![\"\"](\"https:\/\/publishedresearch.cambridgeassociates.com\/wp-content\/uploads\/2023\/01\/Spend-Down-01.png\")
<\/a><\/p>\nWhile spend-down portfolios may seem radical to some investors, effectively turning the perpetual endowment model upside down, this approach\u2014if executed well\u2014can help institutions and individuals achieve the work of a lifetime.<\/p>\n
History of Spend-Down Funds<\/h3>\n
The term \u201cspend-down fund\u201d refers to a time-limited investment pool, designed to spend capital faster than it generates capital through returns. In other words, spend-down funds are pools of assets that are designed to \u201cspend down\u201d to zero. Some have a specific end date (e.g., 2050), whereas others are variable (e.g., an estimated date based on the lifetime of the trustees or beneficiaries). Spend-down funds allow for a higher level of annual spending versus annual spending from a perpetual endowment pool; annual giving from a spend-down fund can be 10% or more, whereas perpetual endowment spending is generally in the 4% to 5% range, to maintain or grow purchasing power after spending and inflation.<\/p>\n
Spend-down or \u201ctime-limited\u201d charities are nearly as old as foundations in the United States. According to the Duke University’s Center for Strategic Philanthropy and Civil Society, there have been time-limited investment pools in the United States since 1890. Prominent examples include the Atlantic Philanthropies, the Bill & Melinda Gates Foundation, Conservation International, and the\u00a0Diana, Princess of Wales Memorial Fund. There are also variations of spend-down funds, among the most notable of which is the\u00a0Giving Pledge. Launched in 2010, its members\u2014including Warren Buffett (Berkshire Hathaway)\u2014have committed to giving away at least half of their wealth during their lifetimes. And spend-down funds are on the rise\u2014a recent survey report from Rockefeller Philanthropy Advisors indicated that while perpetual models remain the most common, nearly a quarter of philanthropies established since 2000 have a time-limited model.<\/p>\n
Beyond foundations and philanthropy, spend-down strategies are widely used for retirement planning, from target-date funds for individual retirement accounts to \u201cglide paths\u201d for institutional defined benefit portfolios, and for other institutional portfolios such as settlement trusts.<\/p>\n
Spend Down Versus Perpetuity<\/h3>\n
Ultimately, the decision of which philanthropic path to take\u2014spend-down funds or investing for perpetuity\u2014is up to the investor. Making an assessment about the appropriate path involves consideration of a range of variables.<\/p>\n
The Case for Spend-down Funds<\/h4>\n\n- Some causes cannot wait.<\/strong> Climate change. Racial justice. Specific diseases. Gender discrimination. Economic development. While these challenges may not be solved in five years or even 50 years, there is a case that more support in the short term will serve to accelerate change, leading to greater total long-term impact and\/or more impact at a faster rate in a critical time of need.<\/li>\n
- Donor involvement\/donor intent.<\/strong> Some wealth owners, including many who have been successful capital allocators in their business careers, prefer to be closely involved with their mission-related work and\/or the institutions they support. Some also prefer to avoid the risk of \u201cdrift\u201d in foundation priorities away from the donors\u2019 original intent in decades to come.<\/span> 1<\/a><\/sup> <\/li>\n
- Avoiding dynastic wealth.<\/strong> Warren Buffett, in describing his choice to give away the majority of his wealth, famously recommended that wealthy families \u201cleave the children enough so that they can do anything but not enough that they can do nothing.\u201d<\/span> 2<\/a><\/sup> <\/li>\n<\/ul>\n
The Case for Investing for Perpetuity<\/h4>\n\n- Maximum long-term spending.<\/strong> If investment portfolios can sustainably earn more than they spend, the amount of spending over time can far extend what a spend-down fund can achieve because of the compounding effect of investing over longer time horizons.<\/li>\n
- Intergenerational equity.<\/strong> A central tenet of endowment-style investing is equity between future and present beneficiaries. Some causes and institutions will need support for decades and even centuries to come\u2014the clearest example of this is education and schools, which benefit from endowments as a source of sustainable financial support.<\/li>\n
- Time arbitrage in investing.<\/strong> Some investment strategies require a long time horizon or capacity to lock up capital to realize potential for higher returns. This includes public equities, where a minimum five- to ten-year time horizon is desired, given the inherent volatility of these strategies. This also holds true for alternative strategies like private equity and venture capital, where capital is locked-up for ten to 15 years.<\/li>\n<\/ul>\n
