“The only thing we have to fear is fear itself” (Franklin Delano Roosevelt) Many foundation decision-makers, but also other experts in the field of fund selection could understand this sentence of the then US president, deliberately taken out of context, differently: The selection of endowment funds can be carried out with a reasonable amount of research or investigation, without necessarily requiring external support for this process.
The “do-it-yourself process” is not inconsistent with the fact that in many cases it would make perfect sense to involve external asset management consultants – but many small to medium-sized foundations often lack the budget for this increase in professionalism in the selection of asset managers.
Certain questions, as mentioned below, could arise for example for decision-makers when selecting funds for foundations. The following questions have arisen from project experience as well as from the intensive exchange of ideas with providers, investors, and committed trade journalists (“interview requests”). Practical experience in the selection of asset managers often shows that the use of certain sources of information or the use of professional networks provides approximate solutions for good, satisfactory problem-solving.
What is an endowment fund?
Contrary to the official, narrow definition in the field of foundations, the term “foundation fund” is normally used to refer to a public fund that makes it possible, for example, to support the foundation financially in the pursuit of its purpose through distributions. The investment guidelines contain information specific to the foundation. The term is often also used in connection with distributing mixed funds or with the term asset management approaches.
What distinguishes an endowment fund from other funds or fund categories?
The investment guidelines and fund information explicitly refer to the area of foundations. Security, risk diversification, and distributions are emphasized, i.e. the target group of foundations is addressed in a focused manner. Of course, other mutual funds serve similar purposes. However, these are initially more difficult for a foundation decision-maker to identify.
What category do endowment funds most likely fit into?
Officially, the focus is very much on the areas of asset management or defensive. Sometimes this can be somewhat misleading because an equity fund for second-line stocks with intelligent risk management and well-thought-out diversification can also have an asset-managing or defensive character and generate distributions for foundations. However, selection is not an easy task. However, a decision-maker who concentrates heavily on bonds or very defensive concepts in his selection may be missing out on interesting portfolio components with a good diversification effect.
Let’s stay with the selection. What approaches are there for endowment funds?
Roughly speaking, one finds approaches with a focus on bonds, equities with bonds, and equities. Some foundations are also interested in concepts with, for example, a stronger money market orientation in combination with sustainability aspects over the longer term. However, it is questionable whether each of these funds is suitable for a foundation. What foundations should do is to look beyond the German horizon. Some foreign providers also do a good job and offer foundations funds for their respective profiles. Independent asset managers are the ones with whom foundations may have a natural congruence of interests. Correspondingly, their so-called private label funds could be an idea to approach fund modules outside the endowment fund universe, at least in a first step.
Is endowment funds always designed to distribute dividends?
Ideally, they should be. The vast majority of them are distributive. Anything that reduces the number of decisions to be made by those responsible for foundations and reduces complexity in the process can be helpful. Regular distributions in the area of endowment funds can be regarded as a kind of “hygiene factor”.
Is an endowment fund cheaper than a conventional fund in terms of costs?
Since the promise of returns is usually calculated conservatively in the case of distributing, rather defensive funds, and since the capital markets often do not offer much upside here either, these funds should generally offer a low-cost alternative to investing for oneself. The price structures are to be regarded as rather moderate. Whereby here it should be stressed: The task of a good asset manager should rather be to generate in his fund, for example, one percent additional performance above market than to show in his fund in the cost area 0.1% advantage for the fund selector.
Where can I find information about endowment funds?
On the websites of investment companies that offer special foundation products in addition to many other funds (e.g. Universal Investment, IPConcept, AmpegaGerling, and many other companies). There are also information portals such as these company’s platform, die-stiftung.de, websites such as fondsweb.de, or service providers such as MMD, which make the characteristics of funds in general and endowment funds in particular visible. With intensive study, good tips can also be obtained from the trade press, and it partly contained data overviews on funds. It is important to note that one categorizes precisely in specialist information and “advertising prose”. Larger foundations have experts or call in consulting firms for the pre-selection – not only for public funds but also for the allocation of special fund mandates. However, this is a path that “small” foundations cannot take. Therefore, a cost-efficient, creative approach to fund selection (“information gathering”) is essential. Associations with specialist circles, member products can also be the first points of contact, such as the Association of Independent Asset Managers Germany, e. V.
How do I recognize a good endowment fund?
It is probably a broad bouquet of information that a foundation should look at. Factual criteria with measurability character can be Low drawdowns (“outliers to the bottom”), a steady, risk-adjusted performance that is satisfactory from a risk-adjusted perspective, volatility, short recovery periods, costs. These are all criteria that also play a role in regular fund selection. For foundations, the quality of fund management, processes, and staff turnover can play an important role. Foundations should attach importance to a certain consistency in this respect. It can also be notified if an endowment fund is managed by an address that itself has extensive experience with foundations or foundation-like investor types. This can be a group of companies that manages pension funds, but also an independent asset manager or family office that has dealt with the conflict between return and capital preservation. The important thing here is that performance must be right over time. Pure foundation expertise combined with mediocre to poor performance also means that the investment decision-maker on the foundation side will have a hard time arguing in committee discussions.
What else should decision-makers of smaller foundations perhaps consider when selecting endowment funds?
Other investors may also find the defensive concepts of endowment funds appealing. Decision-makers at foundations without a large budget for experts and consultants will find a very good basis for decisions about endowment funds in many publicly accessible, dependent, and independent sources of information. In my opinion, they can fulfill their duty of careful selection, provided, of course, that they have a profound professional interest and expertise. It is difficult when the decision-maker wears many hats. Some then resort to external support. By the way, this is also an interesting field for volunteers with a banking background. Free-style or professionalization with budget and externals for the “simple” selection of mutual funds (“whip of transparency!”) is only possible for a fairly manageable number of foundations. So you have to do your research, comb through databases, and do your homework. As big as the task may sound, I will stick to it: For many foundation decision-makers, selecting the right fund does not have to be a “rocket science”!