Investment Terminology

Investing your foundation assets effectively can increase investment returns and thereby provide additional assets to help fulfill your charitable goals. Over the longer term, good investment decisions lead to the potential for more grants and greater impact; poor investment decisions typically lead to fewer grants and lessen a foundation’s impact. In addition, state law requires board members to act as prudent fiduciaries in caring for the foundation’s assets.

Effective investing is not only about the numbers. For foundation staff and trustees who come to foundation investment management with limited experience managing an endowment, familiarize yourself with these 10 key terms. They are intended to get you started on the path to growing your investment knowledge and potential effectiveness.

For detailed definitions of investment terms, try one of these two glossaries:

 

Asset allocation

Asset allocation is the distribution of assets within an investment portfolio across different types of traditional asset classes (stocks, bonds, cash, mutual funds, exchange traded funds) and across different types of alternative asset classes (e.g., hedge funds, private equity, real estate, and commodities funds). Getting the decisions about allocation asset right is central to a foundation’s investment strategy. Extensive research has shown that asset allocation is likely your foundation’s most important investment responsibility—with study after study showing that asset allocation decisions drive the achievement of investment performance objectives and can help moderate investment volatility in a foundation’s portfolio.

More about asset allocation

Fees

Investment management fees are almost always quoted in basis points (bps) or hundredths of a percent times the amount of assets being managed. So, for example, 50 bps is .50%; the annual cost of managing $50,000 in a fund with a fee of 50bps is $250 ($50,000 x .005 = $250). 

All investors need to be sure they understand all fees associated with managing their assets: asset management fees and any marketing, distribution, or sales fees or commissions; administrative fees; fund expenses; and so on. 

There are many different kinds of fees, which vary typically by investment type, investment strategy, size of investment in a particular strategy/product, and so on.

More about controlling fees

Fiduciary responsibility

A fiduciary is anyone who has the legal responsibility of caring for someone else’s money. All foundation board members, as well as investment committee members, and investment advisors would generally be called fiduciaries. Fiduciaries have the responsibility to carry out three duties: duty of loyalty, duty of care, and duty of obedience. Fiduciaries do not have the legal responsibility for achieving a specified “target" annual return. The law does require, however, that fiduciaries be well-informed about the assets under their care as well as follow a prudent process in caring for the assets entrusted to them. 

More about fiduciary duty

Impact investing

Impact investing (often called mission or social investing) describes the intentional deployment of capital in order to meet two objectives simultaneously: to generate positive financial and to achieve specified social returns. Impact investing involves proactively investing in enterprises or activities that will result in a positive community or environmental benefit. Impact investments are made by foundations of all types and sizes, as well as individuals. They include investments across all asset classes and along the entire spectrum of risk and return, from program-related investments (PRIs) to market-rate investments that yield competitive rates of return.

Read Essentials of Impact Investing: A Guide for Small-Staffed Foundations

Investment policy statement (IPS)

An investment policy statement states in writing your foundation’s guidelines for investing that are specifically tailored to help achieve the foundation’s overall mission and goals, and describes how your investment policy and practices will help to achieve those goals. The basic purposes of an IPS are:

To state in writing the board’s attitudes, expectations, objectives, risk tolerance, liquidity needs and other guidelines for investing;

To set forth an asset allocation and diversification plan for the foundation’s assets;

To establish criteria to monitor, evaluate, and compare the performance results of any investment managers the board chooses to use; and

To encourage effective communication between the board and any investment advisors. 

More on investment policy statements

Rebalancing

Periodic rebalancing of your foundation’s portfolio is an essential part of the ongoing asset allocation and investment processes. There are a variety of rebalancing rules that have been suggested and debated by investment professionals. That said, the experts agree that you should rebalance on a regular basis. On an overall basis the central idea of portfolio rebalancing is to adjust allocations to various asset classes based on actual performance, projected performance, maintaining a well-diversified portfolio, meeting liquidity needs and adjusting for existing and projected changes in the external economic environment. 

More on rebalancing

Spending policy

A foundation’s spending policy is the percent of assets you plan to spend each year on grantmaking and other expenses related to fulfilling your mission. Your targeted/required return is the sum of your spending policy rate, the inflation rate expected over your time horizon, net of all expected investment fees. 

More on setting a spending policy

UPMIFA

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) requires fiduciaries to make decisions with "reasonable care, skill and caution," and UPMIFA requirements have been adopted by almost all states. Fiduciaries must:

  • Consider their entire portfolio rather than individual securities;
  • Seek to balance risk and return;
  • Achieve this balance through appropriate diversification;
  • Confirm investing and spending at a rate that will preserve the purchasing power of the principal over the long term; and
  • If necessary, delegate investment functions to the appropriate experts.

More on UPMIFA

Working with advisors

Once your IPS is developed, the board or investment committee will have an important framework for implementing your foundation’s investment strategy. There are two distinct roles that must be filled:

  • Managing the investments involves buying and selling assets according to the plan outlined in the IPS. This can be done in different ways:
  • By internal foundation staff alone or with advisory consultant assistance, or
  • By hiring a paid investment professional to take responsibility for all or part of a foundation’s portfolio.
  • Overseeing the investments involves selecting, monitoring, and evaluating the investment managers, as needed, as well as the investments themselves. This role can be filled by an investment consultant (who also helps to develop an IPS) or a knowledgeable foundation manager; subject to further oversight by the foundation’s investment committee and/or overall board of trustees.

More on working with advisors