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INVESTMENTS:
SAFE HARBOR FOR FOUNDATION
AND ENDOWMENTS


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

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

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.

“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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