smarter giving for private foundations · 2014-12-06 · smarter giving for private foundations 3...

Smarter Giving for Private FoundationsA New Approach to Align Spending Policy with Mission

n How spending policy can helpmaximize charitable impact

n Methods for achieving greaterconsistency of distributions

n Balancing demands on spendingwith investing for perpetuity

September 2010

Bernstein does not provide tax, legal, or accounting advice. In considering this material,you should discuss your individual circumstances with professionals in those areas before making any decisions.

Table of Contents

1Key Research Conclusions

2IntroductionSpending Policy Enters the Spotlight

6Putting Time on Your SideThe Concept of Total Philanthropic Value

10The Virtues of SmoothingLess Volatile Distributions, with Minimal Long-Term Effect

14Spending Policy in PracticeThree Case Studies in Perpetuity, Balance, and Stable Giving

20AppendixProjected Results of Spending Policy Decisions

25Notes on Wealth Forecasting System

27Notes on Asset Allocation in Historical Studies

Smarter Giving for Private Foundations 1

Key Research Conclusions

n Spending policy and asset allocation should be alignedwith a foundation’s mission: Too many foundationssimply spend 5% of their previous year’s assets, subjectinggrantmaking to swings in the financial markets. To gainmore control and achieve the greatest charitable impact, afoundation’s board should align spending policy and assetallocation with the foundation’s philanthropic mission. Athoughtful and thorough quantitative analysis can helpthem make better decisions for the sake of the foundationand its beneficiaries.

n Smoothing formulas improve consistency of distribu-tions without sacrificing longevity: Many foundationsbelieve that smoothing formulas, which are widely used byendowments, don’t apply to them. But our research showsthat smoothing formulas—which determine annual giving asa percentage of the average of several years’ asset valuesrather than one year’s—are potentially quite valuable tofoundations and their beneficiaries. For many foundations,smoothing formulas, when adjusted for the required 5%minimum distribution, can facilitate more investment in stocksthan would otherwise be comfortable, creating the potentialfor greater philanthropic impact over the long term.* Whilehigher stock allocations will likely increase the investmentportfolio’s volatility, smoothing will reduce the volatility of thefoundation’s distributions.

n Stable giving is a realistic objective: Foundations that arecommitted to stable giving (always giving away the sameamount as they gave in the previous year, or more) canachieve similar benefits to smoothing by taking advantageof carryover rules, which allow foundations to “carry over”distributions greater than 5% in one year to the next year.This approach is an effective way to limit asset depletionwhile maintaining a stable level of distributions. n

*All of the studies featured in this publication assume a minimum annual required distribution of 5% of the previous year’s asset value, consistentwith requirements for private nonoperating foundations. For research into philanthropic organizations with no 5% annual minimum requirement,please contact a Bernstein Financial Advisor or a member of the Bernstein Wealth Management Group.

2 Bernstein.com

IntroductionSpending Policy Enters the Spotlight

The philanthropic world has been hit hard by global financialturmoil. Investment portfolio values are down—often dramati-cally—and charitable groups are cutting back. According to theFoundation Center, grantmaking foundations cut their giving in2009 by about 8.4%, or $3.9 billion. At the same time, therecipients of foundation giving are needier than ever. Whetherthe recipients are arts organizations or public service groups,they have been hurt by a weak economy, slashed governmentbudgets, and a distressed public donor base (Display 1).

In this environment, foundations’ spending policies have comeinto the spotlight. In calmer times, determining a spendingpolicy may have seemed like a simple decision. As long as assetvalues were rising, spending could rise more or less in lockstep.But today, if a foundation typically makes grants of a fixeddollar amount (for example, the previous year’s amountadjusted for inflation), this amount may now represent alarger-than-expected percentage of the foundation’s diminishedasset base. Directors may be uncomfortable with these higher

Display 1

Asset Values and Philanthropic Contributions Have Declined, While the Need for Charity Has Soared

200920082007

40

60

80

100

2000 2002 2004 2006 2008 2010

235 229 222

2007 2008 2009

0

4

8

12

Global Stocks Are Down

MSCI World Index: Growth of $100Oct 2007–Dec 2009 ($)

Charitable Contributions Are Down*

US$ Billions

US Unemployment Rate Is Up†

Percent

Past performance does not guarantee future results.*Data for 2009 are the average of the low-growth ($221.06 billion) and high-growth ($223.13 billion) projections.†Data through July 2010, seasonally adjustedSource: FactSet; John J. Havens and Paul G. Schervish, “Center on Wealth and Philanthropy Individual Giving Model: Forecast for 2009,” Advancing Philanthropy(January/February 2010); Morgan Stanley Capital International (MSCI); US Bureau of Labor Statistics; and AllianceBernstein

spending levels, because if investment returns don’t recoverrapidly, the outflow of assets could jeopardize a foundation’slongevity. Conversely, if spending policy dictates giving away apercentage of the assets each year, a foundation’s giving maydrop in absolute terms, to the detriment of the beneficiaries itintends to serve.

Trustees and directors are under intense pressure: Should theycut spending levels to preserve assets? Should they maintain oreven increase spending levels to help their beneficiaries, despitethe threat to their foundations’ longevity? Is it time to changespending policy for the future, based on lessons learned duringthis hard time? Decisions about spending policy can havelong-lasting ramifications, for better or worse.

Unfortunately, there are few hard guidelines or time-testedformulas to help foundations make these decisions. At smallerfoundations in particular, spending policy may be on autopilot.According to a survey by the Association of Small Foundations,only 39% of members have a formal, written spendingpolicy/budget document, whereas 66% have a written invest-ment policy.1 The majority (59%) of small foundations reportthat their spending calculation is simply 5% of the previousyear’s assets, which is the legally required minimum amount forprivate foundations.2 Foundations that use other formulas, suchas smoothing policies or stable giving (see “Basic SpendingFormulas,” right), often have implemented them withoutconducting a rigorous analysis of the impact of these formulason their missions.

As an investment manager for private foundations, endow-ments, and charitable trusts, Bernstein Global Wealth Manage-ment frequently works with directors and trustees on spendingpolicy and investment policy issues. Using historical analysis andour proprietary quantitative modeling tools, we help founda-tions assess the trade-offs between various spending policies sothey can make well-informed decisions.

Creating a spending policy based on disciplined analysis can bea useful exercise for more than financial reasons. It can stimu-late a foundation’s vitality and purpose by requiring the trustees

12009–2011 Foundation Operations & Management Report, Association of Small Foundations (ASF). ASF is a membership organization of more than 3,000 foundationswith few or no staff. Average asset size of survey report respondents was $22.3 million.2Q1 Snapshot Poll Results: ASF Members’ Investments (February 22, 2010), Association of Small Foundations

Laws governing foundation spending (includinggrantmaking and related activity) can be intricate, butthe rule of thumb regarding private foundations is thatthey must distribute at least 5% annually of the value oftheir assets (based on the preceding year’s value). If theyspend more than 5% in a given year, they may carry overthe excess dollar value into the next year to meet thatyear’s requirement. Most foundations use variations ofseveral basic formulas to meet the basic 5% rule.

Market value formulas: This is the simplest and themost popular among small foundations. The foundationdetermines the previous year’s average asset value andspends a fixed percentage of that value (usually 5%,though some foundations choose to spend more).

Market value with smoothing formulas (and/orfloors and ceilings): A smoothing formula takes theaverage of several of the most recent prior years’ assetvalues to establish the current year’s spending level (witha minimum of 5%). An additional floor or ceiling onspending may be added. The purpose is to ensurerelative stability of giving in the event of a large swing inasset value—whether up or down.

Stable giving formulas: In this formula, the foundationnever gives less than it gave in the previous year,potentially adjusted for inflation. This is popular withfoundations whose beneficiaries cannot afford to see adrop in aid during any one year.

Hybrid formulas: Some foundations and endowments(especially larger ones) choose to add inflation-adjustment formulas and/or a mixture of stable givingwith market value formulas. (For more on hybrids, see“What About Hybrids?” page 12.) n

Basic Spending Formulas


IntroductionSpending Policy Enters the Spotlight

The philanthropic world has been hit hard by global financialturmoil. Investment portfolio values are down—often dramati-cally—and charitable groups are cutting back. According to theFoundation Center, grantmaking foundations cut their giving in2009 by about 8.4%, or $3.9 billion. At the same time, therecipients of foundation giving are needier than ever. Whetherthe recipients are arts organizations or public service groups,they have been hurt by a weak economy, slashed governmentbudgets, and a distressed public donor base (Display 1).

In this environment, foundations’ spending policies have comeinto the spotlight. In calmer times, determining a spendingpolicy may have seemed like a simple decision. As long as assetvalues were rising, spending could rise more or less in lockstep.But today, if a foundation typically makes grants of a fixeddollar amount (for example, the previous year’s amountadjusted for inflation), this amount may now represent alarger-than-expected percentage of the foundation’s diminishedasset base. Directors may be uncomfortable with these higher

Display 1

Asset Values and Philanthropic Contributions Have Declined, While the Need for Charity Has Soared

200920082007

40

60

80

100

2000 2002 2004 2006 2008 2010

235 229 222

2007 2008 2009

0

4

8

12

Global Stocks Are Down

MSCI World Index: Growth of $100Oct 2007–Dec 2009 ($)

Charitable Contributions Are Down*

US$ Billions

US Unemployment Rate Is Up†

Percent

Past performance does not guarantee future results.*Data for 2009 are the average of the low-growth ($221.06 billion) and high-growth ($223.13 billion) projections.†Data through July 2010, seasonally adjustedSource: FactSet; John J. Havens and Paul G. Schervish, “Center on Wealth and Philanthropy Individual Giving Model: Forecast for 2009,” Advancing Philanthropy(January/February 2010); Morgan Stanley Capital International (MSCI); US Bureau of Labor Statistics; and AllianceBernstein

spending levels, because if investment returns don’t recoverrapidly, the outflow of assets could jeopardize a foundation’slongevity. Conversely, if spending policy dictates giving away apercentage of the assets each year, a foundation’s giving maydrop in absolute terms, to the detriment of the beneficiaries itintends to serve.

Trustees and directors are under intense pressure: Should theycut spending levels to preserve assets? Should they maintain oreven increase spending levels to help their beneficiaries, despitethe threat to their foundations’ longevity? Is it time to changespending policy for the future, based on lessons learned duringthis hard time? Decisions about spending policy can havelong-lasting ramifications, for better or worse.

Unfortunately, there are few hard guidelines or time-testedformulas to help foundations make these decisions. At smallerfoundations in particular, spending policy may be on autopilot.According to a survey by the Association of Small Foundations,only 39% of members have a formal, written spendingpolicy/budget document, whereas 66% have a written invest-ment policy.1 The majority (59%) of small foundations reportthat their spending calculation is simply 5% of the previousyear’s assets, which is the legally required minimum amount forprivate foundations.2 Foundations that use other formulas, suchas smoothing policies or stable giving (see “Basic SpendingFormulas,” right), often have implemented them withoutconducting a rigorous analysis of the impact of these formulason their missions.

As an investment manager for private foundations, endow-ments, and charitable trusts, Bernstein Global Wealth Manage-ment frequently works with directors and trustees on spendingpolicy and investment policy issues. Using historical analysis andour proprietary quantitative modeling tools, we help founda-tions assess the trade-offs between various spending policies sothey can make well-informed decisions.

Creating a spending policy based on disciplined analysis can bea useful exercise for more than financial reasons. It can stimu-late a foundation’s vitality and purpose by requiring the trustees

12009–2011 Foundation Operations & Management Report, Association of Small Foundations (ASF). ASF is a membership organization of more than 3,000 foundationswith few or no staff. Average asset size of survey report respondents was $22.3 million.2Q1 Snapshot Poll Results: ASF Members’ Investments (February 22, 2010), Association of Small Foundations

Laws governing foundation spending (includinggrantmaking and related activity) can be intricate, butthe rule of thumb regarding private foundations is thatthey must distribute at least 5% annually of the value oftheir assets (based on the preceding year’s value). If theyspend more than 5% in a given year, they may carry overthe excess dollar value into the next year to meet thatyear’s requirement. Most foundations use variations ofseveral basic formulas to meet the basic 5% rule.

Market value formulas: This is the simplest and themost popular among small foundations. The foundationdetermines the previous year’s average asset value andspends a fixed percentage of that value (usually 5%,though some foundations choose to spend more).

Market value with smoothing formulas (and/orfloors and ceilings): A smoothing formula takes theaverage of several of the most recent prior years’ assetvalues to establish the current year’s spending level (witha minimum of 5%). An additional floor or ceiling onspending may be added. The purpose is to ensurerelative stability of giving in the event of a large swing inasset value—whether up or down.

Stable giving formulas: In this formula, the foundationnever gives less than it gave in the previous year,potentially adjusted for inflation. This is popular withfoundations whose beneficiaries cannot afford to see adrop in aid during any one year.

Hybrid formulas: Some foundations and endowments(especially larger ones) choose to add inflation-adjustment formulas and/or a mixture of stable givingwith market value formulas. (For more on hybrids, see“What About Hybrids?” page 12.) n

Basic Spending Formulas

4 Bernstein.com

Display 2

The “DNA” of Endowments and Foundations

Community Need

Asset Value Changes

Accounting Issues

Spending Policy

Market VolatilityDirectors

Mission Statement

Investment Policy

Capital Inflows

Historical Distributions

Source: AllianceBernstein

There was a time when spending policy for foundations wassimple: Trustees invested the foundation’s assets in bondsand dividend-paying stocks, and spent the income fromthese investments. Period. While investment risk was alwaysan issue, there were plenty of blue-chip stocks and invest-ment-grade bonds to provide adequate income.

This “income-only” spending model was rendered obsoleteby a confluence of factors. First, the booming stock marketsof the 1950s and 1960s spurred many nonprofits to jointhe quest for capital gains in lieu of dividends. Then highinflation in the 1970s and 1980s, plus generally shrinkingdividend yields, caused the old investment paradigm tofall short. At the same time, the rise of modern portfoliotheory and laws such as the 1972 Uniform Managementof Institutional Funds Act, or UMIFA (later replaced by theUniform Prudent Management of Institutional Funds Act,or UPMIFA), encouraged institutions to invest for the longterm using a “total return” approach rather than seekinghigh current income.

Today, with interest rates and dividend yields at or near historiclows, trustees are once again trying to arrive at the right mix ofinvesting and spending. The income-only spending model hasbeen replaced by a variety of formulas that seek asset growth,inflation protection, and, in some cases, stability of distributions.

But there is no magic formula. In the financial crisis of 2008,some of the most respected college endowments in thecountry made headlines when investment losses forced themto slash spending. This put their boards in the uncomfortableposition of having to explain why, when they still had billionsof dollars of assets, loyal employees were being laid off andbeloved programs were being canceled.

Not every foundation’s spending decisions are so high-profile,but no board wants to be at the mercy of volatile markets.A well-constructed spending policy based on an analysis ofthe foundation’s circumstances and mission can provide theboard with guiding principles when inevitable marketdownturns occur. n

The Good Old Days Are Gone

and directors to articulate the priorities of the foundation.Ironically, difficult markets may make the exercise even moreproductive, because these environments force the board toaddress the most difficult questions regarding the foundation’smission and how to fulfill it with existing resources.

Nonprofits’ DNA: Investment Policy and Spending PolicyWhen we think about spending policy, we start from thepremise that every foundation has a unique mission, culture,and circumstances—and its financial policies should reflect that.If we think of a foundation as a living organism, many elementscreate its genetic makeup: its founding principles, its personnel,its goals, its assets, and the community it influences. But thefoundation’s impact on its beneficiaries will be manifestedthrough the two main strands of its “financial DNA”: invest-ment policy and spending policy3 (Display 2).

3The spending policy side of the double helix must also account for a foundation’s fund-raising or other capital contributions, whether predictable or nonrecurring. For the sake ofsimplicity, we have not considered additional contributions in the analyses in this book. But for individual foundations, a customized analysis can include their expected contributions.

The DNA analogy is apt because it illustrates the extent to whichinvestment policy and spending policy are inextricably linked. Bothhave to be considered together, as changes to one will affect theresults of the other. This wasn’t always the case. For much of the20th century foundations simply spent the income and dividendsfrom their investments. But in the 1970s this practice began todisappear as institutions began investing for the long term using a“total return” approach rather than seeking high current income(see “The Good Old Days Are Gone,” facing page).

The interplay between investment and spending is mostapparent in a foundation’s asset allocation choices. The majority(76%) of foundations were formed to exist in perpetuity and aremanaged with that goal in mind; most of them have allocatedmore than half their assets to stocks because history suggeststhat is the best way to stay ahead of inflation and the 5%required annual minimum distributions.4 Display 3 shows how aportfolio allocated 50% to stocks and 50% to bonds, paying out5% per year, would have failed to keep up with inflation in themedian 30-year period of the past 120 years. In contrast, the

same portfolio with a 70/30 stock/bond mix would have beateninflation in the median case, with a 0.8% annual surplus.

But high equity allocations bring high volatility. Display 4 showsin how many historical 30-year cycles various stock/bond mixeshave experienced 10%, 20%, and 30% declines in marketvalue. For example, the 70/30 allocation (which Display 3 showsas likely to beat inflation while spending 5% each year) experi-enced a 10% market decline at some point in 93% of the 1,080rolling 30-year periods we studied and a 20% decline in morethan half of them (57% of the time).

