset classes. These may include bonds, equities, liquid alternative strategies, commodities and other diversifying portfolio components. The specific composition depends on the fund's investment objective and risk budget.

The individual asset classes fulfil different functions. Bonds can contribute regular interest income and provide a stabilising element. However, they are not risk-free and may be affected by rising interest rates, changes in credit quality or market movements, among other factors.

Equities can contribute to the long-term growth of foundation assets and to real capital preservation. At the same time, they are subject to greater fluctuations in value. An appropriate equity allocation can therefore be an important source of return, but it must remain compatible with the foundation's risk-bearing capacity and liquidity needs.

Complementary portfolio components can reduce dependence on equities and bonds. However, they come with their own risks, costs and liquidity characteristics. Adding another asset class does not automatically improve a portfolio. What matters is the function it performs and how it interacts with the other investments.

Diversification is a key feature of many investment funds for foundations. Spreading investments across different markets, issuers and sources of return can limit concentration risk. However, it cannot eliminate losses.

In addition to composition, portfolio management is important. Depending on the concept, asset class weights may be adjusted actively or systematically in response to changing market conditions. Risk management can monitor market, interest rate and credit risks, limit individual positions and, where appropriate, use derivatives for hedging. Such measures can reduce risks, but cannot eliminate them completely.

Liquidity is another important factor. A foundation must be able to finance the projects it supports and meet its ongoing obligations. Redemption options, the distribution structure and the liquidity of the underlying investments should therefore be aligned with the foundation's funding requirements.

For non-profit, religious, charitable or philanthropic foundations, sustainability criteria may also be relevant. Environmental, social or ethical requirements can be linked to the foundation's purpose. However, a particular ESG approach or regulatory classification is neither a guarantee of quality nor automatically suitable for every foundation.

Foundation investment funds and traditional multi asset funds may invest in the same asset classes. Both may, for example, combine equities, bonds and complementary strategies. The main difference often lies not in the instruments used, but in the objectives and design.

A foundation investment fund typically places greater emphasis on long-term capital preservation, a clear distribution focus, sufficient liquidity and predictability. The investment is intended to help the foundation fulfil its purpose over long periods.

A traditional multi asset fund, by contrast, may focus more strongly on a general return objective, a particular risk category or comparison with a benchmark. However, these differences are not universal. A traditional multi asset fund can also provide a suitable investment concept for foundations.

Similarly, a fund is not suitable simply because it is labelled a foundation investment fund. A highly defensive portfolio may produce low short-term volatility but generate too little return over the long term to offset distributions and inflation. Excessive caution can therefore also pose a risk to real capital preservation.

Assessment should therefore not begin with the product name. The decisive factors are the investment objectives, risk structure, distribution policy, liquidity and the fund's role within the foundation's overall assets. A detailed quality assessment goes far beyond checking whether the word "foundation" appears in the product name.

A foundation investment fund may generally be suitable for foundations that invest their assets over the long term and regularly require funds to fulfil their purpose. It may be particularly relevant where a broadly diversified fund solution is sought and the foundation does not wish to manage all asset classes independently.

This can be relevant for small and medium-sized foundations that do not maintain their own portfolio management team or specialised investment committee. Suitability does not, however, depend on size alone. Larger foundations may also use foundation investment funds as a building block within a broader asset allocation.

Individual circumstances are decisive. These include the foundation's purpose, governing documents, investment horizon, liquidity needs and risk-bearing capacity. The planned use of funds, internal decision-making processes, potential sustainability requirements and any existing investment policy should also be taken into account.

It is particularly important to consider the foundation's overall assets. If a foundation already owns substantial property holdings, equity interests or other illiquid assets, a liquid foundation investment fund may fulfil a different role than it would for a foundation whose assets consist predominantly of liquid financial investments.

The fund may therefore serve as the core investment, a stabilising building block or a complement to other investments. It is not suitable if its risk, liquidity or distribution policy does not match the foundation's requirements.

A foundation investment fund therefore does not replace the need to define an investment strategy or to review the portfolio regularly. The foundation must continue to assess whether the investment concept is compatible with its purpose, obligations and financial risk-bearing capacity.

A foundation investment fund is an investment fund whose concept takes typical foundation requirements into account. These include, in particular, long-term capital preservation, regular income, sufficient liquidity and portfolio management focused on stability.

Capital preservation remains an objective, not a guarantee. A foundation investment fund also involves risks and the possibility of losses. Distributions should be sustainable over the long term and should not permanently erode the asset base.

Whether a fund is suitable for a foundation cannot be determined by its name. A suitable multi asset concept may be just as appropriate as a solution explicitly labelled a foundation investment fund. The decisive factor is whether the portfolio positioning is aligned with the foundation's purpose, liquidity needs, risk-bearing capacity and overall asset structure.

• How Should a Foundation Invest Its Assets?
• Comparing Foundation Investment Funds: What to Look For
• 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.