For making decisions around proper portfolio positioning, some factors are to be considered. Crafting a spectrum of asset allocation recommendations created for a range of objectives and constraints is needed in the case of Donor Advised Funds (DFAs).
Following are the five lead factors that must be addressed to the donor while discussing the allocation of assets.
- Time horizon and intentions of the donor
It is very important to understand the donor’s intention, especially if the donor plans to allocate all funds right away or soon. All of them are related to time horizons, so it is essential.
It is expected that the assets can ride out short-term market volatility better when the time horizon is longer as other things remain constant. This stimulates higher equity allocation.
It can be an essential input in the investment procedure to have a conversation with donors regarding the same. This helps the donors believe that your organization cares about their intentions and possess the skills and knowledge to help them achieve their objectives.
- Return objectives
The donor’s intention and time horizons should be the basis of the return objective because the assets selected for allocation will need to attain a minimum level of return if the donor chooses to preserve the purchasing power.
A wide range of possible return objectives is there to choose from. However, the right return objective suitable for the situation can be selected after considering the donor’s intention and time horizons.
- Risk forbearance
From both objective and subjective perceptive, the donor’s forbearance towards risk should be estimated during the allocation process. It can help select targets that could compile with them if the donor’s risk forbearance is considered. This would also be helpful to understand how they will respond if an account undergoes extreme levels of volatility.
It is a combination of both art and science to determine the risk forbearance. This process can be helpful to balance objective and subjective considerations relevant to deciding the right portfolio for a donor.
At any point in time, a donor-advised fund allotment can be requested. While investing in DAFs, liquidity is an essential consideration for this reason. It is always advised to invest in liquid, readily marketable securities by considering their varying distribution frequency.
Asset allocation decisions are affected by specifics around distribution, e.g., the need to balance staying fully invested with liquidating investments.
- Peculiar circumstances
Responsible investing assets have remarkably grown across the world over time. Consequently, providing reliable investing portfolio options to the donors by the donor-advised fund has also started. One of the same iterations is the portfolio options that require investments screen for ESG criteria.
It is essential to understand responsible investing to allure donors looking to align their investment portfolio with their values or intentions.
While planning to get allocated with a donor-advised fund considering these five factors can be helpful in matching the portfolio consistent with the donor’s objective and constraints. Thus making the process easy and more likely to be successful.