Foundation

A foundation is a type of non-profit organization created to fund charitable activities. Think of it as a financial engine built for doing good. Typically established by a wealthy individual, family, or corporation, a foundation is given a large sum of money, known as an endowment. This endowment is then invested to generate returns. Instead of lining shareholders' pockets, these investment profits are used to support the foundation's mission, which could be anything from fighting disease to promoting the arts. The core idea is to make the initial gift last forever, allowing the foundation to perpetually fund its chosen causes through the magic of compound interest. Because of their charitable purpose, foundations are generally tax-exempt, but in return, they are legally required to distribute a certain percentage of their assets each year for charitable purposes.

At its heart, a foundation is a simple loop: receive money, invest money, give away the investment profits. This cycle is designed to be self-sustaining.

• The Endowment: This is the seed money, the initial pot of gold. It can consist of cash, stocks, bonds, real estate, or other assets. The goal is not to spend this principal amount but to grow it.
• The Investment Mandate: A foundation’s board has a fiduciary duty to manage the endowment responsibly. They create an investment mandate that outlines their strategy. Given their “forever” timeline, they often act like the ultimate patient investors, focusing on long-term growth and capital preservation. Their portfolio is typically a diversified mix of assets designed to weather market storms and generate consistent returns.
• The Payout: In the United States, for example, most private foundations are required to pay out at least 5% of their asset value each year in the form of grants and operating expenses. This ensures they are actively pursuing their charitable mission and not just hoarding wealth. This process of giving money to other non-profits is called grantmaking.

Not all foundations wear the same hat. They are generally categorized based on where their money comes from and how they use it.

The key difference here is the source of funding.

• Private Foundation: Usually funded and controlled by a single source—one person (like the Chan Zuckerberg Initiative), one family (like the Ford Foundation), or one corporation. They have more stringent operating rules and lower tax deductions for donors compared to public charities.
• Public Charity: Must draw significant support from the general public. Think of organizations like the Red Cross or your local food bank. They receive grants from individuals, governments, and private foundations. Because they are publicly accountable, they face fewer restrictions.

This distinction is about how they do their good work.

• Operating Foundation: Uses its endowment to run its own programs and services directly. A good example is a foundation that operates a museum or a research institute. They use their money to “do” the charity themselves.
• Non-Operating Foundation (Grantmaking): This is the more common type. They don't run their own charitable programs. Instead, they write checks to other organizations—the public charities—that do the on-the-ground work. The Bill & Melinda Gates Foundation is a famous example, funding global health and development projects carried out by others.

For the savvy investor, foundations are more than just charitable behemoths; they are a source of valuable insight.

Foundations are the embodiment of long-term, value-oriented investing. Their goal is to exist in perpetuity, meaning their investment horizon isn't next quarter or next year—it's the next century. This frees them from the market's short-term noise and allows them to follow a disciplined strategy governed by the prudent investor rule. They buy quality assets and hold them, letting value compound over decades. Their approach is a masterclass in patience and discipline, two virtues central to value investing.

The investment portfolios of large foundations are often managed by some of the sharpest minds in finance. Because these foundations must file public tax returns (Form 990-PF in the U.S.), investors can peek into their portfolios. While you shouldn't blindly copy their moves, analyzing where institutions like the Gates Foundation Trust or Yale University's endowment are allocating their capital can provide clues about long-term trends and identify sectors or companies that sophisticated managers believe have enduring value.

A growing trend is for foundations to align their investment portfolio with their charitable mission. For instance, a foundation dedicated to public health might avoid investing in tobacco companies. This approach, known as socially responsible investing (SRI) or impact investing, adds another layer to the investment process. It’s a powerful reminder that for a true value investor, the “value” of an investment isn't just a number on a spreadsheet; it can also reflect the company's character and its impact on the world.