Key Points

This article demonstrates the relevance of correctly accounting for inflation to foundation structure and programs – including, for example, in analyzing perpetual versus spend-down strategies and in comparing the cost-effectiveness of programs over different time periods. Investment teams must also be provided with return targets, which are highly sensitive to inflation and which in turn determine a risk estimate that must be considered by foundation fiduciaries.

Seemingly small differences in inflation estimates will become material over time. But at many foundations, systematic biases are frequently built into inflation estimates. These biases are often attributable to a failure to consider the nature of the costs specific to types of grantees and programs.

This article presents data illustrating the potential magnitude of these differences, and suggests adjustments to better account for these attributes as well as how these adjustments should be applied in projecting future results and in interpreting prior period performance.

Open Access