Thus, foundations face a conundrum: While large equityallocations offer greater longevity potential, they also introducevolatile investment returns, with a potentially negative impacton grantmaking. Herein lies the challenge of spending policy:Foundation trustees and directors must find a formula thatenables the foundation to meet its ongoing philanthropic goalswhile maintaining a prudent rate of asset growth. n

Display 4

...But Higher Stock Allocations Mean Greater Volatility

Historical Probability of Peak-to-Trough LossesFeb 1890–Dec 2009* (%)

Percent probability ofat least one 10% loss

over 30-year period

Severity of Peak-to-Trough Loss

10%

70

38 32

93

5734

10085

58

Stock/Bond Mix %: 50/50 70/30 100/0

20% 30%

Past performance does not guarantee future results.*1,080 rolling 30-year periods, started monthly. See Notes on Asset Allocation inHistorical Studies, pages 27–28.Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills,and Inflation:Year-by-Year Historical Returns,” University of Chicago Press Journal ofBusiness (January 1976); MSCI; NAREIT; Standard & Poor’s; US Bureau of LaborStatistics; and AllianceBernstein

Display 3

Historically, Perpetuity Has Called for a High Stock Allocation...

Rolling 30-Year Periods: Median Compound ReturnFeb 1890–Dec 2009* (%)

Stocks

Bonds

Total ReturnInflation

Spending

Surplus

Shortfall

3.8

(4.3)

6.1

(2.0)

7.5

(0.6) 0.0 0.0

8.9

5.0

0.8

10.5

3.13.1

3.13.1

3.1

5.0

2.4

100

0

70

30

50

50

30

70

0

100


42009–2011 Foundation Operations & Management Report, Association of Small Foundations. The average small foundation has 54% of its assets invested in equities and6% invested in alternative investments, which we assume to have equity-like characteristics.


Display 2

The “DNA” of Endowments and Foundations

Community Need

Asset Value Changes

Accounting Issues

Spending Policy

Market VolatilityDirectors

Mission Statement

Investment Policy

Capital Inflows

Historical Distributions


There was a time when spending policy for foundations wassimple: Trustees invested the foundation’s assets in bondsand dividend-paying stocks, and spent the income fromthese investments. Period. While investment risk was alwaysan issue, there were plenty of blue-chip stocks and invest-ment-grade bonds to provide adequate income.

This “income-only” spending model was rendered obsoleteby a confluence of factors. First, the booming stock marketsof the 1950s and 1960s spurred many nonprofits to jointhe quest for capital gains in lieu of dividends. Then highinflation in the 1970s and 1980s, plus generally shrinkingdividend yields, caused the old investment paradigm tofall short. At the same time, the rise of modern portfoliotheory and laws such as the 1972 Uniform Managementof Institutional Funds Act, or UMIFA (later replaced by theUniform Prudent Management of Institutional Funds Act,or UPMIFA), encouraged institutions to invest for the longterm using a “total return” approach rather than seekinghigh current income.

Today, with interest rates and dividend yields at or near historiclows, trustees are once again trying to arrive at the right mix ofinvesting and spending. The income-only spending model hasbeen replaced by a variety of formulas that seek asset growth,inflation protection, and, in some cases, stability of distributions.

But there is no magic formula. In the financial crisis of 2008,some of the most respected college endowments in thecountry made headlines when investment losses forced themto slash spending. This put their boards in the uncomfortableposition of having to explain why, when they still had billionsof dollars of assets, loyal employees were being laid off andbeloved programs were being canceled.

Not every foundation’s spending decisions are so high-profile,but no board wants to be at the mercy of volatile markets.A well-constructed spending policy based on an analysis ofthe foundation’s circumstances and mission can provide theboard with guiding principles when inevitable marketdownturns occur. n

The Good Old Days Are Gone

and directors to articulate the priorities of the foundation.Ironically, difficult markets may make the exercise even moreproductive, because these environments force the board toaddress the most difficult questions regarding the foundation’smission and how to fulfill it with existing resources.

Nonprofits’ DNA: Investment Policy and Spending PolicyWhen we think about spending policy, we start from thepremise that every foundation has a unique mission, culture,and circumstances—and its financial policies should reflect that.If we think of a foundation as a living organism, many elementscreate its genetic makeup: its founding principles, its personnel,its goals, its assets, and the community it influences. But thefoundation’s impact on its beneficiaries will be manifestedthrough the two main strands of its “financial DNA”: invest-ment policy and spending policy3 (Display 2).

3The spending policy side of the double helix must also account for a foundation’s fund-raising or other capital contributions, whether predictable or nonrecurring. For the sake ofsimplicity, we have not considered additional contributions in the analyses in this book. But for individual foundations, a customized analysis can include their expected contributions.

The DNA analogy is apt because it illustrates the extent to whichinvestment policy and spending policy are inextricably linked. Bothhave to be considered together, as changes to one will affect theresults of the other. This wasn’t always the case. For much of the20th century foundations simply spent the income and dividendsfrom their investments. But in the 1970s this practice began todisappear as institutions began investing for the long term using a“total return” approach rather than seeking high current income(see “The Good Old Days Are Gone,” facing page).

The interplay between investment and spending is mostapparent in a foundation’s asset allocation choices. The majority(76%) of foundations were formed to exist in perpetuity and aremanaged with that goal in mind; most of them have allocatedmore than half their assets to stocks because history suggeststhat is the best way to stay ahead of inflation and the 5%required annual minimum distributions.4 Display 3 shows how aportfolio allocated 50% to stocks and 50% to bonds, paying out5% per year, would have failed to keep up with inflation in themedian 30-year period of the past 120 years. In contrast, the

same portfolio with a 70/30 stock/bond mix would have beateninflation in the median case, with a 0.8% annual surplus.

But high equity allocations bring high volatility. Display 4 showsin how many historical 30-year cycles various stock/bond mixeshave experienced 10%, 20%, and 30% declines in marketvalue. For example, the 70/30 allocation (which Display 3 showsas likely to beat inflation while spending 5% each year) experi-enced a 10% market decline at some point in 93% of the 1,080rolling 30-year periods we studied and a 20% decline in morethan half of them (57% of the time).

Thus, foundations face a conundrum: While large equityallocations offer greater longevity potential, they also introducevolatile investment returns, with a potentially negative impacton grantmaking. Herein lies the challenge of spending policy:Foundation trustees and directors must find a formula thatenables the foundation to meet its ongoing philanthropic goalswhile maintaining a prudent rate of asset growth. n

Display 4

...But Higher Stock Allocations Mean Greater Volatility

Historical Probability of Peak-to-Trough LossesFeb 1890–Dec 2009* (%)

Percent probability ofat least one 10% loss

over 30-year period

Severity of Peak-to-Trough Loss

10%

70

38 32

93

5734

10085

58

Stock/Bond Mix %: 50/50 70/30 100/0

20% 30%


Display 3

Historically, Perpetuity Has Called for a High Stock Allocation...

Rolling 30-Year Periods: Median Compound ReturnFeb 1890–Dec 2009* (%)

Stocks

Bonds

Total ReturnInflation

Spending

Surplus

Shortfall

3.8

(4.3)

6.1

(2.0)

7.5

(0.6) 0.0 0.0

8.9

5.0

0.8

10.5

3.13.1

3.13.1

3.1

5.0

2.4

100

0

70

30

50

50

30

70

0

100


42009–2011 Foundation Operations & Management Report, Association of Small Foundations. The average small foundation has 54% of its assets invested in equities and6% invested in alternative investments, which we assume to have equity-like characteristics.

6 Bernstein.com

foundation and its ability to fulfill its mission. If appropriate to itsmission, the foundation might limit spending in the short term tocreate greater philanthropic value over time. On the other hand,charitable funds spent today may have a lasting impact thatoverwhelms the benefit of spending more tomorrow. Forexample, a program that supports additional education or jobtraining helps recipients improve their lives for not just theimmediate term, but for the long term.

Making a Longevity Prognosis UsingTotal Philanthropic ValueTo illustrate the financial trade-offs between short-term andlong-term priorities, we used the WFS to model the assets of ahypothetical foundation that began with $10 million invested ina simple diversified portfolio of 70% stocks and 30% bonds7

and that spent 5% of its assets for 30 years (Display 5). In themedian of outcomes, the foundation will have given away$15.8 million in today’s purchasing power (i.e., real dollars, oradjusted for inflation). Its remaining real assets are $10.2million. From the sum of the total giving and the remainingassets we derive what we call Total Philanthropic Value (TPV),which in this case is $26 million. TPV is a useful means of

measuring the effect of different investment and spendingchoices in various inflation scenarios. (We use $10 million in ouranalyses because it is easily scalable: For comparison’s sake, a$50 million foundation can multiply our results by five; a $1million foundation can divide by 10. Also, for simplicity’s sake,our default asset allocation is 70% stocks and 30% bonds. Inpractice, foundations often have more diversified portfolios,including alternative investments, which have the potential toenhance risk-adjusted returns.)

The first question we studied was the impact of differentspending levels on TPV. Interestingly, we found that the lowerthe spending rate, the higher the potential TPV. Display 6 showsthe potential outcomes of three different spending levels—5%,6%, and 7%—over 30 years.8 A 7% spending rate results in amedian TPV of $22.4 million after 30 years. But with a lowerspending rate, the foundation’s TPV grows. At 6%, the medianoutcome is $24.0 million, and at 5% it is $26.0 million—about16% more than the 7% spending rate. In all three cases, ifinvestment performance is very poor (the 90th percentile), thereis not a big difference in TPV. But if investment results are verystrong (the 10th percentile), after 30 years the TPV soars from

Display 6

Less Can Be More…

Total Philanthropic Value70% Stocks/30% Bonds

30 Years

Spending Rate

US$

Mill

ions

38.1

22.414.0

42.2

24.0

14.7

47.0

26.0

15.3

5%10%

50%

90%95%Le

vel o

f Con

fiden

ce

5%6%7%

Initial assets of $10 million. See notes to Display 5 for asset allocation assumptions.Also see Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

7See the Appendix, pages 20–24, for details on the asset allocation assumptions used in our analysis.8See “A Closer Look at Our Modeling: The Wealth Forecasting System,” page 8.

Display 7

…When It Provides for Greater Annual Giving over Time

Median Annual Distributions

300

700

1,100

1,500

2925211713951

Years

5% Spending

7% Spending

By year 18, annual distributions of 5% from a larger corpus overtake annual distributions of 7% from a smaller one

US$

Thou

sand

s


Putting Time on Your SideThe Concept of Total Philanthropic Value

Most foundations are founded and managed to exist in perpetuity,often because of a founder’s idealistic goals and the assumptionthat a charity that keeps giving forever will have a greater impactthan one that gives for a finite number of years. But thisassumption is increasingly coming into question.5 Every dollarof charitable giving has social and economic benefits that maycause its value to multiply, so that giving today in fact can havegreater impact than waiting to give tomorrow.6 Short-term,high-impact grants may benefit some philanthropic causes farmore than “extended-release” support. For example, if the goalis to vanquish a curable illness in a certain region of the world,more resources today may well be far more efficacious thansmall amounts doled out over time.

Further, the stock market volatility of the last few years hasprompted many foundation directors and trustees to reexam-ine the feasibility of existing “forever.” When asset valuesappeared to be on a fairly steady climb, a 5% spending policyseemed viable. Today, directors and trustees want to know:How long can our assets support our spending? Can we affordto maintain our distributions through a bear market? Theanswers need to be based on a clear-eyed understanding ofthe foundation’s mission, combined with an objective,quantitative analysis of the probable outcomes of variousspending policies.

Spending can have a big impact on investment returns. Toanalyze the dynamics of simultaneous spending and investmentdecisions, we use our proprietary Wealth Forecasting SystemSM

(WFS), which models the probable outcomes given various

capital markets and inflation scenarios, from poor to excellent.The WFS simulates 10,000 plausible future paths of returns forvarious asset classes and inflation. (For more on our methodology,see “A Closer Look at Our Modeling: The Wealth ForecastingSystem,” page 8.)

This type of analysis is important because of the nature ofinvestment returns and compounding. Put simply, $1 spent todaymeans $1 less to invest tomorrow. But $1 invested today maymean more than $1 tomorrow. Assuming real investment returnsare positive, accumulated asset growth can greatly benefit a

5Arthur “Buzz” Schmidt, “Escaping the Perpetuity Mindset Trap,” The Nonprofit Quarterly, December 20086Robert J. Shapiro and Aparna Mathur, “The Social and Economic Value of Private and Community Foundations,” The Philanthropic Collaborative, December 2008

Display 5

How Philanthropic Assets Grow

70% Stocks/30% Bonds, Distributing 5% AnnuallyMedian Forecast Results, Adjusted for Inflation (US$ Mil.)

10.2

15.810.0

26.0

Remaining Assets

Total PhilanthropicValue (TPV)

Cumulative Distributions

Assets: Year 30Beginning Assets

Initial assets of $10 million. The 70/30 stock/bond mix comprises 65% globalstocks, 25% intermediate taxable fixed income, and 10% REITs (because we regardREITs as having characteristics of both stocks and bonds, the REITs allocation isdivided equally between those two asset classes). Global stocks comprise 35% USvalue, 35% US growth, 25% developed international, and 5% emerging markets.See Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein


foundation and its ability to fulfill its mission. If appropriate to itsmission, the foundation might limit spending in the short term tocreate greater philanthropic value over time. On the other hand,charitable funds spent today may have a lasting impact thatoverwhelms the benefit of spending more tomorrow. Forexample, a program that supports additional education or jobtraining helps recipients improve their lives for not just theimmediate term, but for the long term.

Making a Longevity Prognosis UsingTotal Philanthropic ValueTo illustrate the financial trade-offs between short-term andlong-term priorities, we used the WFS to model the assets of ahypothetical foundation that began with $10 million invested ina simple diversified portfolio of 70% stocks and 30% bonds7

and that spent 5% of its assets for 30 years (Display 5). In themedian of outcomes, the foundation will have given away$15.8 million in today’s purchasing power (i.e., real dollars, oradjusted for inflation). Its remaining real assets are $10.2million. From the sum of the total giving and the remainingassets we derive what we call Total Philanthropic Value (TPV),which in this case is $26 million. TPV is a useful means of

measuring the effect of different investment and spendingchoices in various inflation scenarios. (We use $10 million in ouranalyses because it is easily scalable: For comparison’s sake, a$50 million foundation can multiply our results by five; a $1million foundation can divide by 10. Also, for simplicity’s sake,our default asset allocation is 70% stocks and 30% bonds. Inpractice, foundations often have more diversified portfolios,including alternative investments, which have the potential toenhance risk-adjusted returns.)

The first question we studied was the impact of differentspending levels on TPV. Interestingly, we found that the lowerthe spending rate, the higher the potential TPV. Display 6 showsthe potential outcomes of three different spending levels—5%,6%, and 7%—over 30 years.8 A 7% spending rate results in amedian TPV of $22.4 million after 30 years. But with a lowerspending rate, the foundation’s TPV grows. At 6%, the medianoutcome is $24.0 million, and at 5% it is $26.0 million—about16% more than the 7% spending rate. In all three cases, ifinvestment performance is very poor (the 90th percentile), thereis not a big difference in TPV. But if investment results are verystrong (the 10th percentile), after 30 years the TPV soars from

Display 6

Less Can Be More…

Total Philanthropic Value70% Stocks/30% Bonds

30 Years

Spending Rate

US$

Mill

ions

38.1

22.414.0

42.2

24.0

14.7

47.0

26.0

15.3

5%10%

50%

90%95%Le

vel o

f Con

fiden

ce

5%6%7%


7See the Appendix, pages 20–24, for details on the asset allocation assumptions used in our analysis.8See “A Closer Look at Our Modeling: The Wealth Forecasting System,” page 8.

Display 7

…When It Provides for Greater Annual Giving over Time

Median Annual Distributions

300

700

1,100

1,500

2925211713951

Years

5% Spending

7% Spending

By year 18, annual distributions of 5% from a larger corpus overtake annual distributions of 7% from a smaller one

US$

Thou

sand

s


Putting Time on Your SideThe Concept of Total Philanthropic Value

Most foundations are founded and managed to exist in perpetuity,often because of a founder’s idealistic goals and the assumptionthat a charity that keeps giving forever will have a greater impactthan one that gives for a finite number of years. But thisassumption is increasingly coming into question.5 Every dollarof charitable giving has social and economic benefits that maycause its value to multiply, so that giving today in fact can havegreater impact than waiting to give tomorrow.6 Short-term,high-impact grants may benefit some philanthropic causes farmore than “extended-release” support. For example, if the goalis to vanquish a curable illness in a certain region of the world,more resources today may well be far more efficacious thansmall amounts doled out over time.

Further, the stock market volatility of the last few years hasprompted many foundation directors and trustees to reexam-ine the feasibility of existing “forever.” When asset valuesappeared to be on a fairly steady climb, a 5% spending policyseemed viable. Today, directors and trustees want to know:How long can our assets support our spending? Can we affordto maintain our distributions through a bear market? Theanswers need to be based on a clear-eyed understanding ofthe foundation’s mission, combined with an objective,quantitative analysis of the probable outcomes of variousspending policies.

