With rising interest rates, fixed income investment returns are expected to be significantly lower than historic averages. In order to generate the returns to meet recommended gift annuity rates, a greater allocation to equities may be necessary.

As interest rates begin to rise, bond returns will be lower and nonprofits that issue charitable gift annuities will need to reassess both their overall asset allocation and their annuity program goals to maximize the probability of positive outcomes.

1

Forecasts Show Lower Real Returns on Taxable Bonds

In a rising interest rate environment, fixed income assets will not generate the kind of returns investors have seen over the past 30 years.

2

Even Modest Interest Rate Increases Can Significantly Impact Bond Returns

An investment in a “risk-free" 10-year U.S. Treasury bond would decline 4.9% with a 1% rise in interest rates.

3

“Playing It Safe" May Mean Not Reaching Gift Annuity Targets



Relying on bonds to generate returns sufficient to sustain and grow charitable gift annuity pools may ultimately lead to disappointing results for nonprofits.

4

Adjust Charitable Gift Annuity Objectives to Align with Risk Tolerance



For nonprofits, clearly defining gift annuity objectives and aligning them with risk tolerance will help to manage expectations as to the level of support gift annuities will provide in the future.

5

Despite Recent Volatility, Equities are Attractive Relative to Fixed Income

A stronger U.S. economy, an expected pickup in earnings growth during the second half of the year and continued dollar strength support our recommendation to overweight equities.

4.1%

The average annual real returns (after inflation) on investment grade bonds since the mid-1980s.

1%

Yearly real returns for taxable bonds after inflation, based on our current 7- to 10-year capital market assumptions.

50%

The ACGA's recommended residuum assumption for gift annuity rates.

“Now, more than ever, it is important to have a disciplined, long-term approach to asset allocation.”
Facing uncertainty, nonprofits should re-evaluate asset allocation
Recognize that the bond bull market may be over

Recent market volatility and fears of a global economic slowdown have many questioning whether the Fed will enact additional interest rate increases.

Review risk objectives and asset allocation

Faced with the prospect of lower expected investment returns on fixed income, nonprofits should critically review expectations, goals and current allocation.

Take a disciplined approach to adding equities

When considering a long-term increase in equity allocation, gradually add to equity exposure over time to minimize the impact of short-term market volatility.

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