The laws governing the management responsibility of foundation fiduciaries with respect to investment decisions have changed a great deal over time.

Historically, laws significantly restricted the ability of charitable institutions to pursue diverse investment strategies. Foundation law evaluated investment performance on individual investment decisions, rather than on the performance of the portfolio as a whole, and emphasized production of income and preservation of capital over growth, while also prohibiting foundation managers from delegating investment decisions to third-parties. in some cases, foundation managers were limited to making investments in securities (primarily fixed-income securities) appearing on “legal lists.”

Developments in financial management and the markets, and corresponding changes in the law, incorporated a new concept of fiduciary responsibility that focused on investing for “total return.” This investment strategy not only takes into account interest and dividends, as well as capital appreciation, when measuring investment returns, but also evaluates investment performance based on the foundation’s entire portfolio, rather than the returns or losses of individual investments.

Read the full article about managing risk by Andras Kosaras and Karen Green at the National Center for Family Philanthropy.