How Should a Foundation Invest Its Assets?

The investment strategy should support the long-term fulfilment of the foundation's purpose. This typically gives rise to three closely connected objectives: Preserving foundation assets, generating ongoing income and ensuring sufficient predictability.

Capital preservation does not mean that the value of the portfolio will remain stable at all times. Even a defensively positioned portfolio may experience interim losses. Equities, bonds, commodities and alternative asset classes are each exposed to their own market, interest rate, credit and liquidity risks.

A distinction must also be made between nominal and real capital preservation. Assets that remain unchanged in nominal terms may still lose purchasing power because of inflation. For a foundation established for the long term, it is therefore not enough for the monetary amount to remain unchanged. The assets must also retain sufficient long-term earning power to continue financing the foundation's purpose appropriately.

Ongoing income provides the financial basis for the activities and supported projects of many foundations. The investment strategy should therefore access sources of return that remain as resilient as possible across different market environments. Complete predictability cannot, however, be achieved in capital markets.

The third factor is the foundation's risk-bearing capacity. This does not merely describe the fluctuations in value that a foundation can absorb financially. The experience of the responsible governing bodies, the decision-making processes in place and the ability to deal with temporary losses are also important.

A foundation should therefore not base its investment decisions on an abstract notion of safety. It needs a risk/return profile that fits its purpose, funding requirements and investment horizon.

A broadly diversified investment strategy spreads assets across several asset classes, regions, issuers and sources of return. The objective is to reduce dependence on individual markets or securities.

Diversification does not mean combining as many investments as possible without a clear rationale. Each building block should perform an identifiable function within the overall portfolio. Two funds with different names may be exposed to the same underlying economic risks. Conversely, investments that appear similar may react very differently in different market environments.

For foundations, this functional perspective is particularly important. The portfolio should not consist exclusively of investments that appear stable in one particular environment. If interest rates, inflation or economic conditions change, relationships that previously provided resilience may become less effective.

A very high bond allocation is often associated with a particularly high degree of safety. This assumption is too simplistic. Bonds can provide stability and ongoing interest income, but they may also be affected by changes in interest rates, deteriorating credit quality and widening credit spreads.

A low equity allocation does not automatically protect a foundation against losses in real terms either. Without long-term sources of growth, it may become more difficult to offset inflation, costs and distributions.

The opposite extreme can also be problematic. An overly return-oriented portfolio may experience fluctuations in value that are not compatible with the foundation's funding requirements or risk-bearing capacity.

The decisive factor is therefore not the lowest or highest possible allocation to a single asset class. What matters is how the different investments interact within the overall portfolio.

Bonds have traditionally been among the central building blocks of many foundation portfolios. They can generate ongoing interest income and help limit fluctuations within the overall portfolio. Their actual effect depends, however, on their maturity, credit quality, currency and the prevailing market environment.

Government bonds, corporate bonds and bonds with higher credit risks perform different functions. A higher yield is generally associated with additional risks. The assessment should therefore focus not only on the current coupon, but also on the overall risk/return profile of the bond allocation.

Equities can contribute to the long-term growth of foundation assets. Over longer periods, companies may be able to adjust their revenues, earnings and prices to changes in the economic environment. Equities can therefore contribute to preserving the real value of foundation assets.

This potential contribution comes with fluctuations in value. A foundation must therefore assess which equity allocation it can sustain financially and organisationally, including during difficult market periods. An allocation that appears appropriate when markets are rising may prove too high during a period of substantial losses.

Complementary asset classes can provide additional sources of return and diversification. These may include liquid alternative strategies or commodities. Their role can be to reduce the portfolio's dependence on traditional equity and bond markets.

Complementary strategies must also remain transparent and understandable. Complexity is not a mark of quality. A strategy should only be used if its function, risks, liquidity characteristics and costs can be clearly understood.