Spending can have a big impact on investment returns. Toanalyze the dynamics of simultaneous spending and investmentdecisions, we use our proprietary Wealth Forecasting SystemSM

(WFS), which models the probable outcomes given various

capital markets and inflation scenarios, from poor to excellent.The WFS simulates 10,000 plausible future paths of returns forvarious asset classes and inflation. (For more on our methodology,see “A Closer Look at Our Modeling: The Wealth ForecastingSystem,” page 8.)

This type of analysis is important because of the nature ofinvestment returns and compounding. Put simply, $1 spent todaymeans $1 less to invest tomorrow. But $1 invested today maymean more than $1 tomorrow. Assuming real investment returnsare positive, accumulated asset growth can greatly benefit a

5Arthur “Buzz” Schmidt, “Escaping the Perpetuity Mindset Trap,” The Nonprofit Quarterly, December 20086Robert J. Shapiro and Aparna Mathur, “The Social and Economic Value of Private and Community Foundations,” The Philanthropic Collaborative, December 2008

Display 5

How Philanthropic Assets Grow

70% Stocks/30% Bonds, Distributing 5% AnnuallyMedian Forecast Results, Adjusted for Inflation (US$ Mil.)

10.2

15.810.0

26.0

Remaining Assets

Total PhilanthropicValue (TPV)

Cumulative Distributions

Assets: Year 30Beginning Assets

Initial assets of $10 million. The 70/30 stock/bond mix comprises 65% globalstocks, 25% intermediate taxable fixed income, and 10% REITs (because we regardREITs as having characteristics of both stocks and bonds, the REITs allocation isdivided equally between those two asset classes). Global stocks comprise 35% USvalue, 35% US growth, 25% developed international, and 5% emerging markets.See Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

8 Bernstein.com

Bernstein’s Wealth Forecasting SystemSM (WFS) is a proprie-tary planning tool that is designed to model asset growthover time, given specific variables and starting conditions.It can project the potential returns of foundation portfoliosbuilt with stocks, bonds, and other asset classes to forecastasset growth over extended periods of time.

The WFS uses historical data, Bernstein research, andsophisticated modeling software to create a vast range ofpotential market returns, taking into account the underlyingdrivers and linkages in the capital markets, as well as adegree of randomness. In considering the future spendingpower of a foundation’s assets, inflation is a critical variable.Bernstein’s WFS has three unique attributes that addressinflation risk.

First, initial conditions matter. In other words, forward-look-ing views are very different when the starting point is 1980(very high inflation), 2000 (lower inflation; high assetvaluations), or 2010 (low inflation; modest valuations).Second, we recognize that history has limited use as a guide.While many financial forecasting models use a randomsample of history as their foundation, Bernstein’s WFS creates

plausible paths of investment outcomes to show how thefinancial markets may unfold, based on our understanding ofeconomics and random shocks. This enables us to consider awide range of potential scenarios. Third, in every path wetie together inflation’s impact both on the value of futurephilanthropic gifts and on stock and bond returns. A modelbased on a random sampling of history can create nonsensi-cal outcomes. In contrast, our model considers how the pathof inflation will affect spending and asset returns consistently,creating a holistic view of the foundation’s grants and thevalue of its remaining assets.

Using a so-called Monte Carlo simulation, the WFS generates10,000 plausible outcomes, which we show as a probabilitydistribution known as a “box and whiskers” display. As seenin the display below, the median outcome, or 50th percentile,is indicated by the circle in the middle of the blue bar.The 90th percentile—which represents very poor marketperformance—is at the bottom of the box, and the 10thpercentile is at the top of the box. The whiskers extend thedistributions to the 95th and 5th percentiles. (Why do we usewhiskers? Because they graphically show that such extremeresults, though highly unlikely, are possible.) n

A Closer Look at Our Modeling: The Wealth Forecasting System

Bernstein’s Wealth Forecasting System Can Help Illuminate Potential Outcomes of Different Spending Choices

Philanthropic OrganizationProfile Data Wealth Forecasting ModelsScenarios Probability Distribution

Distribution of 10,000 Outcomes

Simulated Observations

Based on Bernstein’s Proprietary

Capital Markets Research

10%—Top 10% of Outcomes

50%—Median Outcome

90%—Bottom 10% of Outcomes

5%

95%

SpendingPolicy

AssetAllocation

Philanthropic Objectives

Assets

Capital Campaign

Risk Tolerance

Time Horizon


$38.1 million at a 7% spending rate to $47.0 million at a 5%spending rate! Why is there such a big difference in the 10thpercentile compared with the median? It is due to compound-ing: If investment returns keep doing well, year after year theasset growth is exponential.

With more assets invested because less is being spent, over timea higher asset base will result in a higher annual distribution.Display 7 (page 7) shows this by mapping the annual distribu-tions of the same hypothetical foundation, comparing 5%annual spending with 7%. In the median case, even though the5% rate represents lower annual distributions in the founda-tion’s early years, after about 18 years the 5% rate supportshigher annual distributions than the 7% spending rate. Oncethe crossover point is reached, it is a mathematical certainty thatthe 5% spending rate will enable the foundation to distributemore annually and still have more remaining assets than itwould have had with the 7% spending rate. (We also analyzed

this using the 120-year historical record and found that thecrossover point often occurs earlier than 18 years; in none ofthe rolling 30-year periods did it take longer than 20 years.)9

Our analysis indicates that the greater a foundation’s TPV, thegreater its longevity and its potential to go on in perpetuity;conversely, a lower TPV suggests reduced longevity. Of course,each foundation’s mission remains the critical variable. Thetrustees may feel it’s important to make a strong impact fromthe start, even if that means lower TPV over time. If thephilanthropic mission is time-sensitive, or if the board feels thatpart of the foundation’s mission is to spend down its assets overtime, then a greater level of current spending may be appropri-ate. However, for those foundations whose bent is purelytoward perpetuity, spending the 5% minimum will providesubstantial benefits over the long term. Either way, TPV is avaluable tool for measuring the effects of spending policy. n

n The sum of a foundation’s cumulative distributions and its remaining assets can be expressed as Total Philanthropic Value (TPV).

n The lower a foundation’s annual spending, the greater its TPV over time, which can ultimately provide for greaterannual giving.

n TPV is a useful measure for foundation boards: Greater TPV indicates greater longevity and the potential to go on inperpetuity, while lower TPV suggests greater near-term spending and reduced longevity.

Chapter Highlights

9The 30-year rolling periods studied in this analysis began in January of each year.


Bernstein’s Wealth Forecasting SystemSM (WFS) is a proprie-tary planning tool that is designed to model asset growthover time, given specific variables and starting conditions.It can project the potential returns of foundation portfoliosbuilt with stocks, bonds, and other asset classes to forecastasset growth over extended periods of time.

The WFS uses historical data, Bernstein research, andsophisticated modeling software to create a vast range ofpotential market returns, taking into account the underlyingdrivers and linkages in the capital markets, as well as adegree of randomness. In considering the future spendingpower of a foundation’s assets, inflation is a critical variable.Bernstein’s WFS has three unique attributes that addressinflation risk.

First, initial conditions matter. In other words, forward-look-ing views are very different when the starting point is 1980(very high inflation), 2000 (lower inflation; high assetvaluations), or 2010 (low inflation; modest valuations).Second, we recognize that history has limited use as a guide.While many financial forecasting models use a randomsample of history as their foundation, Bernstein’s WFS creates

plausible paths of investment outcomes to show how thefinancial markets may unfold, based on our understanding ofeconomics and random shocks. This enables us to consider awide range of potential scenarios. Third, in every path wetie together inflation’s impact both on the value of futurephilanthropic gifts and on stock and bond returns. A modelbased on a random sampling of history can create nonsensi-cal outcomes. In contrast, our model considers how the pathof inflation will affect spending and asset returns consistently,creating a holistic view of the foundation’s grants and thevalue of its remaining assets.

Using a so-called Monte Carlo simulation, the WFS generates10,000 plausible outcomes, which we show as a probabilitydistribution known as a “box and whiskers” display. As seenin the display below, the median outcome, or 50th percentile,is indicated by the circle in the middle of the blue bar.The 90th percentile—which represents very poor marketperformance—is at the bottom of the box, and the 10thpercentile is at the top of the box. The whiskers extend thedistributions to the 95th and 5th percentiles. (Why do we usewhiskers? Because they graphically show that such extremeresults, though highly unlikely, are possible.) n

A Closer Look at Our Modeling: The Wealth Forecasting System

Bernstein’s Wealth Forecasting System Can Help Illuminate Potential Outcomes of Different Spending Choices

Philanthropic OrganizationProfile Data Wealth Forecasting ModelsScenarios Probability Distribution

Distribution of 10,000 Outcomes

Simulated Observations

Based on Bernstein’s Proprietary

Capital Markets Research

10%—Top 10% of Outcomes

50%—Median Outcome

90%—Bottom 10% of Outcomes

5%

95%

SpendingPolicy

AssetAllocation

Philanthropic Objectives

Assets

Capital Campaign

Risk Tolerance

Time Horizon


$38.1 million at a 7% spending rate to $47.0 million at a 5%spending rate! Why is there such a big difference in the 10thpercentile compared with the median? It is due to compound-ing: If investment returns keep doing well, year after year theasset growth is exponential.

With more assets invested because less is being spent, over timea higher asset base will result in a higher annual distribution.Display 7 (page 7) shows this by mapping the annual distribu-tions of the same hypothetical foundation, comparing 5%annual spending with 7%. In the median case, even though the5% rate represents lower annual distributions in the founda-tion’s early years, after about 18 years the 5% rate supportshigher annual distributions than the 7% spending rate. Oncethe crossover point is reached, it is a mathematical certainty thatthe 5% spending rate will enable the foundation to distributemore annually and still have more remaining assets than itwould have had with the 7% spending rate. (We also analyzed

this using the 120-year historical record and found that thecrossover point often occurs earlier than 18 years; in none ofthe rolling 30-year periods did it take longer than 20 years.)9

Our analysis indicates that the greater a foundation’s TPV, thegreater its longevity and its potential to go on in perpetuity;conversely, a lower TPV suggests reduced longevity. Of course,each foundation’s mission remains the critical variable. Thetrustees may feel it’s important to make a strong impact fromthe start, even if that means lower TPV over time. If thephilanthropic mission is time-sensitive, or if the board feels thatpart of the foundation’s mission is to spend down its assets overtime, then a greater level of current spending may be appropri-ate. However, for those foundations whose bent is purelytoward perpetuity, spending the 5% minimum will providesubstantial benefits over the long term. Either way, TPV is avaluable tool for measuring the effects of spending policy. n

n The sum of a foundation’s cumulative distributions and its remaining assets can be expressed as Total Philanthropic Value (TPV).

n The lower a foundation’s annual spending, the greater its TPV over time, which can ultimately provide for greaterannual giving.

n TPV is a useful measure for foundation boards: Greater TPV indicates greater longevity and the potential to go on inperpetuity, while lower TPV suggests greater near-term spending and reduced longevity.

Chapter Highlights

9The 30-year rolling periods studied in this analysis began in January of each year.

10 Bernstein.com

The Virtues of SmoothingLess Volatile Distributions, with Minimal Long-Term Effect

The majority of foundations use the simplest of spendingpolicies: 5% of the market value of the previous year’s assets.But a difficult choice arises when investments drop in value.Someone has to eat the difference between returns andspending: either the foundation’s beneficiaries (by receivingless money in absolute terms), or the foundation itself (bymaintaining its distributions in absolute dollars, at the costof diminishing its assets, or corpus).

Smoothing formulas, which determine the annual spendingamount based on the average of asset values over severalpreceding years, help make this difficult choice easier. Three-year (or 12-quarter) smoothing formulas are most common.However, we conducted analyses of smoothing over various

time periods, from three to nine years, and found that five-yearformulas tend to be more effective; they are used throughoutthis study. Smoothing formulas tend to be more popular withendowments than foundations, because smoothing in a risingmarket may suggest distributions of less than 5%, which wouldrun afoul of tax rules. But smoothing can still be beneficialwhen a “floor” is added to ensure 5% distributions.

Display 8 shows how smoothing can reduce the impact ofmarket declines on distributions. The green line shows theannual distributions of a hypothetical foundation initially fundedin 1995 ($10 million in assets invested in 70% stocks and 30%bonds, with a 5% distribution policy), with no smoothing. Theblue line shows the foundation’s distributions with a five-yearsmoothing formula. Although the foundation is hypothetical,we used actual historical market returns of the past 15 years tosee how distributions would have fared.

In year 1 (1995), the foundation (with or without smoothing)gave out 5%, or $500,000. Over the next five years itsportfolio grew strongly. In the rising market, smoothingcalculations came up lower than the 5% required annualminimum, so we set a “floor” by which the foundation simplydistributed 5% in those years. In 2000, regardless of whichformula it used, it was making grants of more than $938,000.

Then came the bear markets—the first one beginning in 2000,and the second, in 2008. The display shows how smoothingprotected the foundation’s ability to make grants. Withoutsmoothing, its giving declined to $638,000 in 2003 and to$631,000 in 2009. Its overall grantmaking had dropped nearlyone-third twice in nine years. By contrast, a smoothing formulawould have mitigated the swings in distributions significantly.

Display 8

Smoothing Reduces Annual Declines in Distributions

$10 Million Foundation, Spending 5%70% Stocks/30% Bonds

Five-YearSmoothing

NoSmoothing

938983

631638

806 839

400

600

800

1,000

2010200520001995

US$

Thou

sand

s

Past performance does not guarantee future results.Initial assets of $10 million. See Notes on Asset Allocation in Historical Studies,pages 27–28, for further information.Source: Barclays, Compustat, MSCI, NAREIT, US Bureau of Labor Statistics, andAllianceBernstein

With five-year smoothing, the foundation’s grantmaking dippedto $806,000 in 2003, and recovered more quickly. After theterrible stock market of 2008, its grants dropped to $839,000in 2009—a decline of just under 13% from its peak year.

Trustees and directors often worry that a smoothing formulathat would entail spending through market dips, such as thosein 2003 and 2009, will imperil their foundation’s longevity.However, we find that smoothing has little impact on TPV. Forexample, the difference in cumulative spending in Display 8is minimal. Over the 15 years shown, the foundation usingsmoothing spent a cumulative $12.8 million; the foundationusing no smoothing spent $12.4 million.

Display 9 shows the TPV forecast over 30 years for identicalspending policies—one smoothed and the other not. A five-yearsmoothing formula will result in minimally lower TPV over 30years, but the benefit of more consistent distributions, as shownin Display 8, makes the five-year smoothing formula the clearwinner for many foundations.

Based on the above analysis, we can say with confidencethat for many foundations, a market value spending policywith smoothing is better than one without smoothing. Itreduces the volatility of distributions without a significantimpact on TPV. There is one significant exception: founda-tions that are committed to stable giving. They, however,

can replicate the benefits of smoothing by taking advantageof carryover rules (see “The Steadfast Foundation: StableGiving,” page 17).

Asset Allocation and SmoothingAs mentioned earlier, spending policy should be closely alignedwith investment policy. TPV provides a useful way of thinkingabout the interaction between the two. As an example, let’sconsider a foundation whose board has adopted a 5% spend-ing policy. Alarmed by recent market volatility, they’re thinkingof moving from their current 70% stock/30% bond mix to amore conservative asset allocation of 50% stocks/50% bonds.We know there are certain benefits to this more conservativemix: The portfolio’s investment returns will almost certainly beless volatile than a 70/30 mix. However, we also suspect thatthe long-term TPV will be reduced by the more conservativeallocation—but by how much?

Display 9

Smoothing Has a Minimal Effect on Total Philanthropic Value

5% Spending, 5% Minimum Distribution70% Stocks/30% Bonds

Year 30

US$

Mill

ions

Five-Year SmoothingNo Smoothing

47.3

26.0

15.3

46.7

25.6

15.1

5%10%

50%

90%95%Le

vel o

f Con

fiden

ce

Initial assets of $10 million. See Display 5, page 6, for asset allocation assumptions.Also see Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

Display 10

Smoothing Improves Consistency of Distributions

Longevity vs. Volatility of Distributions5% Spending After 30 Years (US$ Millions)

20

25

30

Five-Year Smoothing

Tota

l Phi

lant

hrop

ic Va

lue

Frequency of Annual Distribution Declines of 10% or Greater(Years)

1 in 50 1 in 17 1 in 10 1 in 7

70/30

60/40

50/50

80/20

NoSmoothing

Initial assets of $10 million. Total philanthropic value is measured by real cumulativedistributions plus real portfolio remainder. The 50/50 stock/bond mix comprises 45%global stocks, 45% intermediate taxable fixed income, and 10% REITs (because weregard REITs as having characteristics of both stocks and bonds, the REITs allocationis divided equally between those two asset classes); 60/40: 55% global stocks, 35%intermediate taxable fixed income, and 10% REITs; 70/30: 65% global stocks, 25%intermediate taxable fixed income, and 10% REITs; 80/20: 75% global stocks, 15%intermediate taxable fixed income, and 10% REITs. Global stocks comprise 35% USvalue, 35% US growth, 25% developed international, and 5% emerging markets. SeeNotes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein


The Virtues of SmoothingLess Volatile Distributions, with Minimal Long-Term Effect

The majority of foundations use the simplest of spendingpolicies: 5% of the market value of the previous year’s assets.But a difficult choice arises when investments drop in value.Someone has to eat the difference between returns andspending: either the foundation’s beneficiaries (by receivingless money in absolute terms), or the foundation itself (bymaintaining its distributions in absolute dollars, at the costof diminishing its assets, or corpus).

