The following statement is true - foundation, unlike defined benefit pension plan, does not need to consider the correlation between plan sponsor financial performance and the performance of the portfolio. i thought this was false, because if the foundation has a sponsor, and they’re doing crappy at the same time the foundation portf is doing crappy, won’t it hurt the foundation’s risk tolerance? is it just a semantics thing - that foundation’s don’t have sponsors? if a problem told you that a company who supports a foundation does crappy whenever the foundation portfolio is doing crappy, would you use that as a reason to support lower risk toler?
I see foundations more like endowments; therefore the need for additional donations is not really there. Certain amount of money is gifted; the foundation is established, for let’s say…to preserve the life of the endangered mexican staring frog of southern sri lanka, and that’s about it. Once the donation is done, there is no real need for further donations. There are no liabilities to be cover in the future. Actually, some foundations might not even have infinite life. Instead they could choose to use up all the funds within a period of time, after which, they cease to exist. Now with DBP pension plans, this is a bit different. There is an obligation an obligation for the sponsor to meet the liabilities in the future. Therefore, the correlations is very important.
saw this q in 2010 V2 Schweser exams too and fell for the same (wrong) idea (its not endowments…). It’s really that a foundation is not dependant on future donations. These institutions generally do not engage in fund-raising campaigns; they may not receive any new contributions from the donor; and they do not receive any public support. (Level III Volume 2 Behavioral Finance, Individual Investors, and Institutional Investors , 4th Edition. Pearson Learning Solutions p. 381). on the other hand endowments: If the same market forces affect both its donor base and its endowment, an institution that relies heavily on donations for current income may see donations drop at the same time as endowment income. (Level III Volume 2 Behavioral Finance, Individual Investors, and Institutional Investors , 4th Edition. Pearson Learning Solutions p. 388).