Introduction

Board members and trustees for foundations and endowments face a demanding mandate: meet spending policy obligations reliably, preserve and grow capital, maintain pristine governance, and ensure the mission of the organization can be fulfilled for years to come. Osterweis Capital Management has a long history of successfully partnering with small and mid-sized foundations and endowments both in the San Francisco Bay area and nationally to help them confidently grow their mission-based work.

We have built our foundations and endowments practice on two core pillars:

1. A differentiated investment style that is straightforward, highly effective, and designed to achieve long-term growth in assets.
2. A focus on proactively partnering with boards and trustees to assist them in fulfilling their fiduciary duties with clearly defined processes.

Our decades of experience working with foundations and endowments can translate into better outcomes for a broad range of small and mid-sized foundations.

When Less is More

The greatest challenge many foundations and endowments face is generating stable, growing income while at the same time both protecting and growing principal over time. In philosophy, Occam’s razor posits that the simplest solution to a problem is often the correct one. We believe this often applies to investing, a contrast to the complexity favored by many institutions today.

Leading pensions and endowments appear to view complexity as their friend. In fact, at year-end 2024, Cambridge Associates reported that its foundation peer group had approximately 30% of their portfolios invested in private assets, many of which are illiquid, carry exceedingly high fees, and use significant financial leverage. The results of this complexity leave much to be desired. Cambridge Associates reported that its foundation peer group, which tracks over 100 foundations managing more $200 billion in assets, averaged an annualized 7.3% return for the ten years ending December 31, 2024.

We believe a simplified approach anchored around a flexible and dynamic allocation of 60% equities and 40% fixed income can better serve investors. While there have been many critics of the so-called “60/40” approach in recent years, we view it as having several enduring attractive attributes: 

1. Generates income to fund annual needs while providing opportunity for capital appreciation for long-term growth
2. Dampens volatility in a wide range of environments
3. Not subject to high and often complex fees related to private investments
4. Highly liquid
5. Simple approach that can be well understood by boards and trustees

The chart below illustrates performance for the Osterweis Growth & Income strategy, which employs a variation on this simple 60/40 approach. Over the long run, it has produced strong returns with much less complexity.

Past performance does not guarantee future results.

The Osterweis Approach to 60/40

Diversification without Dilution

The typical 60/40 strategy invests in an often overly broad pool of equity and fixed income securities. By contrast, our Growth & Income Strategy invests in a concentrated basket of quality growth equities and a highly curated group of fixed income securities that generally tilt toward shorter-term high yield bonds. The equities can offer capital appreciation and growing dividend income, while the bonds can generate above market yields without taking on undue risk.

On the equity side, we define quality growth companies as having three attributes: 1) a durable competitive advantage, 2) ability to reinvest to drive future growth, and 3) excellent governance. We seek to invest in these types of businesses at attractive valuations, often due to a temporary headwind that we believe will abate. Ideally, this enables both multiple expansion and significant growth in per share free cash flow over time, driving attractive long-term equity returns.

We assess the potential competitive advantages of a business by examining its industry structure, barriers to entry, network effects, scale advantages, and related factors. Often a durable competitive advantage is reflected in key attributes like attractive and/or improving returns on capital, high and/or improving margins, pricing power, a prudent balance sheet, and ultimately growing free cash flow per share that can enable rising cash dividends. 

As it relates to growth, we tend to invest in industries enjoying secular tailwinds, as companies that operate in those industries have an easier time growing, especially during soft economic periods.

This disciplined quality growth approach helps avoid speculative manias that distort passive indices and can insulate portfolios from risks created by lofty valuations and credit excesses. 

On the fixed income side, we often say that it is a market of bonds, not a bond market. Consider the investment grade market, which is roughly $10 trillion in size. Investment grade securities offer protections for investors, but they tend to generate significantly lower returns. While the high yield market — much smaller at roughly $2 trillion in size — is generally considered lower quality, we believe it offers identifiable pockets of value at levels of risk comparable to, and in some cases lower than, investment grade. High yield securities often have different characteristics underlying each issue, from collateralization, to restricted payment tests, to change of control features that can offer lenders various levels of protection. 
 
Our fixed income strategy has the flexibility to strategically shift between investment grade and high yield, thereby allowing us to add value to portfolios rather than just act as a buffer to equities. 

Within the high yield universe, careful security selection is critical. We avoid the areas of greatest risk and instead focus on bonds with attractive yields issued by strong companies with robust balance sheets, thereby greatly reducing default risk.

Additionally, we tend to keep portfolio duration short to help manage both credit and interest rate risk. Shorter-term high yield bonds are exposed to less interest rate risk compared to investment grade bonds of comparable maturity. Interest rate risk, which can be measured by duration, decreases as maturities fall and yields rise. Shorter-term issues also carry less credit risk than similarly rated longer-maturity issues, as the issuing company may already have sufficient cash on its balance sheet to pay off the shorter-maturity bond, and there is less risk of negative impact if something goes wrong for the company. Lastly, shorter-duration high yield bonds is inclined to be systematically mispriced due to a lack of understanding of short-term vs. long-term business fundamentals.