Governance and Investment Strategy<\/h3>\nGovernance is Essential<\/h4>\n
While spend-down funds can be radically different from perpetual endowments and family trusts, one success factor is consistent: good results require good governance. This means setting clear policies and objectives, carefully curating who oversees investment and spending policies, separating governance and management of investment assets, and adhering to best practices for meetings and communications with constituents.<\/p>\n
So, what is different about spend-down fund governance? A few things:<\/p>\n
\n- Larger shifts in asset allocation.<\/strong> Significant and dynamic asset allocation changes should be expected with spend-down funds depending on which \u201cphase\u201d the fund is in (more on this below) or based on recent results and current market conditions. In contrast, for perpetual portfolios, major asset allocation shifts should be rare.<\/li>\n
- Continuity of decision makers, if possible.<\/strong> While evolutions within the decision-making group (e.g., term limits, succession plans) are needed for perpetual portfolios, spend-down funds benefit from having largely the same people to the end, if possible. Doing so enables a spend-down fund to stay on course, given the many variables to evaluate and to ensure governance changes do not fundamentally disrupt or alter the purpose and reason for the spend-down fund\u2019s creation.<\/li>\n
- Closer coordination to enhance impact.<\/strong> Many investors are deepening links between their investment portfolios, missions, and values, which may include more coordination and communication between the teams overseeing investments and grants. For perpetual portfolios, there is often distinct separation between the investment and grant-making teams; for spend-down funds, coordination may be even more needed to ensure as much capital as possible (in investments as well as grants) is driving toward the same urgent causes and impact goals.<\/li>\n<\/ul>\n
A Three-Phased Investment Strategy<\/h4>\n
While spend-down funds may have a target date to get to zero, in practice the investment strategy should be dynamic and adaptive. An investor may start with a clear plan spanning 15 years, for example, but capital markets may not always cooperate with that vision. It is important to have flexibility to adjust spending both up and down and to adjust asset allocation plans.<\/p>\n
![\"\"](\"https:\/\/publishedresearch.cambridgeassociates.com\/wp-content\/uploads\/2023\/01\/Spend-Down-02.png\")
<\/a><\/p>\nOur framework starts with liquidity management, working backward from the target end date. The goal is to ensure sufficient liquid assets to support a pre-determined number of years\u2019 spending (i.e., minimum coverage ratio), and a buffer for additional years through lower-risk diversifying assets. Taking this approach also helps determine how much the portfolio can afford to invest in growth assets: in the early years, when spending needs are relatively low, more growth-seeking investments can be appropriate\u2014including private equity and venture capital. Over the middle years, a keen eye on liquidity and spending coverage helps develop a transition plan to a more defensive portfolio, especially as the end years approach.<\/p>\n
\n\nCase Study 1: Hypothetical Portfolio, 15 Years to End Date<\/h4>\n
$100 million initial value, no additional inflows, $11.1 million spending\/year, total spend: $164 million.<\/strong><\/p>\nReturn assumptions:<\/strong> For simplicity, we assume consistent annual returns, of 10% for growth investments (e.g., public and private equities), 7% for diversifiers (e.g., hedge funds and private credit), and 3% for liquidity pool (e.g., cash and bonds).<\/p>\nSpending:<\/strong> We assume annual spending from the liquidity pool only, and annual rebalancing to have two years\u2019 spending in the liquidity pool and an additional two years\u2019 spending in diversifiers (if possible).<\/p>\nResults:<\/strong> What results is a steady decline in assets, but significant growth beyond merely spending down cash (total spending of $164 million, so 1.6+ times the initial $100 million pool value).<\/p>\nObservations:<\/strong> Notably, the asset allocation does not change in a straight line from growth to liquidity\u2014rather, the aim is to seek the maximum possible growth allocation while maintaining sufficient liquidity to live through two to four years of market volatility.<\/p>\n
The Case for Investing for Perpetuity<\/h4>\n\n- Maximum long-term spending.<\/strong> If investment portfolios can sustainably earn more than they spend, the amount of spending over time can far extend what a spend-down fund can achieve because of the compounding effect of investing over longer time horizons.<\/li>\n
