Charity's Declining Fortunes - Philanthropy.com

Related materials

Special Report: Endowments at Nonprofit Organizations

Table: The Chronicle's Annual Endowment Survey: By the Numbers

Article: How The Chronicle's Survey of Nonprofit Endowments Was Conducted

Article tools

Printer friendly	E-mail article	Subscribe

Discuss any Chronicle article in our forums

The bear market that began 18 months ago slashed the value of most endowments in 2008, including even the large college endowments that over the past decade have sharply outperformed their peers by piling into alternative investments like hedge funds.

In The Chronicle's annual survey of endowments, the 60 whose fiscal year ended in December suffered a median decline of 25.4 percent for 2008 — meaning that half lost more and half lost less.

The sharp drops are causing some charities to dump some riskier investments to raise cash. More charities are also handing their endowments over to an outside manager, rather than relying on a rotating group of volunteer investment-committee members to make decisions at quarterly meetings.

"The key to running a perpetual endowment is to have consistency," says Robert L. Thalhimer, senior vice president for advancement at the Community Foundation Serving Richmond and Central Virginia, which turned over management of its endowment to the University of Richmond in 2008.

The value of endowments held by all 229 organizations in The Chronicle's survey declined by a combined $29.1-billion from 2007 to 2008, and 112 of those lost an additional $17.5-billion in combined value since their 2008 fiscal years ended.

Endowments moved heavily into "alternative investments" like hedge funds, real estate, and private-equity funds over the past decade, on the theory that those asset classes would provide strong returns that were often uncorrelated to the stock market. But in 2008, nearly every asset class declined, and alternative investments provided only a modest buffer.

None of the endowments in The Chronicle's survey suffered a return as poor as that posted by the Standard and Poor's 500 index, which dropped more than 38 percent in 2008. Hedge funds helped boost returns. They dropped just 19 percent, on average — half as much as stocks, according to data compiled by Hedge Fund Research Inc., in Chicago. But some endowments may not be fully reflecting losses in private-equity funds, since returns by those funds are often reported three to six months later.

The worst may be over, if the first-quarter change in endowment value at organizations whose fiscal years ended in December is any indication. Among 28 organizations that offered recent updates of their investment performance, the median change in value in the first quarter of 2009 was a decline of 4.3 percent. The returns at the biggest college endowments, like Harvard and Stanford Universities, are probably no worse than those at most other colleges or charities, but their pain is more acute because such institutions rely on their endowments for a huge portion of their spending.

Harvard's endowment, which nearly reached $37-billion last June but had reportedly lost as much as $8-billion by December, provides a third of the university's budget. At Ohio State University, meanwhile, the $1.6billion endowment provides just 3 percent of the budget.

Harvard borrowed $1.5-billion, and is trying to sell certain alternative investments, to generate cash to help cover its operations. The university has also frozen salaries and delayed a planned campus expansion.

Some endowments with strong relative returns in 2008 benefited from an element of luck.

The $1.1-billion McCormick Tribune Foundation, in Chicago, entered 2007 with most of its endowment invested in the Tribune company, which owns newspapers and television stations. By the end of 2008, Tribune was bankrupt, yet the foundation had one of the better returns in the 2008 calendar year, losing just 13.2 percent.

The foundation cashed out when the billionaire Sam Zell bought Tribune at the end of 2007, and so suffered no ill effects when he drove the company into bankruptcy less than a year later.

As of December 2008, the foundation had 60 percent of its assets in cash and bonds.

"We're kind of fortunate to be building a portfolio at this point in time," says David Granat, the foundation's chief investment officer.

The carnage in the stock market may have a few silver linings for some institutional investors, including endowments.

Some investors, including the California Public Employees' Retirement System, are pushing for lower fees and less-strict "lock-up" requirements from hedge funds. Several hedge funds have reportedly been willing to negotiate certain terms, though top funds like SAC Capital still command extraordinarily high fees (3 percent of assets per year, plus additional fees based on performance).

"True investment talent is still a scarce resource," says André Perold, a professor at Harvard Business School and a founder of HighVista Strategies, in Boston, which manages $1.7-billion for more than 100 investors, including charities and colleges. "The great firms have a line around the block trying to get in, even today."

The decline in endowment values may also reduce the likelihood of the introduction of legislation aimed at forcing wealthy colleges to make a minimum payout from their endowments each year, as private foundations must do.

Lynne Munson, an independent researcher who has testified before the Senate Finance Committee, says colleges have succeeded in making the endowment-payout conversation "more complicated" by "creating the illusion of poverty where there is none."