In short, we believe that our prudent approach on both the equity and fixed income sides of the portfolio matches well with the long investment horizons of most foundations and endowments, whose investment strategy should be designed to fund operations and other capital needs over decades. 

Focus on Downside Risk Management

Managing downside volatility is a critically important consideration for foundations and endowments. These entities typically require annual withdrawals to fund operating costs and meet important annual grant obligations. Making withdrawals in down markets can materially erode principal and therefore capital appreciation potential over time, even creating long-term funding challenges. We manage downside volatility in multiple ways.

First, on the equity side of the portfolio, we tend to invest in quality growth companies that pay rising dividends. We focus not on the companies with the highest dividend yields, but rather companies with the ability to consistently grow their dividends over time. In fact, our concentrated equity portfolio tends to have a dividend yield comparable to that of the S&P 500 but with a higher growth rate. Critically, we focus on companies that can weather economic changes and generate substantial free cash flow throughout an economic cycle.

Long-term studies by Ned Davis Research and Hartford Funds show that companies that pay growing dividends tend to deliver better returns than the broader market but with less volatility. Such companies typically have only modest payouts, enabling them to reinvest cash flow to achieve future growth that then supports bigger future dividends.

The second way we manage downside volatility is by dynamically adjusting our equity and fixed income allocations depending on the environment. If we are concerned with macro risks, we tend to dial back our equity exposure and raise our fixed income allocation. Conversely, we will raise our equity allocation and reduce fixed income if macro risks appear to be abating. We find this flexibility can help reduce downside volatility in choppy markets while still allowing us to capture upside in rising markets.

Aligning Investments with Goals

Foundations and endowments are far from uniform. Some are overfunded while others face significant shortfalls. Staffing structures vary — some institutions are expanding rapidly, while others remain stable or are designed with finite lifespans. Many are guided by mandates with restrictions against investments in industries misaligned with their values and missions. In short, each foundation and endowment brings a distinct set of investment requirements.

With nearly 50 years of experience, we understand how to navigate these complexities. Our approach is fully customized — tailoring everything from asset allocation and security selection to cash management — based on each organization’s unique goals and constraints. We also offer flexibility in investment format, providing both separately managed accounts and mutual funds to meet institutional preferences.

End-to-End Support

To fulfill their fiduciary responsibilities, trustees and board members need a robust process based on clear policies, disciplined deliberation, and transparent reporting. We partner with our clients from day one to put that process in place if needed — and keep it working. We take a holistic approach to support each client’s long-term success and organize support around three key administrative areas:

1. Policy & Architecture
   • Draft/modernize the Investment Policy Statement; align asset allocation and risk thresholds to mission and time horizon.
   • Document delegation and oversight roles across the Board, Finance/Investment Committee, and investment manager — reducing ambiguity and audit friction.
2. Spending & Liquidity
   • Advise on the timing of annual disbursements and strategies to adapt to funding level.
   • Customize the portfolio based on an understanding of short-term and long-term spending needs. 
3. Reporting & Education
   • Report regularly and transparently.
   • Meet with the finance committees and boards to ensure they fully understand the portfolios for which they are responsible.
   • Provide open access to our investment professionals and client advisors.

Conclusion

Our decades of experience managing assets for foundations and endowments have been instrumental in helping mission-driven organizations — both local and national — achieve meaningful growth and impact. We believe our differentiated investment style, combined with a partnership-focused administrative approach, provides a strong foundation for success. As a boutique firm, we deliver high-touch service tailored to each client’s needs, and our independent ownership ensures long-term alignment with their values and goals.

Whether we manage a sleeve or an entire portfolio, our commitment remains the same: enabling trustees to demonstrate duty of care with confidence, uphold loyalty through transparent procedures safeguarding against conflict of interest, and ensure mission alignment through thoughtful capital deployment.

Supporting non-profits is more than our profession — it is our passion. Many at Osterweis actively serve on boards across diverse communities, giving us firsthand insight into the challenges and opportunities facing foundation and endowment leaders. This perspective allows us to be not just investment managers but true strategic partners.

About Osterweis Capital Management

Located in San Francisco, Osterweis Capital Management is a trusted investment management firm with extensive experience serving foundations and endowments in the Bay Area and nationwide. Our boutique approach combines disciplined portfolio management with personalized service, helping mission-driven organizations achieve long-term financial sustainability.

Nael Fakhry

Co-Chief Investment Officer – Core Equity

Gregory Hermanski

Co-Chief Investment Officer – Core Equity

John Osterweis

Founder, Chairman & Co-Chief Investment Officer – Core Equity

Carl Kaufman

Co-President, Co-Chief Executive Officer, Chief Investment Officer – Strategic Income & Managing Director – Fixed Income