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INVESTMENTS:
SAFE HARBOR FOR FOUNDATION
AND ENDOWMENTS
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By Bob Schaper
Most money managers agree it’s hard enough to grow an investment
portfolio during a bear stock market. But imagine being required—by
federal law—to give away five percent of a portfolio’s assets every
year.
John Prosperi, a managing director at Argent Capital, who manages
$500 million worth of foundation and endowment portfolios, knows
exactly what the challenge is like.
“For an endowment or a foundation there are a whole different set
of issues than there are for an individual,” Prosperi says. “Non-operating
foundations have a five percent requirement that they have to pay
out of their total portfolio each year.”
Prosperi says a non-operating foundation is one not devoted to any
particular institution. He cites one of his clients, the Sunnen
Foundation, as an example. “They will donate money to a number of
charitable causes,” he says.
Fluctuations in the stock market can have dramatic effects on the
long-term viability of foundations. “If you’re paying out five percent,
and you also have expenses in operating your endowment, you’re looking
at paying maybe six or seven percent a year,” Prosperi says. “In
a market like this, you run the risk of being in a situation where
you’re losing dramatic amounts of money. You’ll never be able to
recover from that.”
"IT'S
NOT GOING TO COME FROM STOCK PICKING OR TIMING THE
MARKET. IT'S HOW YOU DIVIDE YOUR ASSETS BETWEEN STOCKS
AND BONDS AND CASH, AND HOW YOU FURTHER SUBDIVIDE
IT INTO INDIVIDUAL SUB-STYLES."
Mike Ferman
managing director,
RBG advisers
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Operating foundations—sometimes called endowments, because they
are tied to a particular institution—are not subject to the five
percent rule. But Prosperi says the situation can be just as bad
for them, if not worse. “A lot of operating endowments are paying
a much greater amount—10 or 15 percent of their investments—to support
their institutions,” he says.
Prosperi says it all adds up to a real crisis.
“Say your overall account is down by eight percent, and then you
have to pay out six or seven percent for two or three years in a
row. It doesn’t take long at that pace where even if the next year
you have an up 20 percent year, you’re never going to recover. You’ll
spend yourself out of existence by sticking to that strategy.”
Indeed, some foundations have done just that.
“Many endowments that thought they would go on in perpetuity to
support charitable groups, aren’t going to go on in perpetuity,”
Prosperi says. “In fact, they’re not going to last another five
to 10 years, and they’ll run out of money.”
Still, there are strategies that can help managers make it through
the tough times. Mike Ferman, managing director at RBG Advisers
says the secret to long-term stability is proper asset allocation.
“It’s important to understand where returns come from in an investment
portfolio,” Ferman says.
DAVID
LUCKES
CEO and president,
St. Louis Community Foundation |
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Modern portfolio theory was developed in the late 1980s after a
Nobel Prize winning study showed that 90 percent of a portfolio’s
return comes from asset allocation. “It’s not going to come from
stock picking or timing the market,” Ferman says. “It’s how you
divide your assets between stocks and bonds and cash, and how you
further subdivide it into individual sub-styles.”
Ferman advises foundation and endowment managers to clearly determine
what the purpose of the portfolio is, including its cash flow needs.
“Those kinds of decisions will help determine what the asset allocation
is,” he says. “It fluctuates not depending on the market, but depending
on what the goals and objectives of the portfolio are. That will
drive your asset allocation, and your asset allocation will drive
your returns.”
One option available for wealth holders is the St. Louis Community
Foundation. David Luckes, CEO and president, says his organization
strives to deliver value in supporting philanthropy for the region.
The foundation, with assets totaling close to $70 million, functions
much like a private bank. “We set up a fund, negotiate a document
that reflects what the donor wants, how it’s going to work and what
their role is going to be,” Luckes says. “The assets get transferred
to us, and then we hire investment management for those funds.”
