How Endowments and Foundations Can Align Portfolio Strategy With Spending and Mission

Expected spending at endowments and foundations (E&Fs) is on the rise. According to the 2026 Morgan Stanley Endowments and Foundations Survey, nearly one-third of respondents expect to increase spending over the next three years, up from 15% in 2023.¹

That shift places more pressure on portfolios to both generate returns and provide additional liquidity, putting institutions in a difficult position. It also means that E&F investment decision-makers should be prepared to respond during times when spending needs outpace investment returns, fundraising and other inflows.

This article highlights ways that E&F boards and investment committees can better align their portfolios and spending policies with the organization’s mission, constituent needs and changing markets.

Start with the mission

For E&Fs, major portfolio decisions should start with the organization’s mission—whether the goal is funding operations, sustaining grantmaking, preserving purchasing power or increasing impact during moments of need.

Organizations that rely on portfolios to fund a significant portion of operations generally have less room for disruption and may need deeper reserves, clearer cash segmentation and more conservative risk positioning. These organizations typically use investment assets to fund salaries, programs, facilities or services, necessitating more predictability in their portfolios because shortfalls can quickly affect daily operations and constituents.

Grantmaking organizations, on the other hand, may be able to accept more volatility or illiquidity if they can adjust grant timing, pace distributions or use other resources during market stress. But multi-year commitments, crisis-response priorities and donor expectations can still create liquidity constraints for grant-making organizations.

A strong investment policy statement (IPS) should define required and flexible spending, liquidity needs and when distributions may be increased, reduced or deferred. The IPS should be developed through a thorough discovery process that examines the organization’s:

• Cash-flow sources
• Spending patterns
• Grant calendars
• Capital call obligations
• Fundraising variability
• Stakeholder expectations

Controlling for volatility with smoothing

E&F boards and investment committees should think strategically about spending policies. Smoothing techniques, such as using a 12-quarter average market value instead of a fixed spending rate, can help stabilize distributions and mitigate the impact of short-term market swings. Additionally, introducing a market value-based spending formula as a component of the rule rather than a fixed or inflation-linked model can aid in improving predictability.

This approach can be particularly valuable for organizations that rely heavily on the portfolio to fund operations.

Plan the organization’s response to different markets

During financial stress, some organizations preserve liquidity, reduce discretionary spending and/or protect core operations. Others may choose to deploy capital more aggressively during times of greater need among the communities they serve. The right response depends on mission, resources and financial flexibility.

E&F boards and their investment committees should discuss these decisions before a crisis. Successful planning involves planning for rainy-day scenarios in the organization’s IPS and governance processes while preserving flexibility to respond to new opportunities to make an impact.

Organizations should be prepared for sunny days, too. If returns, fundraising or other revenue sources exceed expectations, the organization should know whether these resources will be reinvested, used to expand current impact, reserved for future volatility or allocated to special opportunities.

Strengthen governance

As portfolios become more complex, governance and board education must keep pace. Alternatives and other strategies can introduce new considerations around liquidity, vehicle structure, manager selection and risk. For institutions with meaningful allocations to less liquid alternative investments, portfolios should be put through significant stress tests to help ensure necessary liquidity can be achieved during periods of distress without materially and permanently impairing portfolio performance.

Discovery should also be ongoing to accommodate for changes in leadership, fundraising, stakeholder priorities and markets. A strategic asset allocation that was appropriate five years ago may no longer reflect future obligations or opportunities. While a review may not necessitate changes to the IPS, the health and priorities of the enterprise should be discussed annually to help ensure the portfolio remains aligned with the direction of the organization.

Shifting generational perspectives among donors and stakeholders can add complexity, especially around perpetuity, sunsetting, impact investing and the balance between preserving capital and deploying assets. The IPS can help align these views with mission priorities over time.

Engage with a consultant

With experience across disciplines, a consultant can help E&Fs connect investment portfolios to missions and spending needs.

A more purposeful approach

For E&Fs, a sound investment portfolio supports the mission of the institution by connecting portfolio strategy to the organization’s purpose and its ability to assume both short- and long-term risks. Strong governance, grounded in known factors and informed by market-based risks, can help boards and investment committees make more informed decisions and better position the portfolio to support the institution in any market environment.