In this Observations piece, we explain the process for developing an investment strategy for a Private Ancillary Fund (PAF). We outline the key factors we consider at each stage of the portfolio construction process, including understanding the donor’s objectives, developing an appropriate asset allocation, selecting instruments, and managing risk.

  • PAFs, which are a type of charitable trust that are commonly established by individuals, families or business groups for philanthropic purposes, have the flexibility to invest in a wide range of assets with very few restrictions. However, the PAF must distribute at least 5% of its net assets to eligible charities each year.
  • While the risk/return outcomes for our standard and PAF portfolios are broadly similar, an optimal allocation to domestic equities for those investors able to take advantage of franking credits is the main variable. Instrument selection within PAFs can also take a varied approach; the main elements we look to tie into the instrument selection for PAF solutions are the distribution requirement, fees, increased focus on alternative investment opportunities and values.
  • With a very long-term investment horizon, we have observed a growing number of PAFs that are more inclined toward the endowment-type approach. To this end, there have been considerable changes in how portfolios are constructed in recent years, with many investors implementing larger allocations to alternative assets rather than investing a larger proportion to fixed income.
  • PAFs are increasingly viewed as more than just an investment outcome, with a growing emphasis on tackling both simple and complex problems in society. Our PAF model blends funds that have environmental, social and governance (ESG) screens, sustainability themes, as well as funds with an impact focus.