Thought Leadership

The Spending Dilemma – Endowments and Foundations

The ultimate goals and purposes of specific foundations and endowments may vary slightly; however, these investments typically aim to provide stable and reliable payouts to support charitable missions and operations, while maintaining the independence from the institution and growing the endowed capital.

Understanding the purpose, requirements, and investment beliefs of your foundation or endowment will drive management of two critical, and often competing, factors: spending target and real return target. An inherent conflict arises.

Endowments and foundations with an annual disbursement quota are facing a difficult set of market conditions. The typical foundation or endowment is required to annually disperse approximately 3.5% of fund assets and spends, on average, 1.5% of fund assets on the annual operational budget.[1]

Depending on the Spending Policy, the requirement of 5% annual payouts may lead to the fund not taking enough risk, resulting in inflation eroding principal asset values.

When it comes to the Investment Policy Statement, a desire to grow the principal value of donated assets may lead the fund to take on too much risk. This approach raises the possibility of impairment to payouts and the risk of risk of not being able to pay out full spending targets in market drawdowns.

In our ultra-low interest rate environment, it is growing increasingly difficult to both grow capital and generate adequate income on investments to meet annual spending targets. A fund with a 40% target allocation in low-yielding bonds and money market instruments will struggle to preserve and grow capital while spending 5% per year. How best to meet the conflicting needs of a 5% annual spending rule and the desire for consistent capital growth while abiding by asset allocation requirements?

Rather than focusing on current dividend yield, a portfolio of companies with consistently superior dividend growth is the most efficient way of providing both sufficient liquidity and capital gains for investors in the current low interest rate environment.

Growing yield on cost is the single most important factor in providing adequate income to liquidity-sensitive investors such as endowments and foundations. The growing yield on cost phenomena allows our investors’ income stream to grow to meet spending targets in a variety of market conditions. The added benefit of this approach is that stock prices historically tend to increase in the long term with increases in dividends.

[1] Source: MIT – Endowment Spending: Goals, Rates and Rules. Mehrling, Goldstein, & Sedlacek

Important Disclosures

There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at

This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at

A Note About Forward-Looking Statements

This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.

These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.

How much do you know about dividends?

Take our quick 10-question quiz and find out!

Take the Quiz >

clock Takes 2 minutes


Learn about News, Events and how we are using Data Science to eliminate human bias.