Many endowment and foundation clients face unique investment portfolio challenges as they aim to support impactful giving while also funding organizational objectives and maintaining purchasing power in the face of inflation. With annual spending and distribution policies ranging between 4% and 6% of total assets per year, endowments and foundations must carefully balance growth, liquidity and risk needs to create a sustainable and robust portfolio.

Fluctuating economic conditions over the last 15 years have posed a challenge to this task, however, with changes in interest rates impacting the return from an endowment or foundation’s portfolio. Given the current economic reality, here’s what these organizations can do to ensure their portfolios remain aligned with their long-term goals.

Impact of Interest Rates on Fixed Income

Because of the dual objectives of an endowment or foundation’s portfolio, proper asset allocation is essential. A balanced mix of stocks, bonds and alternative investments can drive growth, provide liquidity and minimize risk. From roughly 2009 to 2022, though, returns for bonds were negatively affected by a prevailing low interest rate environment, resulting in a lower return on fixed income.

Without sufficient returns from that part of their portfolio, many foundations and endowments shifted their allocations more toward equities during this period in order to achieve a higher rate of return to meet their required targets. In doing so, they also increased their overall risk profiles, making their portfolios more vulnerable to market volatility.

Return to Basics

Today, interest rates are significantly higher than they were several years ago, leading to higher projected returns for fixed income. This makes it important for foundations and endowments – as well as other long-term investors – not to be overly complacent with their asset allocations and risk profiles. Where higher equity positions were once necessary to generate better returns, now a more traditional and balanced approach relying on fixed income can now offer sufficient returns without such a high level of risk.

Make Reviews and Adjustments as Necessary

Given the changing nature of market conditions, it’s essential for foundations and endowments to regularly reassess and adjust their portfolio strategies and allocations. These reviews can help ensure their portfolios remain aligned with their long-term goals while also adapting to economic realities such as interest rate levels.

At Bell Bank Wealth Management, we have a team of knowledgeable, experienced professionals dedicated to working with endowments and foundations to advise and manage through these important decisions.

This article was published in the Q3 2024 issue of the Bell Wealth newsletter.