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