Barclays

A new Barclays Wealth White Paper advises that leaders of foundations and endowments will need to assess their overall investment strategy

A recent White Paper by Barclays Wealth, 'Investment management for endowments and foundations; balancing impact and longevity', reveals that there are no miracle solutions for foundations and endowments looking to support their distribution policy (the proportion of total assets they choose to give away each year) and continue doing so for a long time. Faced with the possibility of a prolonged period of low investments returns, the paper advises that leaders of foundations and endowments will need to assess their overall investment strategy and articulate contingency plans.

The analysis looks at two different scenarios to calculate a distribution strategy and makes the assumption that the foundation or endowment receives no future inflows. It also assumes investment allocations across nine asset classes, drawn from Barclays Wealth's Investment Philosophy. In the first scenario, it reveals that under an assumption of a "normal" 4% "risk free" return, the endowment or foundation that distributes 3-5% of its asset value has a good chance of not running out of money.

However, taking a more realistic 2% "risk free" rate of return, the research shows that it is much more difficult for endowments and foundations to distribute a similar amount and stay solvent.

The paper also identifies some of the options to boost investment returns so as to enable current distribution rates to be maintained. It demonstrates that both attempting to achieve market "alpha" and investing in illiquid assets may help to mitigate the effects of low investment returns, but neither are they likely to solve it.

Aaron S. Gurwitz, Chief Investment Officer at Barclays Wealth, comments: "Our findings highlight that there are some challenging times ahead for endowments and foundations, and in order to increase returns in this environment they will have to accept some degree of risk in their investment portfolio." "One small consolation is that should a foundation or endowment choose to continue with its current distribution rate - the "do nothing dramatic" strategy - the decisions would not prove fatal and could probably be rectified by changes in policy at some point in the future."

Aaron continues: "We are cautiously positive on the prospects for markets and our view is that European and North American economies will return to normal growth rates, and that short-term interest rates will return to normal levels over the next few years. However, taking into account our research and the very real possibility that returns will remain unusually low, we believe that endowments and foundations should consider all scenarios and take prudent action now."

For further information contact:

Clare Milton, Barclays Wealth, Corporate Communications
+44 (0) 20 3134 2327

Will Bowen, Barclays Wealth, Corporate Communications
+44 (0) 20 3134 7744