Smoothing formulas, which determine the annual spendingamount based on the average of asset values over severalpreceding years, help make this difficult choice easier. Three-year (or 12-quarter) smoothing formulas are most common.However, we conducted analyses of smoothing over various

time periods, from three to nine years, and found that five-yearformulas tend to be more effective; they are used throughoutthis study. Smoothing formulas tend to be more popular withendowments than foundations, because smoothing in a risingmarket may suggest distributions of less than 5%, which wouldrun afoul of tax rules. But smoothing can still be beneficialwhen a “floor” is added to ensure 5% distributions.

Display 8 shows how smoothing can reduce the impact ofmarket declines on distributions. The green line shows theannual distributions of a hypothetical foundation initially fundedin 1995 ($10 million in assets invested in 70% stocks and 30%bonds, with a 5% distribution policy), with no smoothing. Theblue line shows the foundation’s distributions with a five-yearsmoothing formula. Although the foundation is hypothetical,we used actual historical market returns of the past 15 years tosee how distributions would have fared.

In year 1 (1995), the foundation (with or without smoothing)gave out 5%, or $500,000. Over the next five years itsportfolio grew strongly. In the rising market, smoothingcalculations came up lower than the 5% required annualminimum, so we set a “floor” by which the foundation simplydistributed 5% in those years. In 2000, regardless of whichformula it used, it was making grants of more than $938,000.

Then came the bear markets—the first one beginning in 2000,and the second, in 2008. The display shows how smoothingprotected the foundation’s ability to make grants. Withoutsmoothing, its giving declined to $638,000 in 2003 and to$631,000 in 2009. Its overall grantmaking had dropped nearlyone-third twice in nine years. By contrast, a smoothing formulawould have mitigated the swings in distributions significantly.

Display 8

Smoothing Reduces Annual Declines in Distributions

$10 Million Foundation, Spending 5%70% Stocks/30% Bonds

Five-YearSmoothing

NoSmoothing

938983

631638

806 839

400

600

800

1,000

2010200520001995

US$

Thou

sand

s

Past performance does not guarantee future results.Initial assets of $10 million. See Notes on Asset Allocation in Historical Studies,pages 27–28, for further information.Source: Barclays, Compustat, MSCI, NAREIT, US Bureau of Labor Statistics, andAllianceBernstein

With five-year smoothing, the foundation’s grantmaking dippedto $806,000 in 2003, and recovered more quickly. After theterrible stock market of 2008, its grants dropped to $839,000in 2009—a decline of just under 13% from its peak year.

Trustees and directors often worry that a smoothing formulathat would entail spending through market dips, such as thosein 2003 and 2009, will imperil their foundation’s longevity.However, we find that smoothing has little impact on TPV. Forexample, the difference in cumulative spending in Display 8is minimal. Over the 15 years shown, the foundation usingsmoothing spent a cumulative $12.8 million; the foundationusing no smoothing spent $12.4 million.

Display 9 shows the TPV forecast over 30 years for identicalspending policies—one smoothed and the other not. A five-yearsmoothing formula will result in minimally lower TPV over 30years, but the benefit of more consistent distributions, as shownin Display 8, makes the five-year smoothing formula the clearwinner for many foundations.

Based on the above analysis, we can say with confidencethat for many foundations, a market value spending policywith smoothing is better than one without smoothing. Itreduces the volatility of distributions without a significantimpact on TPV. There is one significant exception: founda-tions that are committed to stable giving. They, however,

can replicate the benefits of smoothing by taking advantageof carryover rules (see “The Steadfast Foundation: StableGiving,” page 17).

Asset Allocation and SmoothingAs mentioned earlier, spending policy should be closely alignedwith investment policy. TPV provides a useful way of thinkingabout the interaction between the two. As an example, let’sconsider a foundation whose board has adopted a 5% spend-ing policy. Alarmed by recent market volatility, they’re thinkingof moving from their current 70% stock/30% bond mix to amore conservative asset allocation of 50% stocks/50% bonds.We know there are certain benefits to this more conservativemix: The portfolio’s investment returns will almost certainly beless volatile than a 70/30 mix. However, we also suspect thatthe long-term TPV will be reduced by the more conservativeallocation—but by how much?

Display 9

Smoothing Has a Minimal Effect on Total Philanthropic Value


Year 30

US$

Mill

ions

Five-Year SmoothingNo Smoothing

47.3

26.0

15.3

46.7

25.6

15.1

5%10%

50%

90%95%Le

vel o

f Con

fiden

ce

Initial assets of $10 million. See Display 5, page 6, for asset allocation assumptions.Also see Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

Display 10

Smoothing Improves Consistency of Distributions


20

25

30

Five-Year Smoothing

Tota

l Phi

lant

hrop

ic Va

lue


1 in 50 1 in 17 1 in 10 1 in 7

70/30

60/40

50/50

80/20

NoSmoothing

Initial assets of $10 million. Total philanthropic value is measured by real cumulativedistributions plus real portfolio remainder. The 50/50 stock/bond mix comprises 45%global stocks, 45% intermediate taxable fixed income, and 10% REITs (because weregard REITs as having characteristics of both stocks and bonds, the REITs allocationis divided equally between those two asset classes); 60/40: 55% global stocks, 35%intermediate taxable fixed income, and 10% REITs; 70/30: 65% global stocks, 25%intermediate taxable fixed income, and 10% REITs; 80/20: 75% global stocks, 15%intermediate taxable fixed income, and 10% REITs. Global stocks comprise 35% USvalue, 35% US growth, 25% developed international, and 5% emerging markets. SeeNotes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

12 Bernstein.com

A number of large endowments, which are facing spend-ing policy challenges similar to those of independentfoundations (but without the mandatory 5% spendingrequirement), have adopted hybrid spending policies thatappear to arrive at just the right balance between consis-tency of distributions and longevity. One that has attractedattention is the so-called Yale Model, used by the well-known university’s endowment. It combines elements ofstable giving and a market value–based model withinflation adjustments.

An analysis of the Yale Model, plotting TPV versus consistency,shows its appeal, but it also demonstrates that what worksfor one charitable organization might not work for another.

In 2009, the Yale target spending rate was 5.25%. It used asmoothing formula under which endowment spending in agiven year is 80% of the previous year’s spending plus 20%of the target spending rate applied to the market value oftwo prior years. This amount was adjusted for inflation butconstrained by a floor of 4.5% and a ceiling of 6%, both ofwhich were based on the inflation-adjusted value of theendowment in the previous year.

The display to the left shows how the Yale model wouldperform for foundations, using our TPV versus distributionvolatility model. The only adjustment we made was tomandate a 5% floor rather than Yale’s 4.5%.

One might expect the Yale Model to have very lowvolatility of distributions, given that 80% of its spending issimply the last year’s level. But for foundations, its resultsactually fall short of the simple five-year smoothingformula, providing slightly less TPV at various assetallocations and higher volatility. However, if we removethe 6% ceiling, as shown in the gray line at left, the Yalemodel shows remarkable consistency of distributions,albeit at a cost to TPV.

The Yale Model works better for endowments becauseinflation-adjusted distribution forces consistency for 80% ofthe payout, and smoothing on the other 20% makes theprobability of a 10% decline in distributions quite unlikely.However, foundations’ mandatory 5% floor, when com-bined with a 6% ceiling, forces smaller adjustments on theupside and downside, limiting the benefits of smoothing.

The lesson is that the same spending policy may havevarying results for different foundations—sometimessurprising ones—and it’s best to closely study one’s ownsituation before committing to a policy simply becauseit worked well for another organization. n

What About Hybrids?

An Ivy League Endowment’s Creative Approach


20

25

30

Yale PolicyWithout Ceiling

Yale PolicyWith 6% Ceiling

Tota

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80/20

70/30

60/40

50/50


No SmoothingFive-Year Smoothing

1 in 50 1 in 17 1 in 10 1 in 7

Total philanthropic value is measured by real cumulative distributions plus realportfolio remainder. Initial assets of $10 million. See notes to Display 10, page11, for asset allocation assumptions. Also see Notes on Wealth ForecastingSystem, pages 25–26, for further information.


In Display 10 (page 11), we compare how the dynamics of TPV,volatility of annual grants, and asset allocation interact—withand without a five-year smoothing formula. The horizontal axisrepresents volatility of distributions or, more precisely, how oftenyou can expect to see a 10% (or greater) decline in year-to-yeardistributions. Values to the left have lower volatility of distribu-tions. The vertical axis shows TPV: the higher the number, thegreater the total philanthropic value over 30 years. Generallyspeaking, moving up while keeping to the left is the desiredtrajectory for foundations focused on perpetuity and consistencyof giving.

As expected, the policy without smoothing (the green line onthe right) is going to be less consistent in its grantmakingability, and indeed, it is further out on the volatility axis. Wecan see that if the directors of the foundation went from a70/30 to a 50/50 asset allocation, they would reduce thevolatility of distributions, but that would also diminish the TPV,producing a negative impact on the foundation’s long-termcumulative benefit.

But here’s an interesting observation: With smoothing (theblue line), the foundation can retain its 70/30 asset allocationand maintain fairly consistent distributions—with minimalimpact on the foundation’s TPV! In fact, a foundation invested70/30 that uses a five-year smoothing method is expected tobe much more consistent in its annual giving than a founda-tion invested 50/50 that does not employ smoothing. It’s

important to remember that a 70/30 asset allocation will stilllikely result in greater investment volatility than a 50/50 mix,but a smoothing formula mitigates the effect of spendingvolatility. In other words, smoothing formulas can allowfoundations to implement a more stock-heavy asset allocationthan they otherwise would (assuming they can tolerate theinvestment volatility), creating greater TPV potential while atthe same time reducing the volatility of their distributions.

Today’s Challenge: Three- or Five-Year Smoothing?As noted above, a five-year smoothing formula tends to bemore effective than a three-year formula. But what if afoundation with a three-year smoothing formula in placetoday wants to switch to a five-year formula? Or, if they wantto move from a non-smoothing policy to one that includessmoothing? If it does so in 2010 or 2011, the new formula willlikely incorporate the higher asset values prior to the marketdownturn of 2008, and would therefore dictate spending ata higher, unacceptable level. In such a case, the foundationboard might consider waiting until 2012 and implementfour-year smoothing, and then move to five-year smoothing in2013. Another option would be to reset the spending policy asif the foundation were starting anew, and add one year to thesmoothing policy each year so that the formula never includes2007 year-end values. Apart from the minimum 5% spendingrule, foundations have a great degree of flexibility in creatingspending policy. n

n Smoothing formulas are generally as beneficial for foundations as they are for endowments.

n Smoothing formulas can help foundations maintain relatively consistent distributions in times of market turmoil, withminimal effect on TPV.

n Smoothing formulas reduce spending volatility and can allow a foundation to implement a more stock-heavy assetallocation than it otherwise might, assuming it can tolerate the investment volatility of stocks.

Chapter Highlights

14 Bernstein.com

Spending Policy in PracticeThree Case Studies in Perpetuity, Balance, and Stable Giving

We’ve seen how Total Philanthropic Value—TPV—is a usefultool for measuring the interplay between spending andinvesting. We’ve also demonstrated the potential benefits ofsmoothing formulas. What, then, are the practical implica-tions for forming spending policy? Since every foundationshould formulate its spending policy around its mission,let’s consider three foundations with different missions:the Forever Foundation, the Middle Way Foundation, andthe Steadfast Foundation.

1. The Forever Foundation: Maximizing TPVThe Forever Foundation is firmly committed to perpetuity. Itbelieves that grants made in the future are just as important asthose made today, and part of its stated mission is to provide forgrantmaking in perpetuity. Therefore, the trustees and directorsare willing to accept volatility in year-to-year grantmaking inorder to preserve the foundation’s assets.

As we’ve shown, lower annual distributions will preserve moreassets for investment and lead to greater TPV, so the legallyrequired minimum distribution of 5% is optimal for the ForeverFoundation—assuming that 5% allows the foundation to meetits short-term philanthropic goals. What about asset allocation?The research on asset allocation is voluminous and relativelyconclusive: For investors with long time horizons, a heavierweighting to stocks is likely to result in greater wealth over thelong term. Display 11 illustrates this, using projections from ourWealth Forecasting System.10

The bars show the probability of the foundation’s assetskeeping pace with inflation after 30 years, given 5% annualspending and a range of asset allocation assumptions. Inthe median case, the foundation will need at least a 70%allocation to equities to have better than a 50% chance ofbeating inflation. To have a shot at even better odds, thefoundation may want to consider more stocks or alternativestrategies, although these should be approached with caution(see “Grounded by Illiquid Investments,” facing page).

10A historical analysis of the last 120 years shows the same pattern—progressively greater stock allocations result in progressively greater returns in 30-year rolling periods—but thehistoric data show much stronger performance. For example, historically a 70/30 stock/bond mix resulted in a 71% probability of growth after 5% spending and inflation, comparedwith the 51% projected by our WFS. Why is this? There are a number of reasons, but the difference is due largely to current initial conditions. While prospective equity returns lookattractive given today’s low prices and cyclically low earnings, the returns of a 70/30 portfolio are diminished by elevated risk levels and unusually low bond yields. For moreinformation, see Notes on Wealth Forecasting System, pages 25–26.

Display 11

Perpetuity Calls for a High Equity Allocation

Probability of 5% Spending Keeping PaceWith Inflation After 30 Years

Stock/Bond Mixes

36%

16%

2%

51%

62%

100/070/3050/5030/700/100

See Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

In 2008, some foundations learned the hard way that illiquidinvestment strategies such as private equity or direct realestate investments can cause trouble in portfolios with fixedspending commitments. While these strategies can offer highreturn potential and valuable diversification benefits, marketstress exacerbates the downside of illiquidity.

Prior to 2008, both liquid and illiquid assets had highvaluations, so foundations that were committed to marketvalue spending policies were locked into spending highamounts in ensuing years. But when financial marketstumbled, foundations had to sell their liquid assets atdepressed prices to meet their spending commitments.

Making matters worse, many illiquid investments, such asprivate equity, require investors to provide periodic funding(capital calls), even while there is little or no money comingback from earlier investments and spending continues todraw down liquid assets. The experience can be painful. Thedisplay to the right shows our analysis of what can happento the weighting of illiquid investments in a portfolio, givenvery poor market conditions. A 10% allocation to illiquidinvestments rises to 24% of total assets; a 20% allocationrises to 40% of total assets; and a 30% allocation rises toover half the total assets—52%, which is clearly untenable.

Foundations with ongoing contributions or capital campaignsthat provide a reliable source of funding may be comfortablewith making illiquid investments, because they can directthose new funds into spending. But for foundations whoseprimary or sole source of funding is their existing portfolio,illiquid assets should be treated cautiously. n

Grounded by Illiquid InvestmentsIn Rough Markets, Illiquid Assets Become Burdens

Portfolio Weight of Illiquid Assets in Poor Markets*Base Case: 60% Stocks/40% Bonds, 5% Spending

302010

52%

40%

24%

Illiquid Target Allocation (% of Portfolio)

*Poor markets are defined as the 90th percentile of performance, modeled over a30-year period. Stocks in the 60/40 asset allocation comprise 35% US value,35% US growth, 25% developed international, and 5% emerging markets.Bonds are intermediate taxable fixed income. Illiquid assets reflect a mix of venturecapital, private equity, and private real estate invested over several vintages. Theyare included in the equity allocation, so the actual base case asset allocation wouldbe 50% stocks, 40% bonds, and 10% illiquid assets.See Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

Should the Forever Foundation adopt a smoothing formula?While smoothing does not dramatically reduce TPV, it neverthe-less does reduce it, as we saw in Display 9 (page 11); it alsotends to decrease the potential upside of the investmentportfolio. Therefore, the foundation’s board should seriouslyconsider the potential impact of occasional drops in distribu-tions. If it decides that it can live with them, then for the sakeof maximizing TPV, it can forgo smoothing.

In summary, for the highest probability of achieving its mission,the Forever Foundation should:

n Invest in a well-diversified portfolio with a stock allocation ofat least 70%, possibly 80%.

n Adopt a spending policy of a flat percentage of assets, withno smoothing formulas. If a 5% spending rate can meet thefoundation’s short-term goals, it will help maximize TPV.


Spending Policy in PracticeThree Case Studies in Perpetuity, Balance, and Stable Giving

We’ve seen how Total Philanthropic Value—TPV—is a usefultool for measuring the interplay between spending andinvesting. We’ve also demonstrated the potential benefits ofsmoothing formulas. What, then, are the practical implica-tions for forming spending policy? Since every foundationshould formulate its spending policy around its mission,let’s consider three foundations with different missions:the Forever Foundation, the Middle Way Foundation, andthe Steadfast Foundation.

