Charitable Endowments

It is very likely that the endowment that supports your non-profit organization has the potential to be a robust, growing source of funding that can:

        • Expand the reach of your programs
        • Reduce your fundraising burden
        • Increase donor confidence
        • Raise community awareness

However, it is also likely that this potential has not yet been realized. Non-profit investors, such as foundations and endowments, have unique needs and challenges that are different than those faced by individual investors. Serving on various non-profit boards and finance committees has allowed me the opportunity to view these challenges from the perspective of the client, which has had an enormous influence on my investment and risk management philosophy and has made serving on these committees even more rewarding and interesting.

A properly managed endowment is like a snowball rolling downhill, not only can it fund an expanding list of good things, but its own success can often be its most effective fundraising tool. Donors like giving to foundations or endowments because we like the idea that a gift today has the potential of providing funding tomorrow, next year and fifty years from now. The idea of making a gift that can have a multi-generational impact is powerful, but to carry any weight, the donor has to have confidence in the stewardship of those funds. Unfortunately, effective stewardship is surprisingly rare.

A common handicap is the transitory nature of the board of directors and finance committee members that provide oversight. Often, as finance committee members come and go, the advisor remains the one constant and can ultimately wield an unsuitable amount of influence. Compounding the issue of nomadic directors is a problem I refer to as “renters bias.” Because no real person actually owns the endowment, the impulse to yield responsibility to the advisor can be particularly strong. The absence of a direct stake dulls the pain felt by bad decisions and makes us more willing to conform to consensus and the status quo.

Another common problem is benchmarking. Committee reviews of endowment performance are typically very superficial. Returns are usually compared to how the market did or how other endowments of comparable size fared. When looking at the individual investments that make up an endowment portfolio, normally they are each compared to a particular index like the S&P 500 or the MSCI EAFE or the Lehman Brothers Aggregate Bond index, etc. Unfortunately, we seldom know much about these indices or why we should care about them.  More importantly, by focusing on performance relative to these faceless concepts, we remove our focus from the primary goal of an endowment – to support the mission of the organization. In benchmarking terms, if the market is down 30%, a corresponding holding that is only down 25% looks like a big winner. In real world terms, these kind of ‘big winners’ can be the start of a death spiral of forcibly reduced spending, reduced relevance and reduced donor confidence.

Donor correlation is another commonly overlooked issue. Most endowments are, and should be, growth investors. However, charitable organizations have a risk issue that most growth investors don’t. They depend on donations from other growth investors to both fund current operations and add to the corpus of the endowment. When the market suffers a setback, not only does the endowment portfolio suffer along with it, but donations fall at the same time. The endowment is least able to support the programs of the organization at the exact moment the support is most needed. Growth should be pursued, but not at the risk of putting the mission of the organization in peril. A risk management plan should always be an integral part of the investment plan.

Fortunately, these isssues, and many others, can be solved without incurring expense or a great deal of extra time. Effectively managing a charitable endowment means focusing on a few, big picture items:

        • Defining goals
        • Setting investment policy consistent with those goals
        • Recognizing and discussing risk factors
        • Measuring progress

Obviously there is some nuance that goes into these items, but to keep everyone engaged and effective, it’s important to resist overcomplicating the issues. Too often, investment policies seem to be written as part of some kind of painful ritual. What could be a usable, effective, four or five page document becomes a bloated monstrosity that is rendered impotent on arrival due to the fact that nobody will ever read it.

Is your current advisor talking with you about these topics? Do you have a risk management plan in place? Is the performance of your endowment compatible with the bigger mission of your organization? If you would like a partner to help you unlock the potential of your endowment, I invite you to contact me today.

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