There are certain factors that you need to consider when making decisions around proper portfolio positioning. In the case of Donor Advised Funds (DFAs), you need to craft a spectrum of asset allocation recommendations created for a range of objectives and constraints.
And while DAF might be tricky with its strategic decisions around asset allocation, below are five factors that you should address while discussing the same.
1. Time horizon and intentions of the donor
Understanding a donor’s intention is very important, especially when there are plans to allocate all funds immediately or over the near term. This is essential because all of them are related to time horizons.
Since other things remain constant, the longer the time horizon, the better the assets can ride out short-term market volatility, as expected. This stimulates higher equity allocation.
Having a conversation regarding the same with donors can be one of the essential inputs in the investment process. This instils belief in the donors that your organization cares about the intentions and has the requisite skill and knowledge to help them achieve their objectives.
2. Return objectives
The return objective should be based on the donor’s intention and time horizons. That’s because if the donor chooses to preserve purchasing power, the assets selected for allocation will need to attain a minimum level of return.
There is a wide range of possible return objectives to choose from. However, considering the donor’s intentions and time horizons can help you select the right return objective suitable for their situation.
3. Risk forbearance
The donor’s forbearance towards risk should be estimated during the allocation process, from both objective and subjective perceptive. Considering donor’s risk forbearance can help you elect targets that could compile with them. This would even help you understand how they respond if an account undergoes extreme levels of volatility.
Determining the risk forbearance is a combination of both art and science. This process can help you balance objective and subjective considerations relevant to deciding the right portfolio for a donor.
A donor advised fund allotment can be requested at any point in time. This is why liquidity is an essential consideration while investing in DAFs. Considering its erratic distribution frequency, it is always advised to invest in liquid, readily marketable securities.
Specifics around distribution also affect asset allocation decisions like the need to balance staying fully invested with liquidating investments.
5. Peculiar circumstances
Over time, responsible investing assets have remarkably grown across the globe. As a result, donor-advised funds have also started to provide reliable investing portfolio options to their donors. Portfolio options that require investments screen for ESG criteria are one of the iterations of the same.
Understanding responsible investing is essential because it can help you lure donors looking to align their investment portfolio with their values or intentions.
Considering these five factors while planning to get allocated with a donor advised fund can help you match the portfolio consistent with the donor’s objective and constraints. But yes, you must know that DAF is a wide subject and there is always scope to know more.