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Foundations,
Endowments, & Not-for-Profit Organizations (also
small
& private)
Foundations, Endowments and Not-for-Profit organizations
come in all
shapes and sizes. The assets that they control and manage for the
benefit of countless projects, charities, and causes is staggering in
total and has become a primary market for the vast array of investment
products developed by Wall Street financial institutions. One
can only speculate about how much "Bubble Paper"
finds its way into the these portfolios, but nearly all of them are
managed by the major brokerage firms, and all such firms bonus their
brokers on the basis of product sales. It is not uncommon for Wall
Street to re-write the syllabus for Investments 101, redefining
Quality, Diversification, and Income to suit its own dark purposes...
If you were to look back at your
foundation/endowment/not-for-profit portfolio of the late 90's, how much was invested
in NASDAQ issues, either directly or in the form of mutual funds?
Dot.coms? Don't be at all surprised if your more recent reports (2006
thru 2008) are replete with CMOs, CDOs, Index Funds, Foreign
Investments, etc. This is the type of investing that is standard fare
on Wall Street and it is certainly something that you need to be
concerned about. Wall Street Pros always move the money toward
whatever is popular at the moment. Always. No matter how it is labeled, this new-age,
scientific, asset management is just one speculation level above
options, commodities, and futures. You don't need to go there to
achieve the goals of your organization... plain vanilla stocks and
bonds are not broken, they have just been replaced with better income
generators, but just for the Wizards. I hope that I've gotten your
attention.
From what I've been reading, it seems that the
disbursement-budget determination process in some organizations is based
on information that has absolutely nothing to do with the portfolio's
ability to generate the money being disbursed. Similarly,
it appears as though all investments are expected to grow in market
value irrespective of where mother nature's investment twin is in her various cycles. Somehow, a higher market value translates into a
(theoretically) higher
availability of disbursable funds, when, in fact, no such relationship
exists. Some organizations determine their annual disbursement budget
based on the average market value of the investment portfolio over the
past several years. If the investment markets cooperate, and the
market value remains above the average, the disbursements take place
as scheduled. If not, some beneficiaries may have to go without. This
is unnecessary, as well as absurd. The average market value of
the portfolio is not what determines the amount of spendable income
the portfolio produces. This approach also assures that payouts will
decrease just when they are needed the most... when the market is in a
prolonged correction, donor contributions are down, and interest rates
or inflation (or both) are trending higher.
Let's say, for example, that we have a portfolio
invested solely in government bonds yielding 6%. This 6% will be
available for disbursement regardless of the direction of the
portfolio market value. Lower valuations are always opportunities to
add to holdings. Similarly, a portfolio invested in equities
with an average dividend yield of 1.5% just will not cover a 4%
disbursement nut unless something is sold... a sale which could well
be a losing transaction. (Wall Street pros take losses quickly, but
rarely take profits in the same manner.) The amount of base income produced by a portfolio
is very predictable. In the case of most foundation and endowment
portfolios, the rate of annual additions from contributors can also be
safely, and conservatively, estimated. Creating a portfolio that produces enough income to
cover programmed disbursements, even with a three-month money-market
reserve, is simply simple... and has absolutely nothing to do with the
portfolio market value. Another thing to look for, as a trustee or
director of your organization is the profitability of sales
transactions. The results may surprise you.
Inflation is a purchasing power issue,
and purchasing power depends on income. Hoping, as many people do, for
the upward only portfolio-market-value scenario, is comical at best. A
properly designed portfolio will constantly generate increasing levels
of base income... the income from which disbursements will be made. If
the payout rate to beneficiaries is 4% (of Working Capital, perhaps) and we want to
increase the dollar amount of the 4%, we need simply to increase the
number of bonds, preferred shares, REITs, etc. that are producing the
income. Increasing the market value of the securities looks good but
generates no additional regular spending money. In fact, higher
yields are always more available when prices are down than when
they are up... go figure. Really, go figure.
If we can (through proper asset allocation, and
a portfolio management methodology that focuses on productive capital)
increase our investment in our income producing securities base, we
can stay ahead of inflation and satisfy our commitment to whatever
cause it is that concerns us. This can be done with much less risk
than most not-for-profit board members have become used to in recent years
while they blindly chase the gold ring of ever higher market values.
Market value, though, will cycle to new highs periodically, as the
stock market, interest rate, and business cycles move on down, and up,
the road. Isn't the primary purpose, after all, to grow the
distributed benefits?
As important as income is to the achievement of
your disbursement goals, there is certainly a place for a diversified
portfolio of Investment Grade
Value Stocks within the asset allocation. You will have difficulty
convincing your broker to stick with IGV stocks, and to trade them for
short term profits. Frankly, most are inexperienced at doing so. But
your tax status, size, and mission are perfect for this kind of
strategy. Your investment manager should take care of the income part of
the asset allocation first, before venturing into the riskier realm of
equities. Stop! No matter what you've been told lately, quality
income investments are always less risky than equity investments. What
about the 2007 CDO mess? Junk is junk, no matter how pretty the
package.
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