1. The Forever Foundation: Maximizing TPVThe Forever Foundation is firmly committed to perpetuity. Itbelieves that grants made in the future are just as important asthose made today, and part of its stated mission is to provide forgrantmaking in perpetuity. Therefore, the trustees and directorsare willing to accept volatility in year-to-year grantmaking inorder to preserve the foundation’s assets.

As we’ve shown, lower annual distributions will preserve moreassets for investment and lead to greater TPV, so the legallyrequired minimum distribution of 5% is optimal for the ForeverFoundation—assuming that 5% allows the foundation to meetits short-term philanthropic goals. What about asset allocation?The research on asset allocation is voluminous and relativelyconclusive: For investors with long time horizons, a heavierweighting to stocks is likely to result in greater wealth over thelong term. Display 11 illustrates this, using projections from ourWealth Forecasting System.10

The bars show the probability of the foundation’s assetskeeping pace with inflation after 30 years, given 5% annualspending and a range of asset allocation assumptions. Inthe median case, the foundation will need at least a 70%allocation to equities to have better than a 50% chance ofbeating inflation. To have a shot at even better odds, thefoundation may want to consider more stocks or alternativestrategies, although these should be approached with caution(see “Grounded by Illiquid Investments,” facing page).

10A historical analysis of the last 120 years shows the same pattern—progressively greater stock allocations result in progressively greater returns in 30-year rolling periods—but thehistoric data show much stronger performance. For example, historically a 70/30 stock/bond mix resulted in a 71% probability of growth after 5% spending and inflation, comparedwith the 51% projected by our WFS. Why is this? There are a number of reasons, but the difference is due largely to current initial conditions. While prospective equity returns lookattractive given today’s low prices and cyclically low earnings, the returns of a 70/30 portfolio are diminished by elevated risk levels and unusually low bond yields. For moreinformation, see Notes on Wealth Forecasting System, pages 25–26.

Display 11

Perpetuity Calls for a High Equity Allocation

Probability of 5% Spending Keeping PaceWith Inflation After 30 Years

Stock/Bond Mixes

36%

16%

2%

51%

62%

100/070/3050/5030/700/100

See Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

In 2008, some foundations learned the hard way that illiquidinvestment strategies such as private equity or direct realestate investments can cause trouble in portfolios with fixedspending commitments. While these strategies can offer highreturn potential and valuable diversification benefits, marketstress exacerbates the downside of illiquidity.

Prior to 2008, both liquid and illiquid assets had highvaluations, so foundations that were committed to marketvalue spending policies were locked into spending highamounts in ensuing years. But when financial marketstumbled, foundations had to sell their liquid assets atdepressed prices to meet their spending commitments.

Making matters worse, many illiquid investments, such asprivate equity, require investors to provide periodic funding(capital calls), even while there is little or no money comingback from earlier investments and spending continues todraw down liquid assets. The experience can be painful. Thedisplay to the right shows our analysis of what can happento the weighting of illiquid investments in a portfolio, givenvery poor market conditions. A 10% allocation to illiquidinvestments rises to 24% of total assets; a 20% allocationrises to 40% of total assets; and a 30% allocation rises toover half the total assets—52%, which is clearly untenable.

Foundations with ongoing contributions or capital campaignsthat provide a reliable source of funding may be comfortablewith making illiquid investments, because they can directthose new funds into spending. But for foundations whoseprimary or sole source of funding is their existing portfolio,illiquid assets should be treated cautiously. n

Grounded by Illiquid InvestmentsIn Rough Markets, Illiquid Assets Become Burdens

Portfolio Weight of Illiquid Assets in Poor Markets*Base Case: 60% Stocks/40% Bonds, 5% Spending

302010

52%

40%

24%

Illiquid Target Allocation (% of Portfolio)

*Poor markets are defined as the 90th percentile of performance, modeled over a30-year period. Stocks in the 60/40 asset allocation comprise 35% US value,35% US growth, 25% developed international, and 5% emerging markets.Bonds are intermediate taxable fixed income. Illiquid assets reflect a mix of venturecapital, private equity, and private real estate invested over several vintages. Theyare included in the equity allocation, so the actual base case asset allocation wouldbe 50% stocks, 40% bonds, and 10% illiquid assets.See Notes on Wealth Forecasting System, pages 25–26, for further information.Source: AllianceBernstein

Should the Forever Foundation adopt a smoothing formula?While smoothing does not dramatically reduce TPV, it neverthe-less does reduce it, as we saw in Display 9 (page 11); it alsotends to decrease the potential upside of the investmentportfolio. Therefore, the foundation’s board should seriouslyconsider the potential impact of occasional drops in distribu-tions. If it decides that it can live with them, then for the sakeof maximizing TPV, it can forgo smoothing.

In summary, for the highest probability of achieving its mission,the Forever Foundation should:

n Invest in a well-diversified portfolio with a stock allocation ofat least 70%, possibly 80%.

n Adopt a spending policy of a flat percentage of assets, withno smoothing formulas. If a 5% spending rate can meet thefoundation’s short-term goals, it will help maximize TPV.

16 Bernstein.com

2. The Middle Way Foundation: Consistency of ImpactUnlike the Forever Foundation, the Middle Way Foundationwants to exist as long as possible, but it is not willing to permitwide swings in grantmaking from year to year. It can toleratesome divergence in distributions, but only to a limited extent.(In the real world, this is a more common practice than theForever Foundation’s rigid commitment to perpetuity. Even ifperpetuity is a goal, many foundation boards seek ways tocompromise to avoid cutting off beneficiaries when marketperformance is very poor. Commemorating this tendency in aquantifiable spending policy can be valuable when futuregenerations of trustees face new crises.)

Clearly, smoothing will go a long way toward meeting theMiddle Way Foundation’s objective, by limiting swings indistributions. But what about when market volatility is soextreme that even smoothing doesn’t alleviate the problem?In other words, if the market plunges as it did in 2008, shouldthe Middle Way Foundation spend a greater percentage thanit anticipated or cut back on grantmaking?

Display 12 shows the distributions made possible when a 5%spending rate with five-year smoothing was applied duringseveral of the worst market environments in modern history.During the bear markets in the 1930s, 1970s, and 2000s,smoothing resulted in annual distributions that were morethan 6.5% of current assets. This might make a fiduciaryuncomfortable, so it would be wise to anticipate how tohandle such situations.

However, our analysis shows that with a five-year smoothingformula the Middle Way Foundation should be able to tolerateoccasional spikes in its distribution rate without causing severedamage to its TPV. To test this, we created two hypotheticalfoundations that started at the worst possible times—1925 and1968 (five years before the worst bear markets of the 20thcentury)—to see how they fared, with and without smoothingformulas. For both foundations, smoothing formulas of threeyears or five years resulted in modestly lower TPV after 30years: 1% to 5% less than if they had not used smoothing. Thereason the drop was relatively moderate was that in each case,

as markets normalized, the foundations’ asset values recovered.Of course, there is no guarantee that markets in the future willrecover the way they did in the past.

Perhaps the Middle Way Foundation should consider an annualceiling on distributions. A ceiling of, say, 6% may seem like agood compromise to keep spending within bounds. Our analysisshows, however, that ceilings at this level actually have littlelong-term effect on either volatility or TPV; Display 12 reflectshow infrequently a 6% ceiling would have been relevant since1925. Furthermore, Display 13 shows how smoothing has astrong impact on volatility of distributions, but ceilings have lessimpact. A 6% ceiling on a five-year smoothing formula actuallyincreases the volatility of distributions over time, with little effecton TPV. Lower ceilings of 5.75% or 5.5% would certainly havemore impact. However, the closer the ceiling gets to the 5%floor, the less smoothing will take place. A ceiling on a smooth-ing formula increases distribution volatility, because by limitingthe ability of smoothing to average out the swings in assetvalue, it limits smoothing’s effectiveness.

Display 12

Spikes in Spending Can Be Significant


Spen

ding

as

Perc

ent o

f Prio

r-Yea

r Ass

ets

Five-Year Smoothing

No Smoothing

3

5

7

9

2009200019851970195519401925

Past performance does not guarantee future results.See Notes on Asset Allocation in Historical Studies, pages 27–28.Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills,and Inflation:Year-by-Year Historical Returns,” University of Chicago Press Journal ofBusiness (January 1976); MSCI; NAREIT; Standard & Poor’s; US Bureau of LaborStatistics; and AllianceBernstein

Therefore, we would advise the Middle Way Foundation thatto maximize the probability of achieving its mission, it should:

n Invest in a well-diversified portfolio with at least a 70%allocation to stocks.

n Apply a five-year smoothing formula to a market valuespending policy, with a floor of 5%.11

n Consider a distribution ceiling, because it’s better to planahead for stressful conditions than to make ad hoc decisionswhen a crisis hits. The board should aim for maintaining itsdistributions during market downturns, as the historicalrecord suggests its distributions will soon return to normal,and TPV will not be diminished in a material way.

3. The Steadfast Foundation: Stable GivingThe Steadfast Foundation’s mission is to provide aid to a singlecharity. Because the charity depends on the foundation’s grants,the charity would disappear if distributions were to decline

significantly. So the Steadfast Foundation is committed to stablegiving—in other words, never dispersing less in a given year than itgave the year before.

The Steadfast Foundation’s practice is typical of many foundations,which adopt a stable giving policy without ever officially definingit that way. Simply agreeing in an ad hoc manner to spend at leastwhat they did in the previous year (perhaps adjusted for inflation),they’ve effectively committed to a long-term spending policywithout fully understanding its implications.

Because stable giving foundations never make a distribution thatis lower than the previous year’s, we did not model distributionvolatility for the Steadfast Foundation. Nor does smoothing apply,since a stable giving foundation ignores market declines, whichsmoothing addresses. The one key variable that the SteadfastFoundation can control, however, is asset allocation.

By lowering its allocation to stocks, it can seek to maximize itslongevity while ensuring stable giving. For example, a 50/50stock/bond mix will likely result in a lower TPV over time, but itwill also lower the risk of the foundation exhausting its assets.Generally speaking, stable giving foundations with high stockallocations run a higher risk of exhaustion because an extendedperiod of poor market performance combined with steadyspending can completely deplete a foundation’s assets.12

However, the Steadfast Foundation can take advantage of rulesthat allow foundations to “carry over” distributions greater than5% in a single year. In times of poor market performance, assetvalues drop, and a stable giving foundation might distribute, say,6% of its assets rather than the required minimum 5%. Usingcarryover rules, the following year it may apply the value of thedifference to reduce that year’s percentage of spending, even asthe dollar value of distributions remains stable. This can be a veryeffective way to preserve assets during a bull market. The impactof carryover rules may allow a foundation to keep its spendingconstant, but by applying carryovers, it can limit spending ofcurrent assets to 4.5% or even lower. In this regard, the benefitsof carryover rules are comparable to those of smoothing formulas.

Display 13

A 6% Ceiling on Spending Has Little Impact

Longevity vs. Volatility of Distributions70% Stock/30% Bond Mix, 5% Spending After 30 Years (US$ Millions)

Tota

l Phi

lant

hrop

ic Va

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Five-YearSmoothing

No Smoothing6% Ceiling


1 in 50 1 in 17 1 in 10 1 in 7 1 in 6

20

25

30

Initial assets of $10 million. Total Philanthropic Value is measured by real cumulativedistributions plus real portfolio remainder; volatility is measured by the probability of adecline in distributions of 10%. For asset allocation assumptions, see notes to Display5, page 6. Also see Notes on Wealth Forecasting System, pages 25–26, for furtherinformation.Source: AllianceBernstein

11For data on three-year smoothing, see the Appendix, pages 20–24.12Because there is a fixed-dollar minimum to be distributed, over time a foundation with a stable giving policy may spend itself down to zero. In contrast, a foundation adopting afixed percent spending policy—with or without smoothing—will almost never spend itself down to zero. If it is spending a flat 5%, provided its investments don’t decline by 95% ormore in one year, the foundation will have at least some money left.


2. The Middle Way Foundation: Consistency of ImpactUnlike the Forever Foundation, the Middle Way Foundationwants to exist as long as possible, but it is not willing to permitwide swings in grantmaking from year to year. It can toleratesome divergence in distributions, but only to a limited extent.(In the real world, this is a more common practice than theForever Foundation’s rigid commitment to perpetuity. Even ifperpetuity is a goal, many foundation boards seek ways tocompromise to avoid cutting off beneficiaries when marketperformance is very poor. Commemorating this tendency in aquantifiable spending policy can be valuable when futuregenerations of trustees face new crises.)

Clearly, smoothing will go a long way toward meeting theMiddle Way Foundation’s objective, by limiting swings indistributions. But what about when market volatility is soextreme that even smoothing doesn’t alleviate the problem?In other words, if the market plunges as it did in 2008, shouldthe Middle Way Foundation spend a greater percentage thanit anticipated or cut back on grantmaking?

Display 12 shows the distributions made possible when a 5%spending rate with five-year smoothing was applied duringseveral of the worst market environments in modern history.During the bear markets in the 1930s, 1970s, and 2000s,smoothing resulted in annual distributions that were morethan 6.5% of current assets. This might make a fiduciaryuncomfortable, so it would be wise to anticipate how tohandle such situations.

However, our analysis shows that with a five-year smoothingformula the Middle Way Foundation should be able to tolerateoccasional spikes in its distribution rate without causing severedamage to its TPV. To test this, we created two hypotheticalfoundations that started at the worst possible times—1925 and1968 (five years before the worst bear markets of the 20thcentury)—to see how they fared, with and without smoothingformulas. For both foundations, smoothing formulas of threeyears or five years resulted in modestly lower TPV after 30years: 1% to 5% less than if they had not used smoothing. Thereason the drop was relatively moderate was that in each case,

as markets normalized, the foundations’ asset values recovered.Of course, there is no guarantee that markets in the future willrecover the way they did in the past.

Perhaps the Middle Way Foundation should consider an annualceiling on distributions. A ceiling of, say, 6% may seem like agood compromise to keep spending within bounds. Our analysisshows, however, that ceilings at this level actually have littlelong-term effect on either volatility or TPV; Display 12 reflectshow infrequently a 6% ceiling would have been relevant since1925. Furthermore, Display 13 shows how smoothing has astrong impact on volatility of distributions, but ceilings have lessimpact. A 6% ceiling on a five-year smoothing formula actuallyincreases the volatility of distributions over time, with little effecton TPV. Lower ceilings of 5.75% or 5.5% would certainly havemore impact. However, the closer the ceiling gets to the 5%floor, the less smoothing will take place. A ceiling on a smooth-ing formula increases distribution volatility, because by limitingthe ability of smoothing to average out the swings in assetvalue, it limits smoothing’s effectiveness.

Display 12

Spikes in Spending Can Be Significant


Spen

ding

as

Perc

ent o

f Prio

r-Yea

r Ass

ets

Five-Year Smoothing

No Smoothing

3

5

7

9

2009200019851970195519401925

Past performance does not guarantee future results.See Notes on Asset Allocation in Historical Studies, pages 27–28.Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills,and Inflation:Year-by-Year Historical Returns,” University of Chicago Press Journal ofBusiness (January 1976); MSCI; NAREIT; Standard & Poor’s; US Bureau of LaborStatistics; and AllianceBernstein

Therefore, we would advise the Middle Way Foundation thatto maximize the probability of achieving its mission, it should:

n Invest in a well-diversified portfolio with at least a 70%allocation to stocks.

n Apply a five-year smoothing formula to a market valuespending policy, with a floor of 5%.11

n Consider a distribution ceiling, because it’s better to planahead for stressful conditions than to make ad hoc decisionswhen a crisis hits. The board should aim for maintaining itsdistributions during market downturns, as the historicalrecord suggests its distributions will soon return to normal,and TPV will not be diminished in a material way.

3. The Steadfast Foundation: Stable GivingThe Steadfast Foundation’s mission is to provide aid to a singlecharity. Because the charity depends on the foundation’s grants,the charity would disappear if distributions were to decline

significantly. So the Steadfast Foundation is committed to stablegiving—in other words, never dispersing less in a given year than itgave the year before.

The Steadfast Foundation’s practice is typical of many foundations,which adopt a stable giving policy without ever officially definingit that way. Simply agreeing in an ad hoc manner to spend at leastwhat they did in the previous year (perhaps adjusted for inflation),they’ve effectively committed to a long-term spending policywithout fully understanding its implications.

Because stable giving foundations never make a distribution thatis lower than the previous year’s, we did not model distributionvolatility for the Steadfast Foundation. Nor does smoothing apply,since a stable giving foundation ignores market declines, whichsmoothing addresses. The one key variable that the SteadfastFoundation can control, however, is asset allocation.

By lowering its allocation to stocks, it can seek to maximize itslongevity while ensuring stable giving. For example, a 50/50stock/bond mix will likely result in a lower TPV over time, but itwill also lower the risk of the foundation exhausting its assets.Generally speaking, stable giving foundations with high stockallocations run a higher risk of exhaustion because an extendedperiod of poor market performance combined with steadyspending can completely deplete a foundation’s assets.12

However, the Steadfast Foundation can take advantage of rulesthat allow foundations to “carry over” distributions greater than5% in a single year. In times of poor market performance, assetvalues drop, and a stable giving foundation might distribute, say,6% of its assets rather than the required minimum 5%. Usingcarryover rules, the following year it may apply the value of thedifference to reduce that year’s percentage of spending, even asthe dollar value of distributions remains stable. This can be a veryeffective way to preserve assets during a bull market. The impactof carryover rules may allow a foundation to keep its spendingconstant, but by applying carryovers, it can limit spending ofcurrent assets to 4.5% or even lower. In this regard, the benefitsof carryover rules are comparable to those of smoothing formulas.

