Endowment Managers Consider How to Handle Downturn

By Ben Gose

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Some investment committees at charities and foundations plan to hold special meetings to assess their endowments' exposure to the most toxic stocks in the Wall Street crisis.

But so far, few nonprofit organiations and foundations are panicking and selling stocks to preserve capital.

"You have to have a decision framework before this stuff starts flying," says Jonathan Hirtle, chief executive of Hirtle Callaghan, which manages more than $12-billion for endowments, foundations, and pension funds. "If you don't, when you get in a bind like this, you really don't know what to do."

Mr. Hirtle says most charities and foundations have asset-allocation plans that call for rebalancing when one asset class gains or drops significantly.

"If they're disciplined and they have a strong committee, today they would be buying value stocks, which includes financial stocks, but I would make the case that most of these committees are probably wavering. They're saying, 'We can't buy financial stocks — look at what's going on.'"

Seeking Outside Help

Investment experts say the extreme volatility in today's markets will probably lead more investment committees to hire outside companies to handle the day-to-day oversight of their endowment, a trend that has been under way for years.

The tradeoff is that professional management comes with higher fees — and if the markets produce the kind of returns in the next decade that they have produced in the last decade, management fees alone will eat up a large percentage of an endowment's return.

Even so, experts say that many small and mid-size charities and foundations look at the returns generated by the biggest endowments and hope to figure out a way to get closer to those kinds of returns.

Harvard University, for example, earned 8.6 percent for the fiscal year ending in June — a period during which endowments overall posted losses.

"Do you want a team of people thinking about this each and every day, or do you want to do it with volunteers every three months?" asks Daniel J. Jick, chief executive of HighVista Strategies, a Boston firm that manages money for small and mid-size endowments and foundations. "It seems the former ought to be able to deliver more. The truth will be in the numbers."

Some investment managers say the volatile markets have created bargains.

Brian L. Jones, president of Consulting Services Group, a Memphis, Tenn., company that provides investment advice to endowments, foundations, and pension plans, sees value in areas that have been hit hard, including emerging-markets stocks, real estate investment trusts, and U.S. stocks.

"We want to enforce that discipline of buying low," he says.

James J. Burns, an investment manager in Melville, N.Y., who works with several nonprofit endowments, says he is attracted to certain secured corporate bonds that are yielding 10 percent. "This might be a good time to go 60/40 bonds to stocks," he says. "Now is the time to be looking out into the world and saying, Where am I getting the most bang for my dollar with the least amount of risk."

Spending Policies

Some nonprofit organizations are already "looking at situations where their ability to maintain their spending policies is being seriously challenged," Mr. Jones says.

Most endowments use a three-year average of their endowment's value to determine how much money they will spend.

But Mr. Jones notes that a weak economy could be around for awhile, and charities will have to do more than just monitor their investments.

Many also will have to make tough decisions about cutting budgets, and tread the sensitive waters of deciding how hard to push donors who are having trouble meeting their pledges.

"Charities are going to have their hands full," Mr. Jones says.