Key Points

In this article, we create a capital markets-based indicator to trigger when a discussion about changing portfolio payout rates may be appropriate. Although the payout rate is often a calendar agenda item for foundations and endowments, volatility in capital markets may cause a deluge of ad hoc payout discussions that may decrease the effectiveness of investment committees.

Recent market performance provides a poor foundation for decisions related to a sustainable payout. The most sustainable portion of the investment return is the portfolio yield. We construct a metric using equity and bond market yields as a quantitative leading indicator of when a payout-rate discussion may be warranted.

While this methodology might be more of a resource to university-affiliated or public foundations, which have complete discretion over the level of the payout rate, private foundations might find understanding the sustainable payout of a portfolio useful in determining the potential erosion of the corpus caused by an unsustainable payout rate.

Open Access