Display 13

A 6% Ceiling on Spending Has Little Impact

Longevity vs. Volatility of Distributions70% Stock/30% Bond Mix, 5% Spending After 30 Years (US$ Millions)

Tota

l Phi

lant

hrop

ic Va

lue

Five-YearSmoothing

No Smoothing6% Ceiling


1 in 50 1 in 17 1 in 10 1 in 7 1 in 6

20

25

30

Initial assets of $10 million. Total Philanthropic Value is measured by real cumulativedistributions plus real portfolio remainder; volatility is measured by the probability of adecline in distributions of 10%. For asset allocation assumptions, see notes to Display5, page 6. Also see Notes on Wealth Forecasting System, pages 25–26, for furtherinformation.Source: AllianceBernstein

11For data on three-year smoothing, see the Appendix, pages 20–24.12Because there is a fixed-dollar minimum to be distributed, over time a foundation with a stable giving policy may spend itself down to zero. In contrast, a foundation adopting afixed percent spending policy—with or without smoothing—will almost never spend itself down to zero. If it is spending a flat 5%, provided its investments don’t decline by 95% ormore in one year, the foundation will have at least some money left.

18 Bernstein.com

Display 14 shows the difference between using carryovers andnot using them, applied to two possible asset allocations: 50/50and 70/30. Using carryovers, TPV is very nearly the same in bothallocations. But the likelihood of the foundation exhausting itsassets after 50 years drops significantly when carryovers areapplied. In the 50/50 allocation, the probability of exhaustiondrops from 21% to 19%. And in the 70/30 allocation, it dropsfrom 25% to 22%, reducing the potential that spending willdeplete the foundation’s assets.

Finally, would a ceiling on annual spending help the SteadfastFoundation preserve its assets? It might, but it’s also possiblethat in certain instances, the floor could end up above theceiling! When a foundation uses stable giving as a floor andsets a ceiling of, say, 6%, there will be times when the ceilingdictates they pay out less than the floor recommends. Charita-ble boards adopting ceilings should consider what they woulddo if something like this were to occur: respect the floor andignore the ceiling, or vice versa? Emotional decisions madein the heat of the moment may prove ill-advised. Rationallyanalyzing the question today can provide valuable guidancewhen the next crisis occurs.

To summarize, in order to maintain its stable giving policy, theSteadfast Foundation should:

n Invest in a diversified portfolio of 50% stocks and 50%bonds, to seek a balance of growth with relatively lessvolatility of returns and lower risk of exhaustion.

n Consider using carryovers whenever possible, as an effectiveway to improve TPV and lower the probability of exhaustingits assets.

Conclusion: Matching Mission to Spending PolicyOur analysis shows how a judicious approach to spending policycan help foundations take control of their ability to meet theirphilanthropic missions—rather than being subject to swings ofthe financial markets. Yet many trustees and directors lackaccess to the quantitative tools needed to address spendingpolicy effectively. The majority of foundations consider the legal

minimum 5% as their bogey, regardless of asset value changes,and many foundations that could benefit from a smoothingpolicy have not considered it. Instead, often they make adjust-ments to their spending policies during times of market stresson a one-off basis, without addressing the potential long-termimpacts of their decisions. By availing themselves of all the toolsat their disposal and objectively analyzing the probability ofvarious outcomes in using these tools, foundations may wellmaximize their longevity and the probability of fulfilling theircharitable mission.

We also see how important two key concepts are in determin-ing spending policy: First, spending ought to be linked closelyto asset allocation. Second, the long-term impact of spendingpolicy decisions should be gauged by determining TPV. Whilenot every foundation will want to maximize TPV, every founda-tion should at least understand the TPV implications of itsspending policy.

Display 14

The Volatility of Stocks Can Erode the Assets of a FoundationCommitted to Stable Giving

5% Spending with Floor of Last Year’s DistributionNo Smoothing

21

24

21

2425

2221

19

70/3050/5070/3050/50

TPV: Year 30US$ Millions

Probability of 50-Year Exhaustion

Percent

CarryoverNo Carryover

Initial assets of $10 million. See notes to Display 10, page 11, for asset allocationassumptions. Also see Notes on Wealth Forecasting System, pages 25–26, forfurther information.Source: AllianceBernstein

Display 15 summarizes the goals and spending policies facingthe three types of foundations we considered in the previouspages. Each has a primary question it must answer:

n Is longevity of greatest importance? If so, focus on maximiz-ing TPV, and adopt a high allocation to equities (70%–80%).A fixed percentage payout will provide for long-term benefits.Smoothing is not necessary.

n Is consistency of impact most important? For most founda-tions, a combination of relatively high equity exposure (about70%) with a five-year smoothing policy for distributions willstrike the right balance between TPV and consistency ofdistributions. Some charities may also consider spendingceilings for times when investment returns drop sharply.

n Is “stable giving” most important? In this case, a lowerallocation to stocks may make sense because the highvolatility of stock returns could cause a rapid depletion ofassets. Carrying over any excess distributions (more than 5%)from one year to the next will also help the foundationpreserve its assets over the long term, without reducing itsability to maintain stable giving levels.

Of course, every foundation has its own “DNA,” with uniquecircumstances and considerations that may have a bearing onspending and investment policy. By conducting a customizedanalysis, foundation trustees and directors can make the policydecisions that best support their philanthropic mission. n

Display 15

Matching the Charitable Mission with Asset Allocation andSpending Policy

CharitableObjective

Asset Allocation(% Equities)

SpendingPolicy

Forever Foundation:Maximize TPV andLongevity

70%–80%Fixed PercentNo Smoothing

Middle Way Foundation:Seek Balance 70%

Fixed PercentFive-Year Smoothing

Consider Ceilings

Steadfast Foundation:Ensure Stable Giving 50%–70%

Stable GivingConsider Carryovers


n Foundations whose primary goal is perpetuity should aim to maximize TPV and forgo smoothing.

n When perpetuity is a goal but distribution volatility is unacceptable, foundations can seek a compromise by applying asmoothing formula to their spending policy.

n Stable-giving foundations should adopt a lower allocation to stocks (in the 50% to 70% range) and make use of carryovers.

Chapter Highlights


Display 14 shows the difference between using carryovers andnot using them, applied to two possible asset allocations: 50/50and 70/30. Using carryovers, TPV is very nearly the same in bothallocations. But the likelihood of the foundation exhausting itsassets after 50 years drops significantly when carryovers areapplied. In the 50/50 allocation, the probability of exhaustiondrops from 21% to 19%. And in the 70/30 allocation, it dropsfrom 25% to 22%, reducing the potential that spending willdeplete the foundation’s assets.

Finally, would a ceiling on annual spending help the SteadfastFoundation preserve its assets? It might, but it’s also possiblethat in certain instances, the floor could end up above theceiling! When a foundation uses stable giving as a floor andsets a ceiling of, say, 6%, there will be times when the ceilingdictates they pay out less than the floor recommends. Charita-ble boards adopting ceilings should consider what they woulddo if something like this were to occur: respect the floor andignore the ceiling, or vice versa? Emotional decisions madein the heat of the moment may prove ill-advised. Rationallyanalyzing the question today can provide valuable guidancewhen the next crisis occurs.

To summarize, in order to maintain its stable giving policy, theSteadfast Foundation should:

n Invest in a diversified portfolio of 50% stocks and 50%bonds, to seek a balance of growth with relatively lessvolatility of returns and lower risk of exhaustion.

n Consider using carryovers whenever possible, as an effectiveway to improve TPV and lower the probability of exhaustingits assets.

Conclusion: Matching Mission to Spending PolicyOur analysis shows how a judicious approach to spending policycan help foundations take control of their ability to meet theirphilanthropic missions—rather than being subject to swings ofthe financial markets. Yet many trustees and directors lackaccess to the quantitative tools needed to address spendingpolicy effectively. The majority of foundations consider the legal

minimum 5% as their bogey, regardless of asset value changes,and many foundations that could benefit from a smoothingpolicy have not considered it. Instead, often they make adjust-ments to their spending policies during times of market stresson a one-off basis, without addressing the potential long-termimpacts of their decisions. By availing themselves of all the toolsat their disposal and objectively analyzing the probability ofvarious outcomes in using these tools, foundations may wellmaximize their longevity and the probability of fulfilling theircharitable mission.

We also see how important two key concepts are in determin-ing spending policy: First, spending ought to be linked closelyto asset allocation. Second, the long-term impact of spendingpolicy decisions should be gauged by determining TPV. Whilenot every foundation will want to maximize TPV, every founda-tion should at least understand the TPV implications of itsspending policy.

Display 14

The Volatility of Stocks Can Erode the Assets of a FoundationCommitted to Stable Giving

5% Spending with Floor of Last Year’s DistributionNo Smoothing

21

24

21

2425

2221

19

70/3050/5070/3050/50

TPV: Year 30US$ Millions

Probability of 50-Year Exhaustion

Percent

CarryoverNo Carryover

Initial assets of $10 million. See notes to Display 10, page 11, for asset allocationassumptions. Also see Notes on Wealth Forecasting System, pages 25–26, forfurther information.Source: AllianceBernstein

Display 15 summarizes the goals and spending policies facingthe three types of foundations we considered in the previouspages. Each has a primary question it must answer:

n Is longevity of greatest importance? If so, focus on maximiz-ing TPV, and adopt a high allocation to equities (70%–80%).A fixed percentage payout will provide for long-term benefits.Smoothing is not necessary.

n Is consistency of impact most important? For most founda-tions, a combination of relatively high equity exposure (about70%) with a five-year smoothing policy for distributions willstrike the right balance between TPV and consistency ofdistributions. Some charities may also consider spendingceilings for times when investment returns drop sharply.

n Is “stable giving” most important? In this case, a lowerallocation to stocks may make sense because the highvolatility of stock returns could cause a rapid depletion ofassets. Carrying over any excess distributions (more than 5%)from one year to the next will also help the foundationpreserve its assets over the long term, without reducing itsability to maintain stable giving levels.

Of course, every foundation has its own “DNA,” with uniquecircumstances and considerations that may have a bearing onspending and investment policy. By conducting a customizedanalysis, foundation trustees and directors can make the policydecisions that best support their philanthropic mission. n

Display 15

Matching the Charitable Mission with Asset Allocation andSpending Policy

CharitableObjective

Asset Allocation(% Equities)

SpendingPolicy

Forever Foundation:Maximize TPV andLongevity

70%–80%Fixed PercentNo Smoothing

Middle Way Foundation:Seek Balance 70%

Fixed PercentFive-Year Smoothing

Consider Ceilings

Steadfast Foundation:Ensure Stable Giving 50%–70%

Stable GivingConsider Carryovers


n Foundations whose primary goal is perpetuity should aim to maximize TPV and forgo smoothing.

n When perpetuity is a goal but distribution volatility is unacceptable, foundations can seek a compromise by applying asmoothing formula to their spending policy.

n Stable-giving foundations should adopt a lower allocation to stocks (in the 50% to 70% range) and make use of carryovers.

Chapter Highlights

20 Bernstein.com

AppendixProjected Results of Spending Policy Decisions

For easy reference, the tables on the following pages show theresults of our modeling for various asset allocations, spendinglevels, and spending formulas. They provide a vivid picture ofthe trade-offs involved in decisions regarding these elements ofspending policy.

All the tables assume a foundation with starting assets of $10million. (As mentioned on page 7, we use $10 million because itis easily scalable. So, for example, if you want to apply the datato a $50 million foundation, simply multiply all dollar results byfive. Similarly, for a $1 million foundation, divide by 10.)

The first three pages (pages 21–23) assume spending levelsof 5%, 6%, and 7%, respectively. Each one shows six assetallocations, from 50% stocks/50% bonds to 100% stocks.Each asset allocation is divided into probable results from fiveto 50 years.

The first column, “Real Remaining Assets,” shows the expectedasset value, adjusted for inflation, that the foundation will likelyhave at the end of each time frame. These numbers are themedian of our projections. The second column, “Real Cumula-tive Distributions,” shows the dollar amount it has given away(adjusted for inflation), and is also the median of our projections.

In the third set of columns, “Real Total Philanthropic Value (TPV),”we show three numbers: one with a 10% confidence level;a median; and one with a 90% confidence level. The 10%confidence level means market performance was excellent,resulting in a much higher value. The median represents the 50th

percentile of results, or most common. The 90% confidence levelmeans market performance over the time period was dismal,resulting in a much lower value. We provide all three numbersbecause forecasting is a probabilistic exercise, and responsibleplanning considers both best- and worst-case scenarios.

The fourth column shows the frequency of a 10% decline indistributions, measured in years. So, for example, a foundationspending 7% a year and allocated 100% to stocks (page 23,top row) can expect to experience a 10% decline in distribu-tions—or worse—once every four years.

Finally, the fifth column shows the probability of maintainingreal portfolio value over the respective time period, adjustedfor inflation.

shows how various spending policies, such as smooth-ing, ceilings, and stable giving, are likely to play out overtime—given a 5% target distribution level. The columns are thesame as those in the tables on the preceding three pages, exceptthat the far right column shows the probability of portfolioexhaustion for each time period.

All the data in these tables are generated by our WealthForecasting SystemSM (WFS), a powerful planning tool thatprojects the potential returns of portfolios with multiple assetclasses, incorporating the effect of inflation, taxes, and spend-ing. For more information on the WFS, please see “A CloserLook at Our Modeling: The Wealth Forecasting System,” page8, and the notes that begin on page 25. n

Initial Assets: $10 Million | Spending 5%

RealRemaining

Assets

RealCumulative

Distributions Real Total Philanthropic Value (TPV)

Frequency of10% Decline inDistributions

Probability ofMaintaining

Real PortfolioValue

Median Median10%

Confidence Median90%

Confidence Years %

100% Stocks 5 Years $10.9 Mil. $2.6 Mil. $21.0 Mil. $13.5 Mil. $8.8 Mil. 58

10 Years 11.3 5.3 29.6 16.7 9.8 58

20 Years 12.3 11.2 48.6 23.8 12.5 60

30 Years 13.5 18.0 74.3 31.9 15.6 1 in 5 61

40 Years 14.9 25.6 110.3 41.4 18.4 62

50 Years 16.2 34.1 159.5 51.5 21.0 62

90% Stocks/10% Bonds 5 Years 10.6 2.6 19.8 13.2 9.0 57

10 Years 10.9 5.2 27.2 16.2 10.0 57

20 Years 11.6 10.8 43.0 22.6 12.7 58

30 Years 12.5 17.0 63.3 29.9 15.8 1 in 6 59

40 Years 13.5 24.0 89.8 38.2 18.6 60

50 Years 14.6 31.6 125.6 47.4 21.1 60


10 Years 10.6 5.1 25.2 15.7 10.1 56

20 Years 10.9 10.4 38.3 21.6 12.7 56

30 Years 11.5 16.2 54.9 28.0 15.6 1 in 6 56

40 Years 12.2 22.4 75.3 35.1 18.3 57

50 Years 12.9 29.1 101.3 42.9 20.7 57


10 Years 10.2 5.0 23.2 15.2 10.2 54

20 Years 10.2 10.1 34.2 20.4 12.6 52

30 Years 10.2 15.8 47.3 26.0 15.3 1 in 7 52

40 Years 10.9 20.9 63.0 32.1 17.9 53

50 Years 11.3 26.6 82.4 38.5 20.1 53


10 Years 9.8 4.9 21.4 14.7 10.3 51

20 Years 9.5 9.7 30.4 19.3 12.5 48

30 Years 9.5 14.5 40.8 24.1 14.9 1 in 9 47

40 Years 9.6 19.4 52.8 29.2 17.2 47

50 Years 9.7 24.3 66.8 34.6 19.4 47


10 Years 9.4 4.8 19.7 14.2 10.4 47

20 Years 8.8 9.3 27.1 18.2 12.4 43

30 Years 8.5 13.7 35.2 22.2 14.5 1 in 10 41

40 Years 8.3 17.9 44.3 26.4 16.6 40

50 Years 8.2 22.2 55.0 30.8 18.5 40

Data do not represent any past performance and are not a promise of actual future results. Stocks comprise 35% US value, 35% US growth, 25% developed international, and5% emerging markets; bonds: 100% intermediate taxables. All allocations (except 100% stocks) include a 10% allocation to real estate investment trusts (REITs); because we regardREITs as having characteristics of both stocks and bonds, the REITs allocation is divided equally between those two asset classes. The 100% stock allocation does not include REITs.TPV is measured by real cumulative distributions plus real portfolio remainder. Frequency of 10% decline in distributions represents the frequency of a 10% or greater decline inyear-over-year distributions over 30 years. Based on AllianceBernstein’s estimates of the range of returns for the applicable capital markets over the next 50 years. See Notes on WealthForecasting System, pages 25–26, for further details.