Luckes says the foundation does everything from strategic planning
to basic check writing services. “A donor calls us and says I’d
like ‘X’ amount of dollars to go to this organization,” he says.
“We process that grant recommendation, do some due diligence on
their behalf, making sure the charity is a charity, and then we
cut a check, usually within a week.”
Because the St. Louis Community Foundation is a public charity,
Luckes says the tax advantages are better than a private family
foundation. “We give them better tax advantages, because we are
a public charity and that has a preferential tax status to a private
foundation,” he says. “If you’re an individual donor and you want
to function in the least regulatory and the highest tax preference
environment, we’re a good alternative.”
The Foundation also acts as an educational resource for families,
even if they choose not to donate their assets. Luckes says, “If
we help a family better understand their options and give them a
little strategic advice and they go on to do something great for
St. Louis—whether through us or not—then I think we’ve done a good
job.”
Back at Argent, Prosperi says some fund managers have also turned
to riskier, so-called “total return investments,” such as hedge
funds. “The larger endowments and foundations out there are turning
more and more to absolute return strategy products,” he says. “It’s
an effort to have some piece of their portfolio not subject to market
equity returns.”
Unfortunately, many foundations have voluntarily closed their books.
“They’re deciding that no longer is this foundation going to go
on in perpetuity,” Prosperi says. “So instead of making these relatively
small payments to a lot of different groups, they make a couple
of really big, meaningful payments to some charities and spend themselves
out of existence.”
INVESTING IN WORTHWILE PROJECTS CAN BENEFIT COMPANIES
By Bob Schaper
A wise man once said, “Those who give cheerfully give twice—once
to others, once to themselves.” One local executive says this
proves true not only for individuals, but corporations, as
well.
The
St. Louis History Museum, shown here, is one
of Emerson’s philanthropic projects.
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“I go down the hall and I’m always telling everyone, you’ve
got to drive through Forest Park,” laughs Jo Ann Harmon, a
senior vice president at Emerson. “You’ve got to see the Grand
Basin, it’s so wonderful. I watch it like a child.”
The Emerson Charitable Trust, which Harmon oversees, was instrumental
in making the renovated Emerson Grand Basin a reality. But
with annual donations totaling $20 million, Emerson’s contributions
to Forest Park (which include the Emerson Children’s Zoo,
and the Emerson addition to the History Museum) are just a
small part of its worldwide philanthropy.
Harmon says the company’s community involvement has a great
effect on employee morale—which translates into low turnover
rates. “A lot of it is because of the pride the people have
in the company,” she says. “It’s the fact that people feel
their company is involved, and that they, as part of the company,
get to represent the company. When we bring people to St.
Louis, I drive them right through the park and say isn’t this
wonderful, look what’s happening.”
Like most corporate trusts, Emerson’s focus is on communities
where the company is located. “Our primary objective is to
make those communities a better place for our employees to
live and work,” Harmon says.
Each of Emerson’s operating units allocates a certain amount
of their earnings to the trust. Harmon says the funds are
then returned to the units, based on their requests.
“They tell me what’s important in their community,” she says.
“We then follow their direction in making gifts. They directly
get results for recruiting and community involvement for their
employees.”
Volunteerism among workers is crucial, Harmon says, because
it builds pride in the company and the community. For example,
Emerson recently agreed to build a new park in a town devastated
by a tornado. “One of my requirements is that the employees
have to be involved in rebuilding the park, which they’re
all excited about,” Harmon says.
Most people agree that St. Louis is a powerhouse of corporate
giving. “I think the collaborations and partnerships in St.
Louis are just outstanding,” Harmon says. “St. Louis is very
special in that companies here are willing to share in making
things happen. In St. Louis, it happens.”
And for Harmon and the employees at Emerson, making it happen
is what matters most. She says: “The more we can do to leverage
the dollars we give, the better the community is going to
be.” |
Bob Schaper is a free-lance writer based in St. Louis. |
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