Divide and conquer
As an alternative, Crook suggests using a goals-based wealth management framework, an approach that UBS developed in 2015. “It’s about dividing assets so that different segments can be directly aligned with your goals,” he says. This method separates the portfolio into multiple parts, each of which is invested to meet a particular objective. “For a private foundation, that means having some investments dedicated to meeting that 5% distribution over the next few years.”
“Higher returns can help a foundation remain sustainable over the long term.” – Crook
That part of the portfolio might take the form of a bond ladder—several bonds or bond funds that mature at different times. Ordinarily, as a bond in the ladder reaches maturity and the bond principal is returned to an investor, the proceeds would be reinvested in another bond. But these days, says Crook, because bond returns are so low and many portfolios need to reduce their dependence on them, “we sometimes recommend spending bond principal as it matures.” The money can help meet the distribution goal.
Meanwhile, another part of the portfolio could be invested in stocks, including international equities, which have been less expensive than U.S. stocks and could have larger gains in the years ahead. “Those higher returns can help a foundation remain sustainable over the long term,” Crook says.
Write a blueprint for investing
With the 5% rule, there’s little room for error when investing private foundation assets. That’s why it’s essential not only to have a well-considered strategy for meeting foundation goals but also to formalize its principles in an investment policy statement to help guide ongoing investing decisions—something you can discuss with your Financial Advisor.
According to Crook, an investment policy statement serves several purposes, from clarifying investing strategies and goals for the foundation to stipulating who will make investment decisions and how performance will be measured. “It’s also a great place to put a rebalancing strategy,” Crook says. This could help a foundation’s managers do what’s best for the portfolio even when that’s emotionally difficult—for example, buying stocks to restore investment balance after the market has plunged. “That’s a lot easier to do if you’ve already decided ahead of time,” he says. Creating an investment policy statement can also spark conversations about your family’s values and establish roles for younger family members. “Your kids may not be so excited about the technical aspects of investing,” says Bill Sutton, Head of Client Philanthropy in the U.S. for UBS. “But they will pay attention when you talk about how to make more money to support the charities they love.”
The law requires a prudent investor
A final challenge for private foundations is to meet the requirements of state laws that establish a “standard of care” for foundation officers and managers. Although the specific requirements of these regulations differ state to state, they generally call for those in charge of a foundation’s investments to act as an “ordinarily prudent person” would. Your Financial Advisor and UBS investing and foundation experts can help you follow the rules while finding the most effective approach for meeting your foundation’s goals and perpetuating its influence.