AppendixProjected Results of Spending Policy Decisions

For easy reference, the tables on the following pages show theresults of our modeling for various asset allocations, spendinglevels, and spending formulas. They provide a vivid picture ofthe trade-offs involved in decisions regarding these elements ofspending policy.

All the tables assume a foundation with starting assets of $10million. (As mentioned on page 7, we use $10 million because itis easily scalable. So, for example, if you want to apply the datato a $50 million foundation, simply multiply all dollar results byfive. Similarly, for a $1 million foundation, divide by 10.)

The first three pages (pages 21–23) assume spending levelsof 5%, 6%, and 7%, respectively. Each one shows six assetallocations, from 50% stocks/50% bonds to 100% stocks.Each asset allocation is divided into probable results from fiveto 50 years.

The first column, “Real Remaining Assets,” shows the expectedasset value, adjusted for inflation, that the foundation will likelyhave at the end of each time frame. These numbers are themedian of our projections. The second column, “Real Cumula-tive Distributions,” shows the dollar amount it has given away(adjusted for inflation), and is also the median of our projections.

In the third set of columns, “Real Total Philanthropic Value (TPV),”we show three numbers: one with a 10% confidence level;a median; and one with a 90% confidence level. The 10%confidence level means market performance was excellent,resulting in a much higher value. The median represents the 50th

percentile of results, or most common. The 90% confidence levelmeans market performance over the time period was dismal,resulting in a much lower value. We provide all three numbersbecause forecasting is a probabilistic exercise, and responsibleplanning considers both best- and worst-case scenarios.

The fourth column shows the frequency of a 10% decline indistributions, measured in years. So, for example, a foundationspending 7% a year and allocated 100% to stocks (page 23,top row) can expect to experience a 10% decline in distribu-tions—or worse—once every four years.

Finally, the fifth column shows the probability of maintainingreal portfolio value over the respective time period, adjustedfor inflation.

Page 24 shows how various spending policies, such as smooth-ing, ceilings, and stable giving, are likely to play out overtime—given a 5% target distribution level. The columns are thesame as those in the tables on the preceding three pages, exceptthat the far right column shows the probability of portfolioexhaustion for each time period.

All the data in these tables are generated by our WealthForecasting SystemSM (WFS), a powerful planning tool thatprojects the potential returns of portfolios with multiple assetclasses, incorporating the effect of inflation, taxes, and spend-ing. For more information on the WFS, please see “A CloserLook at Our Modeling: The Wealth Forecasting System,” page8, and the notes that begin on page 25. n


RealRemaining

Assets

RealCumulative




Real PortfolioValue

Median Median10%


Confidence Years %


10 Years 11.3 5.3 29.6 16.7 9.8 58

20 Years 12.3 11.2 48.6 23.8 12.5 60

30 Years 13.5 18.0 74.3 31.9 15.6 1 in 5 61

40 Years 14.9 25.6 110.3 41.4 18.4 62

50 Years 16.2 34.1 159.5 51.5 21.0 62


10 Years 10.9 5.2 27.2 16.2 10.0 57

20 Years 11.6 10.8 43.0 22.6 12.7 58

30 Years 12.5 17.0 63.3 29.9 15.8 1 in 6 59

40 Years 13.5 24.0 89.8 38.2 18.6 60

50 Years 14.6 31.6 125.6 47.4 21.1 60


10 Years 10.6 5.1 25.2 15.7 10.1 56

20 Years 10.9 10.4 38.3 21.6 12.7 56

30 Years 11.5 16.2 54.9 28.0 15.6 1 in 6 56

40 Years 12.2 22.4 75.3 35.1 18.3 57

50 Years 12.9 29.1 101.3 42.9 20.7 57


10 Years 10.2 5.0 23.2 15.2 10.2 54

20 Years 10.2 10.1 34.2 20.4 12.6 52

30 Years 10.2 15.8 47.3 26.0 15.3 1 in 7 52

40 Years 10.9 20.9 63.0 32.1 17.9 53

50 Years 11.3 26.6 82.4 38.5 20.1 53


10 Years 9.8 4.9 21.4 14.7 10.3 51

20 Years 9.5 9.7 30.4 19.3 12.5 48

30 Years 9.5 14.5 40.8 24.1 14.9 1 in 9 47

40 Years 9.6 19.4 52.8 29.2 17.2 47

50 Years 9.7 24.3 66.8 34.6 19.4 47


10 Years 9.4 4.8 19.7 14.2 10.4 47

20 Years 8.8 9.3 27.1 18.2 12.4 43

30 Years 8.5 13.7 35.2 22.2 14.5 1 in 10 41

40 Years 8.3 17.9 44.3 26.4 16.6 40

50 Years 8.2 22.2 55.0 30.8 18.5 40


22 Bernstein.com


RealRemaining

Assets

RealCumulative




Real PortfolioValue

Median Median10%


Confidence Years %


10 Years 10.2 6.1 28.8 16.4 9.8 53

20 Years 10.1 12.3 45.0 22.6 12.3 52

30 Years 10.0 18.7 65.5 29.3 14.8 1 in 5 52

40 Years 10.1 25.3 90.2 36.1 17.1 51

50 Years 9.9 32.0 122.0 43.0 19.0 51


10 Years 9.9 6.0 26.6 15.9 10.0 52

20 Years 9.5 11.8 39.8 21.6 12.4 50

30 Years 9.3 17.7 55.9 27.4 15.0 1 in 5 48

40 Years 9.1 23.7 74.1 33.6 17.3 48

50 Years 9.0 29.7 97.0 39.5 19.2 48


10 Years 9.6 5.9 24.6 15.5 10.1 49

20 Years 8.9 11.4 35.7 20.6 12.5 46

30 Years 8.6 16.9 48.8 25.7 14.9 1 in 6 45

40 Years 8.2 22.3 62.8 31.0 16.9 44

50 Years 7.9 27.5 79.6 36.1 18.9 43


10 Years 9.2 5.8 22.7 15.0 10.2 47

20 Years 8.4 11.0 32.0 19.5 12.4 43

30 Years 7.8 16.0 42.2 24.0 14.7 1 in 6 40

40 Years 7.3 20.8 53.1 28.5 16.6 39

50 Years 6.9 25.3 65.5 32.7 18.3 38


10 Years 8.8 5.7 21.0 14.6 10.3 43

20 Years 7.8 10.6 28.5 18.5 12.3 38

30 Years 7.0 15.2 36.6 22.4 14.3 1 in 7 34

40 Years 6.5 19.4 45.1 26.1 16.1 32

50 Years 5.9 23.3 54.1 29.6 17.7 31


10 Years 8.5 5.5 19.3 14.1 10.4 38

20 Years 7.2 10.2 25.5 17.5 12.2 31

30 Years 6.3 14.3 31.9 20.7 13.9 1 in 9 28

40 Years 5.6 18.0 38.4 23.8 15.5 25

50 Years 5.0 21.3 45.1 26.6 16.8 23



RealRemaining

Assets

RealCumulative




Real PortfolioValue

Median Median10%


Confidence Years %


10 Years 9.3 6.8 28.0 16.1 9.8 48

20 Years 8.3 13.1 42.0 21.6 12.1 45

30 Years 7.4 19.0 58.0 26.9 14.1 1 in 4 42

40 Years 6.8 24.5 74.9 31.9 16.0 41

50 Years 6.0 29.7 95.1 36.4 17.4 39


10 Years 9.0 6.7 25.9 15.7 10.0 46

20 Years 7.8 12.6 37.2 20.6 12.2 42

30 Years 6.9 18.1 49.9 25.4 14.3 1 in 5 39

40 Years 6.1 23.0 62.4 29.8 16.1 37

50 Years 5.5 27.7 77.0 33.7 17.6 35


10 Years 8.7 6.6 24.0 15.3 10.1 43

20 Years 7.3 12.2 33.4 19.7 12.3 38

30 Years 6.4 17.2 43.5 23.8 14.2 1 in 5 34

40 Years 5.5 21.7 53.6 27.6 15.9 32

50 Years 4.8 25.7 64.1 31.0 17.2 30


10 Years 8.3 6.4 22.2 14.8 10.2 40

20 Years 6.8 11.8 30.1 18.8 12.2 33

30 Years 5.8 16.3 38.1 22.4 14.0 1 in 6 29

40 Years 4.9 20.4 45.7 25.5 15.6 27

50 Years 4.2 23.8 53.5 28.4 16.8 25


10 Years 8.0 6.3 20.5 14.4 10.3 36

20 Years 6.4 11.4 27.0 17.8 12.1 28

30 Years 5.2 15.5 33.2 20.9 13.7 1 in 6 24

40 Years 4.3 19.0 39.0 23.5 15.2 21

50 Years 3.6 22.0 44.9 25.9 16.2 19


10 Years 7.7 6.2 18.9 13.9 10.4 30

20 Years 5.9 10.9 24.2 16.9 12.0 22

30 Years 4.7 14.7 29.1 19.5 13.4 1 in 7 17

40 Years 3.8 17.8 33.5 21.7 14.7 15

50 Years 3.1 20.3 37.8 23.5 15.6 13




RealRemaining

Assets

RealCumulative




Real PortfolioValue

Median Median10%


Confidence Years %


10 Years 10.2 6.1 28.8 16.4 9.8 53

20 Years 10.1 12.3 45.0 22.6 12.3 52

30 Years 10.0 18.7 65.5 29.3 14.8 1 in 5 52

40 Years 10.1 25.3 90.2 36.1 17.1 51

50 Years 9.9 32.0 122.0 43.0 19.0 51


10 Years 9.9 6.0 26.6 15.9 10.0 52

20 Years 9.5 11.8 39.8 21.6 12.4 50

30 Years 9.3 17.7 55.9 27.4 15.0 1 in 5 48

40 Years 9.1 23.7 74.1 33.6 17.3 48

50 Years 9.0 29.7 97.0 39.5 19.2 48


10 Years 9.6 5.9 24.6 15.5 10.1 49

20 Years 8.9 11.4 35.7 20.6 12.5 46

30 Years 8.6 16.9 48.8 25.7 14.9 1 in 6 45

40 Years 8.2 22.3 62.8 31.0 16.9 44

50 Years 7.9 27.5 79.6 36.1 18.9 43


10 Years 9.2 5.8 22.7 15.0 10.2 47

20 Years 8.4 11.0 32.0 19.5 12.4 43

30 Years 7.8 16.0 42.2 24.0 14.7 1 in 6 40

40 Years 7.3 20.8 53.1 28.5 16.6 39

50 Years 6.9 25.3 65.5 32.7 18.3 38


10 Years 8.8 5.7 21.0 14.6 10.3 43

20 Years 7.8 10.6 28.5 18.5 12.3 38

30 Years 7.0 15.2 36.6 22.4 14.3 1 in 7 34

40 Years 6.5 19.4 45.1 26.1 16.1 32

50 Years 5.9 23.3 54.1 29.6 17.7 31


10 Years 8.5 5.5 19.3 14.1 10.4 38

20 Years 7.2 10.2 25.5 17.5 12.2 31

30 Years 6.3 14.3 31.9 20.7 13.9 1 in 9 28

40 Years 5.6 18.0 38.4 23.8 15.5 25

50 Years 5.0 21.3 45.1 26.6 16.8 23



RealRemaining

Assets

RealCumulative




Real PortfolioValue

Median Median10%


Confidence Years %


10 Years 9.3 6.8 28.0 16.1 9.8 48

20 Years 8.3 13.1 42.0 21.6 12.1 45

30 Years 7.4 19.0 58.0 26.9 14.1 1 in 4 42

40 Years 6.8 24.5 74.9 31.9 16.0 41

50 Years 6.0 29.7 95.1 36.4 17.4 39


10 Years 9.0 6.7 25.9 15.7 10.0 46

20 Years 7.8 12.6 37.2 20.6 12.2 42

30 Years 6.9 18.1 49.9 25.4 14.3 1 in 5 39

40 Years 6.1 23.0 62.4 29.8 16.1 37

50 Years 5.5 27.7 77.0 33.7 17.6 35


10 Years 8.7 6.6 24.0 15.3 10.1 43

20 Years 7.3 12.2 33.4 19.7 12.3 38

30 Years 6.4 17.2 43.5 23.8 14.2 1 in 5 34

40 Years 5.5 21.7 53.6 27.6 15.9 32

50 Years 4.8 25.7 64.1 31.0 17.2 30


10 Years 8.3 6.4 22.2 14.8 10.2 40

20 Years 6.8 11.8 30.1 18.8 12.2 33

30 Years 5.8 16.3 38.1 22.4 14.0 1 in 6 29

40 Years 4.9 20.4 45.7 25.5 15.6 27

50 Years 4.2 23.8 53.5 28.4 16.8 25


10 Years 8.0 6.3 20.5 14.4 10.3 36

20 Years 6.4 11.4 27.0 17.8 12.1 28

30 Years 5.2 15.5 33.2 20.9 13.7 1 in 6 24

40 Years 4.3 19.0 39.0 23.5 15.2 21

50 Years 3.6 22.0 44.9 25.9 16.2 19


10 Years 7.7 6.2 18.9 13.9 10.4 30

20 Years 5.9 10.9 24.2 16.9 12.0 22

30 Years 4.7 14.7 29.1 19.5 13.4 1 in 7 17

40 Years 3.8 17.8 33.5 21.7 14.7 15

50 Years 3.1 20.3 37.8 23.5 15.6 13


24 Bernstein.com

Initial Assets: $10 Million | 5% Target Distribution

RealRemaining

Assets

RealCumulative

DistributionsReal Total Philanthropic Value (TPV)

Year 30


Probabilityof PortfolioExhaustion

Year 30Median

Year 30Median

10%Confidence Median

90%Confidence

Over30 Years Year 50

100% Stocks Fixed Percent $13.5 Mil. $18.0 Mil. $74.3 Mil. $31.9 Mil. $15.6 Mil. 1 in 5 N/A

Three-Year Smoothing 12.7 18.1 72.7 31.4 15.3 1 in 8 N/A

Five-Year Smoothing 12.5 18.1 72.8 31.2 15.2 1 in 9 N/A

Five-Year Smoothing/6% Ceiling 12.7 18.1 73.0 31.3 15.3 1 in 8 N/A

Stable Giving 8.4 19.1 68.6 28.2 12.8 <1 in 50 38%

Stable Giving w/Carryover 9.2 18.8 70.1 28.7 12.9 <1 in 50 34%90% Stocks/10% Bonds Fixed Percent 12.5 17.0 63.3 29.9 15.8 1 in 6 N/A




Stable Giving 8.1 18.1 58.7 26.8 13.2 <1 in 50 34%





Stable Giving 7.9 17.2 51.3 25.4 13.6 <1 in 50 29%





Stable Giving 7.5 16.2 44.7 24.0 13.6 <1 in 50 25%





Stable Giving 7.1 15.3 38.9 22.6 13.6 <1 in 50 23%





Stable Giving 6.6 14.4 33.7 21.1 13.5 <1 in 50 21%

Stable Giving w/Carryover 6.9 14.2 34.3 21.3 13.6 <1 in 50 19%

Data do not represent any past performance and are not a promise of actual future results. Stocks comprise 35% US value, 35% US growth, 25% developed international, and 5%emerging markets; bonds: 100% intermediate taxables. All allocations (except 100% stocks) include a 10% allocation to real estate investment trusts (REITs); because we regard REITs ashaving characteristics of both stocks and bonds, the REITs allocation is divided equally between those two asset classes. The 100% stock allocation does not include REITs. TPV is measuredby real cumulative distributions plus real portfolio remainder. Frequency of 10% decline in distributions represents the frequency of a 10% or greater decline in year-over-year distributions over30 years. Stable giving is defined as having a floor of 5% or the previous year’s distribution, whichever is greater. Stable giving with carryover assumes that distributions greater than 5% in asingle year can be carried over to offset future spending for five years, still imposing a floor of the previous year’s distribution. Based on AllianceBernstein’s estimates of the range of returns for theapplicable capital markets over the next 50 years. See Notes on Wealth Forecasting System, pages 25–26, for further details.


Notes on Wealth Forecasting System1. Purpose and Description of Wealth Forecasting SystemBernstein’s Wealth Forecasting SystemSM is designed to assist

investors in making long-term investment decisions regarding their

allocation of investments among categories of financial assets. Our

planning tool consists of a four-step process: 1) Client Profile Input:

the client’s asset allocation, income, expenses, cash withdrawals, tax

rate, risk-tolerance level, goals, and other factors; 2) Client Scenarios:

in effect, questions clients would like our guidance on, which may

touch on issues such as whether their portfolio can beat inflation

long term and how different asset allocations might impact a

foundation’s longevity; 3) The Capital-Markets Engine: Our proprie-

tary model, which uses our research and historical data to create a

vast range of market returns, takes into account the linkages within

and among the capital markets, as well as their unpredictability; and

finally 4) A Probability Distribution of Outcomes: Based on the assets

invested pursuant to the stated asset allocation, 90% of the

estimated ranges of returns and asset values the client could expect

to experience are represented within the range established by the

5th and 95th percentiles on “box and whiskers” graphs. However,

outcomes outside this range are expected to occur 10% of the time;

thus, the range does not establish the boundaries for all outcomes.

