Asset Management for Foundations
Are you a decision-maker in a foundation or do you work in related fields? Due to your financial possibilities and your idealistic values, you have already thought about establishing a foundation? But you lack both legal and tax knowledge? You also lack expertise in the investment of foundation assets? You would like a non-binding consultation and to be shown possibilities of how your ideas can be put into practice or how your current situation can be solved in a more professional way?
We have a broad and long experience in structuring and managing endowments. In our large network you will find experts from Germany and abroad who have either set up their own foundations and/or looked after individuals and families in order to plan and implement such an undertaking. In Germany, for example, we work with the experts at Deutsche Stiftungstreuhand, who specialize in foundations.
We would be happy to put you in touch with the right contacts so that you can obtain first-hand, professional information. Please feel free to contact us at any time!
Foundations are generally institutions that use assets to pursue a purpose defined by the founder -- even beyond the latter’s death. In principle, the assets invested are intended to be preserved in perpetuity and to provide beneficiaries with virtually perpetual support in the form of income from these assets. Most foundations are established under private law and serve charitable purposes, which means that they are usually tax-exempt.
Since the foundation’s assets are to be preserved and ideally even to grow over the years, most foundation statutes are designed with investment guidelines that either completely exclude or at least limit so-called risky investments. Until now, this has never been a cause for concern, as five- or ten-year government bonds guaranteed handsome interest payments for many decades. However, the euro crisis in 2011 turned out to be a game changer. At the latest with the notorious words “whatever it takes” from the former head of the European Central Bank, Mario Draghi, it became clear: The times of attractive interest rates on bonds are coming to an end.
Each maturing bond from the high-interest phase thus represents an ever-increasing challenge for investment decision-makers at foundations. They are faced with the dilemma that new government bonds can at best deliver a zero yield, but are usually issued with a negative coupon. However, if one wants to generate a clearly positive interest rate, this goes hand in hand with risks (e.g. in the case of corporate bonds or bonds of risky countries), which are not allowed at all according to the statutes. The result is unattractive, because the permanently declining “running yield”, i.e. the current distribution yield of an endowment portfolio, means for the beneficiaries of the endowment: There is less and less money available to finance one-off expenses or even to keep the operational business running.
Often -- and perhaps too often -- investors forget the age-old investment equation that still holds true: opportunity = risk. The more return you want to achieve, the higher the risk. An investment with high profit potential that is also absolutely safe simply does not exist. If you want to achieve a good return over the long term, you must therefore also be prepared to keep calm in the event of interim losses. As equity specialists, we know how to deal with fluctuations in value. The challenge is to invest wisely, to incorporate experience into decisions and to offer the greatest possible security and continuity through prudent but consistent and active action.
So how can a conservative foundation adequately move, i.e. invest, in a low or even negative interest rate environment in order to fulfill the actual purpose of the foundation?
For us as asset managers, one thing is of crucial importance here: the conservative nature of a foundation lies primarily in the fact that it is a truly long-term investor. And this is precisely an advantage of inestimable importance compared to many other investors. Why? A life insurance company must at some point repay its policyholders’ premiums, perhaps even with a guaranteed interest rate. A foundation does not have a repayment date that puts it under pressure in terms of timing. As a result, it can withstand price fluctuations much better, especially since it never finds itself in the predicament of a potential sale. At the end of the day, it is much more important to secure returns, because price losses are recovered over a complete investment cycle. This means nothing other than that a foundation is definitely more capable of bearing risk than is often assumed.
What can we do to optimize the risk-reward ratio for a foundation? We offer individual solutions for each foundation’s assets and, after detailed consultation, develop exactly the portfolio that the foundation’s donor and/or the person responsible for the investment wishes. Numerous parameters can be integrated, such as a maximum negative price fluctuation of 15%. We use hedges to exclude further losses. Although the costs reduce the participation potential upwards, the main objective of a foundation is not to achieve price gains.
In our view, the ideal composition of a foundation’s assets is a combination of fixed-income securities and equities. The former are responsible for achieving a reasonable distribution yield, even while accepting acceptable risks. The latter form of investment contributes to an increase in returns through the receipt of dividends and should, in the long term, continuously and sustainably increase the originally invested assets. Keyword sustainability: Especially for foundations, sustainable investments (link to article: sustainability -- what does that actually mean) are an important concern. You provide us with the framework, we create a tailor-made portfolio for you that meets your requirements and ideas 100%. Because only when you are satisfied, are we satisfied.
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