- Intergenerational equity.<\/strong> A central tenet of endowment-style investing is equity between future and present beneficiaries. Some causes and institutions will need support for decades and even centuries to come\u2014the clearest example of this is education and schools, which benefit from endowments as a source of sustainable financial support.<\/li>\n
- Time arbitrage in investing.<\/strong> Some investment strategies require a long time horizon or capacity to lock up capital to realize potential for higher returns. This includes public equities, where a minimum five- to ten-year time horizon is desired, given the inherent volatility of these strategies. This also holds true for alternative strategies like private equity and venture capital, where capital is locked-up for ten to 15 years.<\/li>\n<\/ul>\n
Governance and Investment Strategy<\/h3>\nGovernance is Essential<\/h4>\n
While spend-down funds can be radically different from perpetual endowments and family trusts, one success factor is consistent: good results require good governance. This means setting clear policies and objectives, carefully curating who oversees investment and spending policies, separating governance and management of investment assets, and adhering to best practices for meetings and communications with constituents.<\/p>\n
So, what is different about spend-down fund governance? A few things:<\/p>\n
\n- Larger shifts in asset allocation.<\/strong> Significant and dynamic asset allocation changes should be expected with spend-down funds depending on which \u201cphase\u201d the fund is in (more on this below) or based on recent results and current market conditions. In contrast, for perpetual portfolios, major asset allocation shifts should be rare.<\/li>\n
- Continuity of decision makers, if possible.<\/strong> While evolutions within the decision-making group (e.g., term limits, succession plans) are needed for perpetual portfolios, spend-down funds benefit from having largely the same people to the end, if possible. Doing so enables a spend-down fund to stay on course, given the many variables to evaluate and to ensure governance changes do not fundamentally disrupt or alter the purpose and reason for the spend-down fund\u2019s creation.<\/li>\n
- Closer coordination to enhance impact.<\/strong> Many investors are deepening links between their investment portfolios, missions, and values, which may include more coordination and communication between the teams overseeing investments and grants. For perpetual portfolios, there is often distinct separation between the investment and grant-making teams; for spend-down funds, coordination may be even more needed to ensure as much capital as possible (in investments as well as grants) is driving toward the same urgent causes and impact goals.<\/li>\n<\/ul>\n
A Three-Phased Investment Strategy<\/h4>\n
While spend-down funds may have a target date to get to zero, in practice the investment strategy should be dynamic and adaptive. An investor may start with a clear plan spanning 15 years, for example, but capital markets may not always cooperate with that vision. It is important to have flexibility to adjust spending both up and down and to adjust asset allocation plans.<\/p>\n
<\/a><\/p>\nOur framework starts with liquidity management, working backward from the target end date. The goal is to ensure sufficient liquid assets to support a pre-determined number of years\u2019 spending (i.e., minimum coverage ratio), and a buffer for additional years through lower-risk diversifying assets. Taking this approach also helps determine how much the portfolio can afford to invest in growth assets: in the early years, when spending needs are relatively low, more growth-seeking investments can be appropriate\u2014including private equity and venture capital. Over the middle years, a keen eye on liquidity and spending coverage helps develop a transition plan to a more defensive portfolio, especially as the end years approach.<\/p>\n
\n\nCase Study 1: Hypothetical Portfolio, 15 Years to End Date<\/h4>\n
$100 million initial value, no additional inflows, $11.1 million spending\/year, total spend: $164 million.<\/strong><\/p>\nReturn assumptions:<\/strong> For simplicity, we assume consistent annual returns, of 10% for growth investments (e.g., public and private equities), 7% for diversifiers (e.g., hedge funds and private credit), and 3% for liquidity pool (e.g., cash and bonds).<\/p>\nSpending:<\/strong> We assume annual spending from the liquidity pool only, and annual rebalancing to have two years\u2019 spending in the liquidity pool and an additional two years\u2019 spending in diversifiers (if possible).<\/p>\nResults:<\/strong> What results is a steady decline in assets, but significant growth beyond merely spending down cash (total spending of $164 million, so 1.6+ times the initial $100 million pool value).<\/p>\nObservations:<\/strong> Notably, the asset allocation does not change in a straight line from growth to liquidity\u2014rather, the aim is to seek the maximum possible growth allocation while maintaining sufficient liquidity to live through two to four years of market volatility.<\/p>\n