Expected market returns on bonds are derived taking into account

yield and other criteria. An important assumption is that stocks

will, over time, outperform long bonds by a reasonable amount,

although this is in no way a certainty. Moreover, actual future results

may not meet Bernstein’s estimates of the range of market returns,

as these results are subject to a variety of economic, market, and

other variables. Accordingly, the analysis should not be construed as

a promise of actual future results, the actual range of future results,

or the actual probability that these results will be realized.

2. RebalancingAnother important planning assumption is how the asset allocation

varies over time. We attempt to model how the portfolio would

actually be managed. Cash flows and cash generated from portfolio

turnover are used to maintain the selected asset allocation between

cash, bonds, stocks, REITs, and hedge funds over the period of the

analysis. Where this is not sufficient, an optimization program is run

to trade off the mismatch between the actual allocation and targets

against the cost of trading to rebalance. In general, the portfolio

allocation will be maintained reasonably close to its target.

3. Expenses and Spending Plans (Withdrawals)All results are generally shown after applicable taxes and after

anticipated withdrawals and/or additions, unless otherwise noted.

Liquidations may result in realized gains or losses, which will have

capital gains tax implications.

4. Modeled Asset ClassesThe assets or indexes below were used in this analysis to represent

the various model classes.

5. VolatilityVolatility is a measure of dispersion of expected returns around the

average. The greater the volatility, the more likely it is that returns

in any one period will be substantially above or below the expected

result. The volatility for each asset class used in this analysis is listed

in the Capital Markets Projections section at the end of these

notes. In general, two-thirds of the returns will be within one

standard deviation. For example, assuming that stocks are expected

to return 8.0% on a compounded basis and the volatility of returns

on stocks is 17.0%, in any one year it is likely that two-thirds of

the projected returns will be between (8.9)% and 28.8%. With

intermediate government bonds, if the expected compound return

is assumed to be 5.0% and the volatility is assumed to be 6.0%,

two-thirds of the outcomes will typically be between (1.1)% and

11.5%. Bernstein’s forecast of volatility is based on historical data

and incorporates Bernstein’s judgment that the volatility of fixed

income assets is different for different time periods.

Asset Class Modeled as...

AnnualTurnover

Rate

Int.-Term Taxables Taxable Bonds with Maturity of 7 Years 30%

US Value Stocks S&P/Barra Value Index 15%

US Growth Stocks S&P/Barra Growth Index 15%

Developed Int’l Stocks MSCI EAFE Unhedged 15%

Emerging Markets Stocks MSCI Emerging Markets Index 20%

REITs NAREIT 30%

26 Bernstein.com

6. Technical AssumptionsBernstein’s Wealth Forecasting System is based on a number of

technical assumptions regarding the future behavior of financial

markets. Bernstein’s Capital Markets Engine is the module

responsible for creating simulations of returns in the capital

markets. These simulations are based on inputs that summarize

the condition of the capital markets as of December 31, 2009.

Therefore, the first 12-month period of simulated returns repre-

sents the period from December 31, 2009, through December 31,

2010, and not necessarily the calendar year of 2009. A description

of these technical assumptions is available on request.

7. Tax ImplicationsBefore making any asset allocation decisions, an investor should

review with his/her tax advisor the tax liabilities incurred by the

different investment alternatives presented herein, including any

capital gains that would be incurred as a result of liquidating all or

part of his/her portfolio, retirement-plan distributions, investments

in municipal or taxable bonds, etc. Bernstein does not provide tax,

legal, or accounting advice. In considering this material, you should

discuss your individual circumstances with professionals in those

areas before making any decisions.

8. Tax RatesBernstein’s Wealth Forecasting System has used the following tax

rates for this analysis:

The federal income tax rate represents Bernstein’s estimate of either

the top marginal tax bracket or an “average” rate calculated based

upon the marginal-rate schedule. The federal capital gains tax rate is

represented by the lesser of the top marginal income tax bracket or

the current cap on capital gains for an individual or corporation, as

applicable. Federal tax rates are blended with applicable state tax

rates by including, among other things, federal deductions for state

income and capital gains taxes. The state tax rate generally represents

Bernstein’s estimate of the top marginal rate, if applicable.

9. Private FoundationThe Private Foundation is modeled as a charitable trust or not-for-profit corporation, which can be either a private operatingfoundation or a private nonoperating foundation. The foundationmay receive an initial donation and periodic funding from eitherthe personal portfolio modeled in the system or an external source.Annual distributions from the foundation may be structured in anumber of different ways, so long as the foundation distributes theminimum amount required under federal regulations, including:1) only the minimum amount; 2) an annuity or fixed dollar amount,which may be increased annually by inflation or by a fixedpercentage; 3) a unitrust, or annual payout of a percentage offoundation assets, based on a single year or averaged over multipleyears; 4) a linear distribution of foundation assets, determined eachyear by dividing the foundation assets by the remaining number ofyears; or 5) the greater of the previous year’s distribution or any ofthe above methods. These distribution policies can be varied in anygiven year. For nonoperating foundations, the system calculates theexcise tax on net investment income.

10. Capital Markets Projections

TaxpayerStartYear

EndYear

FederalIncome

TaxRate

FederalCapitalGainsTax

Rate

StateIncome

TaxRate

StateCapitalGainsTax

Rate

TaxMethod

Type

Foundation 2010 2059 0% 0% 0% 0% No Tax

Median50-YearGrowth

Rate

MeanAnnualReturn

MeanAnnualIncome

One-YearVolatility

50-YearAnnualEquiv-alent

Volatility

Intermediate-TermTaxables

5.4% 5.7% 6.4% 4.7% 13.1%

US Value Stocks 8.9 10.4 3.7 17.8 17.1

US Growth Stocks 8.5 10.4 2.3 20.2 17.8

Developed Int’l Stocks 9.2 11.4 3.5 21.3 18.1

Emerging Markets Stocks 7.2 11.2 2.8 29.1 26.4

REITs 7.0 8.7 4.2 24.3 17.5

Inflation 3.0 3.2 N/A 1.2 11.6

Based on 10,000 simulated trials, each consisting of 50-year periods. ReflectsBernstein’s estimates and the capital markets conditions as of December 31, 2009.Does not represent any past performance and is not a guarantee of any future specificrisk levels or returns, or any specific range of risk levels or returns.

Notes on Asset Allocation in Historical StudiesData SourcesUS Stocks. February 1890 through 1925: S&P 500 Total ReturnIndex (with Global Financial Data extension). 1926 through1974: S&P 500 Total Return Index. Represented by Ibbotsonfrom 1926 through 1974 and by the S&P 500 thereafter (fromCompustat via FactSet).

US Value Stocks. 1975 through 2009: S&P 500 Barra ValueTotal Return Index.

US Growth Stocks. 1975 through 2009: S&P 500 Barra GrowthTotal Return Index.

Developed International Stocks. 1970 through 2009: MSCI EAFETotal Return Index (unhedged, market capitalization weighted).

Emerging Markets Stocks. 1988 through 2009: MSCI EmergingMarkets Free Total Return Index (market capitalization weighted).

Bonds. February 1890 through 1918: Global Financial Data10-year US Government Bond Total Return Index. 1919through 1925: Global Financial Data 5-year US GovernmentBond Total Return Index. 1926 through January 1962: USLong-Term Government Bond Index. February 1962 through1975: 5-year Treasury TPA. 1976 through 2009: BarclaysCapital US Aggregate Bond Index.

REITs. February 1972 through November 1997: NAREIT EquityREIT Index. December 1997 through 2009: EPRA/NAREIT GlobalReal Estate Total Return Index.

Inflation. February 1890 through 1925: US Bureau of LaborStatistics Consumer Price Index, Not Seasonally Adjusted.1926 through 2009: US Consumer Price Index.

Asset Allocation Simulation Assumptions100% Bondsn February 1890 through 2009: 100% Bonds.

30% Stocks/70% Bondsn February 1890 through 1969: 30% US Stocks/70% Bonds.

n 1970 through January 1972: 21% US Stocks/9% DevelopedInternational Stocks/70% Bonds.

n February 1972 through 1974: 17.5% US Stocks/7.5%Developed International Stocks/65% Bonds/10% REITs.

n 1975 through 1987: 8.75% US Value Stocks/8.75% USGrowth Stocks/7.5% Developed International Stocks/65%Bonds/10% REITs.

n 1988 through 2009: 8.75% US Value Stocks/8.75% USGrowth Stocks/6.25% Developed International Stocks/1.25%Emerging Markets Stocks/65% Bonds/10% REITs.





n 1988 through 2009: 15.75% US Value Stocks/15.75% USGrowth Stocks/11.25% Developed International Stocks/2.25% Emerging Markets Stocks/45% Bonds/10% REITs.


6. Technical AssumptionsBernstein’s Wealth Forecasting System is based on a number of

technical assumptions regarding the future behavior of financial

markets. Bernstein’s Capital Markets Engine is the module

responsible for creating simulations of returns in the capital

markets. These simulations are based on inputs that summarize

the condition of the capital markets as of December 31, 2009.

Therefore, the first 12-month period of simulated returns repre-

sents the period from December 31, 2009, through December 31,

2010, and not necessarily the calendar year of 2009. A description

of these technical assumptions is available on request.

7. Tax ImplicationsBefore making any asset allocation decisions, an investor should

review with his/her tax advisor the tax liabilities incurred by the

different investment alternatives presented herein, including any

capital gains that would be incurred as a result of liquidating all or

part of his/her portfolio, retirement-plan distributions, investments

in municipal or taxable bonds, etc. Bernstein does not provide tax,

legal, or accounting advice. In considering this material, you should

discuss your individual circumstances with professionals in those

areas before making any decisions.

8. Tax RatesBernstein’s Wealth Forecasting System has used the following tax

rates for this analysis:

The federal income tax rate represents Bernstein’s estimate of either

the top marginal tax bracket or an “average” rate calculated based

upon the marginal-rate schedule. The federal capital gains tax rate is

represented by the lesser of the top marginal income tax bracket or

the current cap on capital gains for an individual or corporation, as

applicable. Federal tax rates are blended with applicable state tax

rates by including, among other things, federal deductions for state

income and capital gains taxes. The state tax rate generally represents

Bernstein’s estimate of the top marginal rate, if applicable.

9. Private FoundationThe Private Foundation is modeled as a charitable trust or not-for-profit corporation, which can be either a private operatingfoundation or a private nonoperating foundation. The foundationmay receive an initial donation and periodic funding from eitherthe personal portfolio modeled in the system or an external source.Annual distributions from the foundation may be structured in anumber of different ways, so long as the foundation distributes theminimum amount required under federal regulations, including:1) only the minimum amount; 2) an annuity or fixed dollar amount,which may be increased annually by inflation or by a fixedpercentage; 3) a unitrust, or annual payout of a percentage offoundation assets, based on a single year or averaged over multipleyears; 4) a linear distribution of foundation assets, determined eachyear by dividing the foundation assets by the remaining number ofyears; or 5) the greater of the previous year’s distribution or any ofthe above methods. These distribution policies can be varied in anygiven year. For nonoperating foundations, the system calculates theexcise tax on net investment income.

10. Capital Markets Projections

TaxpayerStartYear

EndYear

FederalIncome

TaxRate

FederalCapitalGainsTax

Rate

StateIncome

TaxRate

StateCapitalGainsTax

Rate

TaxMethod

Type

Foundation 2010 2059 0% 0% 0% 0% No Tax

Median50-YearGrowth

Rate

MeanAnnualReturn

MeanAnnualIncome

One-YearVolatility

50-YearAnnualEquiv-alent

Volatility

Intermediate-TermTaxables

5.4% 5.7% 6.4% 4.7% 13.1%

US Value Stocks 8.9 10.4 3.7 17.8 17.1

US Growth Stocks 8.5 10.4 2.3 20.2 17.8

Developed Int’l Stocks 9.2 11.4 3.5 21.3 18.1

Emerging Markets Stocks 7.2 11.2 2.8 29.1 26.4

REITs 7.0 8.7 4.2 24.3 17.5

Inflation 3.0 3.2 N/A 1.2 11.6

Based on 10,000 simulated trials, each consisting of 50-year periods. ReflectsBernstein’s estimates and the capital markets conditions as of December 31, 2009.Does not represent any past performance and is not a guarantee of any future specificrisk levels or returns, or any specific range of risk levels or returns.

Notes on Asset Allocation in Historical StudiesData SourcesUS Stocks. February 1890 through 1925: S&P 500 Total ReturnIndex (with Global Financial Data extension). 1926 through1974: S&P 500 Total Return Index. Represented by Ibbotsonfrom 1926 through 1974 and by the S&P 500 thereafter (fromCompustat via FactSet).

US Value Stocks. 1975 through 2009: S&P 500 Barra ValueTotal Return Index.

US Growth Stocks. 1975 through 2009: S&P 500 Barra GrowthTotal Return Index.

Developed International Stocks. 1970 through 2009: MSCI EAFETotal Return Index (unhedged, market capitalization weighted).

Emerging Markets Stocks. 1988 through 2009: MSCI EmergingMarkets Free Total Return Index (market capitalization weighted).

Bonds. February 1890 through 1918: Global Financial Data10-year US Government Bond Total Return Index. 1919through 1925: Global Financial Data 5-year US GovernmentBond Total Return Index. 1926 through January 1962: USLong-Term Government Bond Index. February 1962 through1975: 5-year Treasury TPA. 1976 through 2009: BarclaysCapital US Aggregate Bond Index.

REITs. February 1972 through November 1997: NAREIT EquityREIT Index. December 1997 through 2009: EPRA/NAREIT GlobalReal Estate Total Return Index.

Inflation. February 1890 through 1925: US Bureau of LaborStatistics Consumer Price Index, Not Seasonally Adjusted.1926 through 2009: US Consumer Price Index.

Asset Allocation Simulation Assumptions100% Bondsn February 1890 through 2009: 100% Bonds.





n 1988 through 2009: 8.75% US Value Stocks/8.75% USGrowth Stocks/6.25% Developed International Stocks/1.25%Emerging Markets Stocks/65% Bonds/10% REITs.






28 Bernstein.com






100% Stocksn February 1890 through 1969: 100% US Stocks.

n 1970 through January 1972: 70% US Stocks/30% DevelopedInternational Stocks.

n February 1972 through 1974: 70% US Stocks/30%Developed International Stocks.

n 1975 through 1987: 35% US Value Stocks/35% US GrowthStocks/30% Developed International Stocks.

n 1988 through 2009: 35% US Value Stocks/35% US GrowthStocks/25% Developed International Stocks/5% EmergingMarkets Stocks.






100% Stocksn February 1890 through 1969: 100% US Stocks.

n 1970 through January 1972: 70% US Stocks/30% DevelopedInternational Stocks.

n February 1972 through 1974: 70% US Stocks/30%Developed International Stocks.

n 1975 through 1987: 35% US Value Stocks/35% US GrowthStocks/30% Developed International Stocks.

n 1988 through 2009: 35% US Value Stocks/35% US GrowthStocks/25% Developed International Stocks/5% EmergingMarkets Stocks.

Securing Your Financial FutureBuilding and preserving wealth across generations requires expert planning, unbiased advice, and highly disciplined investing. Our clients are individuals and families, business owners, family trusts and foundations, and other financial guardians. We work in concert with their accountants, tax planners, trust and estate attorneys, and other expert advisors to resolve complex financial issues.

The core principles of our approach to building and preserving our clients’ wealth are:

Lifetime Wealth Planning

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Putting sophisticated planning tools and expert advice to work for you, we help you make well-informed investment decisions.

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To give you direct access to our best thinking, we’ve structured our business around centralized research and investment management, with integrated wealth planning.

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Your particular circumstances guide the way we manage your money, as we tailor portfolios to your goals, income needs, tax situation, and tolerance for risk.

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Keeping More of What You Earn

To help you keep more of what your investments earn, we employ tax management strategies in multiple ways.

Keeping You Informed

Communication Works Both Ways

When you’re well-informed about the strategies we pursue, you’re more secure. And the more we understand you, the better we can tailor solutions just for you.

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Commitment to Individuals, Families, and Their Causes

When you entrust Bernstein to serve as your investment manager, you become part of a proud tradition of integrity, trust, and financial success.

Global Wealth Management

A unit of AllianceBernstein L.P.

BER–6354–0910 www.bernstein.com | 212.486.5800

© 2010 AllianceBernstein L.P.

Note to All Readers:The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication.AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast, or opinion in thismaterial will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. Thisdocument is for informational purposes only and does not constitute investment advice. It does not take an investor’s personal investment objectives or financial situationinto account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construedas sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product, or service sponsored by AllianceBernstein or its affiliates.

Bernstein Global Wealth Management is a unit of AllianceBernstein L.P.

Note to UK Readers:AllianceBernstein Global Wealth Management is a unit of AllianceBernstein Limited. AllianceBernstein Limited (FRN147956) is authorised and regulated inthe United Kingdom by the Financial Services Authority. Issued by AllianceBernstein Limited, Devonshire House, One Mayfair Place, London W1J 8AJ.

Bernstein Global Wealth Management and AllianceBernstein Global Wealth Management do not offer tax, legal, oraccounting advice. In considering this material, you should discuss your individual circumstances with professionals inthose areas before making any decisions.

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