"They're back to their values in 2005," Ms. Munson says. "They were already fabulously wealthy in 2005, and they remain fabulously wealthy today."

Sen. Charles E. Grassley, the senior Republican on the Finance Committee, who has pressured colleges to spend more to reduce costs for students, does not seem inclined to abandon the issue.

"Contrary to what colleges might argue, the weak economy makes a strong case for more endowment spending on student aid," he said in January, after the National Association of College and University Business Officers released its annual survey on college endowments. "If an endowment is a rainy-day fund, it's pouring. Colleges' smart saving and investing could really help students right now."

The struggling stock market may also prompt more foundations to consider tying investments to their mission, on the theory that if their money is not growing anyway, why not earn a "social return" on it?

Forty-one of 229 respondents in The Chronicle's survey said they had put a portion of their endowment in investments that further their organization's social mission.

For some foundations, mission-related investments outperformed their other holdings in 2008. The Annie E. Casey Foundation, in Baltimore, puts $100-million of its $2.3-billion endowment in mission-related investments, such as loans to support economic-development projects in low-income areas.

In 2008, "the mission-related investments had a positive performance when everything else was negative," says Burt Sonenstein, the foundation's vice president and chief investment officer.

The volatility in the markets has led many investment committees to replace their money managers. A quarter of the 229 respondents to The Chronicle's survey said they had changed investment managers, and another 25 percent said they were considering doing so. Twenty-two percent of organizations said they had made "significant changes" to their investment strategy.

Some investment committees have decided to delegate their tasks to an outside firm.

"It's a very daunting task in a complex environment like this one," says Carolyn McLaurin, a senior vice president at SEI Institutional Group, in Oaks, Pa., outside Philadelphia, which manages endowments for about 100 charities. "Investment committees have some very smart people on them, but those board members are busy with their own jobs. They're volunteers. It takes a lot of time to do this work effectively."

An increasing number of charities are commingling their assets with the assets of another nonprofit group that has a proven track record for managing an endowment.

The Community Foundation Serving Richmond and Central Virginia, and the Citadel, the military academy in Charleston, S.C., both turned over management of their endowments to the University of Richmond in 2008.

The Richmond community foundation already had a sophisticated investing mix, with roughly 45 percent of its assets in alternative investments, before teaming up with the university. But Mr. Thalhimer, the advancement vice president, says the organization's board came to believe that the university's in-house operation was simply more likely to earn high returns than the portfolio assembled by the community foundation's investment committee, which meets four times per year.

For the 10 years ending in December 2008, the community foundation returned 2.9 percent on average per year, handily beating the negative 1.4 percent average for the S&P 500. But the University of Richmond earned 9.2 percent on average per year over that period.

"There's something about their system," Mr. Thalhimer says. "It was consistently outperforming our system over good years and bad years. It is just a better system."

The community foundation will pay a high price for that expertise — in addition to sharing proportionately in the costs that the University of Richmond incurs, the community foundation will pay the university an additional fee of roughly 1 percent per year, depending on performance.

"People who make decisions strictly based on cost would have said, 'No go,'" Mr. Thalhimer concedes.

Some investing experts believe that most endowments are paying high fees to managers for returns that are likely to disappoint over the long term.

In a recent interview with Pro Publica, a nonprofit journalism site, David F. Swenson, the chief investment officer of Yale University's endowment, said most endowments are on a fruitless search for market-beating returns, and should abandon active management in favor of passive investments like index funds. (Yale's endowment earned an average 16.3 percent per year for the decade ending in June 2008, trouncing the S&P 500, but its value had dropped roughly 25 percent by December, according to its president, Richard Levin.)

"The investment management world is a strange place in that the right solution is not in the middle," Mr. Swenson told Pro Publica. "The right solution is at one extreme or the other."

The Dallas Foundation's is among the few endowments that have fully committed to indexing.

The community fund's $16.1-million endowment, which has 60 percent of assets in stock and 40 percent in bonds, lost 22.3 percent in value in 2008, slightly better than the median for endowments with a December fiscal year in The Chronicle's survey.

The foundation's simple approach to investing appeals to its donors, says its president, Mary Jalonick. "We have to send each one of those donors a report every quarter," Ms. Jalonick says. "An investment strategy that we can explain fairly easily is important to us."

The strategy means the community foundation's investment fees are minuscule, compared with those incurred by the average grant maker. And the foundation spends virtually no time evaluating the quality of its managers, according to Bill Solomon, the fund's chief financial officer, since it has settled for the returns earned by stock and bond indices.

"All those things," he says, "stack up to make our approach a no-brainer for us."