A Multi Asset approach can combine these building blocks within a single portfolio. Its potential advantage does not lie merely in the number of asset classes, but in coordinated portfolio management. Allocations can be adjusted within defined ranges in response to changing risks and market conditions.

Risk management should not begin only after losses have already occurred. It includes the ongoing monitoring of the portfolio, the limitation of concentrations and regular assessments of whether the individual building blocks continue to perform their intended functions.

Many foundations already own real estate, business interests or other assets that are committed for the long term. These holdings must be taken into account when designing the liquid portfolio.

Real estate can generate ongoing income and represent a real asset. At the same time, it is often illiquid, sensitive to changes in interest rates and concentrated in specific locations or types of use. A foundation with a high real estate allocation is therefore already exposed to significant property, location and liquidity risks.

The liquid securities portfolio should not unintentionally amplify these existing risks. It may be appropriate to introduce different sources of return and provide greater daily liquidity. The resulting portfolio positioning depends on the foundation's specific total asset structure.

Private equity, private debt and infrastructure investments can also offer long-term return opportunities. However, they often involve long capital commitments, limited redemption options and complex valuation and cost structures.

For foundations with regular funding requirements, this limited liquidity can be problematic. Distributions from private markets are also not as predictable as contractually agreed interest payments. Capital calls and cash returns may occur at different times.

Private markets are therefore not unsuitable for foundations in principle. However, they require robust liquidity planning, sufficient resources for due diligence and monitoring, and total assets that can support long capital commitments.

Smaller and medium-sized foundations in particular should consider whether their governing bodies can manage the complexity of such investments on an ongoing basis. The economic suitability of an investment depends not only on its expected return, but also on the foundation's ability to understand it, monitor it and integrate it into its processes.

A long-term investment strategy should not be confused with an unchanging portfolio composition. The foundation's objectives should remain valid over the long term, but their implementation must be able to respond to changing circumstances.

Rigid allocations can restrict the foundation's ability to act. If individual asset classes are assigned fixed weights irrespective of market conditions, the portfolio may no longer perform its intended economic function appropriately.

Allocation ranges provide greater flexibility. They allow the weights of individual asset classes to be adjusted within a predefined risk framework. It must be clearly established who is authorised to make decisions and which criteria apply.

These principles should be set out in an investment policy. Among other things, it should specify the investment objectives, risk budget, liquidity requirements, permitted asset classes, allocation ranges, responsibilities and reporting lines. Its precise structure must be consistent with the foundation's governing documents and the founder's intentions.

Ongoing portfolio management also requires regular reviews. These should not focus solely on performance. Fluctuations in value, distributions, costs, liquidity, concentration risks and changes in the foundation's total assets are equally important.

Strong performance during a single market environment does not prove that a strategy will remain suitable over the long term. Conversely, a temporary period of weaker performance does not automatically make a long-term strategy unsuitable. What matters is whether the development remains within the expected risk parameters and whether the investment strategy continues to fulfil its intended purpose.

Legal, tax and accounting considerations should be assessed separately. A foundation investment strategy can only remain sustainable if the economic strategy, governing documents and organisational processes are properly aligned.

A foundation should not invest its assets according to a one-size-fits-all model allocation. The starting points are the foundation's purpose, funding requirements, risk-bearing capacity and existing asset structure.

A broadly diversified portfolio can combine equities, bonds and complementary asset classes. Each building block performs a specific function. Bonds can contribute ongoing income and stability, equities can provide long-term growth opportunities and additional strategies can offer further diversification.

Neither the lowest possible equity allocation nor the largest possible number of investments is a mark of quality in itself. What matters is the risk/return profile of the overall portfolio, sufficient liquidity and flexible portfolio management.

The investment strategy should be robust enough to withstand difficult market environments and flexible enough to respond to changing conditions. In this way, it can support the long-term fulfilment of the foundation's purpose without guaranteeing capital preservation or distributions.

• What Are Foundation Investment Funds and Who Are They Suitable For?
• 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.