Governance and Investment Strategy<\/h3>\nGovernance is Essential<\/h4>\n
While spend-down funds can be radically different from perpetual endowments and family trusts, one success factor is consistent: good results require good governance. This means setting clear policies and objectives, carefully curating who oversees investment and spending policies, separating governance and management of investment assets, and adhering to best practices for meetings and communications with constituents.<\/p>\n
So, what is different about spend-down fund governance? A few things:<\/p>\n
- \n
- Larger shifts in asset allocation.<\/strong> Significant and dynamic asset allocation changes should be expected with spend-down funds depending on which \u201cphase\u201d the fund is in (more on this below) or based on recent results and current market conditions. In contrast, for perpetual portfolios, major asset allocation shifts should be rare.<\/li>\n
- Continuity of decision makers, if possible.<\/strong> While evolutions within the decision-making group (e.g., term limits, succession plans) are needed for perpetual portfolios, spend-down funds benefit from having largely the same people to the end, if possible. Doing so enables a spend-down fund to stay on course, given the many variables to evaluate and to ensure governance changes do not fundamentally disrupt or alter the purpose and reason for the spend-down fund\u2019s creation.<\/li>\n
- Closer coordination to enhance impact.<\/strong> Many investors are deepening links between their investment portfolios, missions, and values, which may include more coordination and communication between the teams overseeing investments and grants. For perpetual portfolios, there is often distinct separation between the investment and grant-making teams; for spend-down funds, coordination may be even more needed to ensure as much capital as possible (in investments as well as grants) is driving toward the same urgent causes and impact goals.<\/li>\n<\/ul>\n
A Three-Phased Investment Strategy<\/h4>\n
While spend-down funds may have a target date to get to zero, in practice the investment strategy should be dynamic and adaptive. An investor may start with a clear plan spanning 15 years, for example, but capital markets may not always cooperate with that vision. It is important to have flexibility to adjust spending both up and down and to adjust asset allocation plans.<\/p>\n
<\/a><\/p>\nOur framework starts with liquidity management, working backward from the target end date. The goal is to ensure sufficient liquid assets to support a pre-determined number of years\u2019 spending (i.e., minimum coverage ratio), and a buffer for additional years through lower-risk diversifying assets. Taking this approach also helps determine how much the portfolio can afford to invest in growth assets: in the early years, when spending needs are relatively low, more growth-seeking investments can be appropriate\u2014including private equity and venture capital. Over the middle years, a keen eye on liquidity and spending coverage helps develop a transition plan to a more defensive portfolio, especially as the end years approach.<\/p>\n
\n\nCase Study 1: Hypothetical Portfolio, 15 Years to End Date<\/h4>\n
$100 million initial value, no additional inflows, $11.1 million spending\/year, total spend: $164 million.<\/strong><\/p>\n
Return assumptions:<\/strong> For simplicity, we assume consistent annual returns, of 10% for growth investments (e.g., public and private equities), 7% for diversifiers (e.g., hedge funds and private credit), and 3% for liquidity pool (e.g., cash and bonds).<\/p>\n
Spending:<\/strong> We assume annual spending from the liquidity pool only, and annual rebalancing to have two years\u2019 spending in the liquidity pool and an additional two years\u2019 spending in diversifiers (if possible).<\/p>\n
Results:<\/strong> What results is a steady decline in assets, but significant growth beyond merely spending down cash (total spending of $164 million, so 1.6+ times the initial $100 million pool value).<\/p>\n
Observations:<\/strong> Notably, the asset allocation does not change in a straight line from growth to liquidity\u2014rather, the aim is to seek the maximum possible growth allocation while maintaining sufficient liquidity to live through two to four years of market volatility.<\/p>\n
- Continuity of decision makers, if possible.<\/strong> While evolutions within the decision-making group (e.g., term limits, succession plans) are needed for perpetual portfolios, spend-down funds benefit from having largely the same people to the end, if possible. Doing so enables a spend-down fund to stay on course, given the many variables to evaluate and to ensure governance changes do not fundamentally disrupt or alter the purpose and reason for the spend-down fund\u2019s creation.<\/li>\n