The challenges facing today’s foundation and endowment committees can be very daunting. Balancing the continued success of the portfolio with the desired spending policy forces committees to focus on those elements of the portfolio management process that are within their control.

Four factors impact the success of a foundation’s investment program:

• time horizon
• capital market returns
• spending policy
• asset allocation

The latter two, which go hand in hand, are controllable through decisions of the investment committee.

In order to calculate the amount to spend, not-for-profit organizations generally follow one of the following practices:

• income-oriented
• market value-oriented
• budget-oriented

An income-oriented spending policy concentrates on earned interest and dividends as the source of the organization’s cash flow, where a market value-oriented approach sets a percentage of the portfolio as the target for annual spending. Finally, a budget-oriented approach sets a fixed dollar value that must be withdrawn from the portfolio.

McLean Budden has developed proprietary software to evaluate the long term impact of different asset allocations and spending policies on the success of the fund. This customized analysis is made available to clients of McLean Budden.

Clients may vary the following inputs to evaluate various scenarios:

• asset mix
• payouts (income and/or dividends, market value, budget)
• annual contributions (including growth rates)
• administration costs
• inflation assumptions
• end balance (real or nominal)

And as a final check, McLean Budden will run a “stress test” assuming an initial five years of negative investment returns. The software stores all scenarios and an in-depth report will enable clients to compare the expected results of their controllable decisions.