Question: We are concerned about performing our proper due diligence where management of our corpus is concerned and would also like to know how our foundation compares to similar ones in their corpus growth. In addition, what role, if any, should money manager consultants play in shepherding assets?
Answer: The Roundtable staff canvassed a number of experts and practitioners on these questions, and the two most valuable replies came from the head of a mid-sized foundation and the founder of a small family foundation who also has experience as a money manager.
First, here is the case for independent outside consultants, as put forth by the mid-sized foundation head: When his foundation was established, long before he arrived, its assets were managed by a board member who was a banker. The man invested the funds in a very conservative way, mostly in Treasury bonds. After a while, the board as a whole decided to manage the money, which proved to be an imprudent policy. After the current president arrived, he selected outside consultants who were then brought in for a day-long meeting with the foundation’s board of trustees to discuss possible ways to manage the corpus. The president believed that this sort of face-to-face, detailed discussion was the best way for the board to contemplate the various avenues open to them and also to become more familiar with the consultants that the president thought were the best available. In a larger foundation, of course, the board might delegate such work to an investment committee.
The day-long meeting was highly educational for the board, which found itself much impressed by the consultants and decided to hire them to oversee the selection of money managers for the corpus and the investment strategies to be used. That was 8 years ago, and the foundation has been pleased with the consulting firm’s supervision of its funds. The foundation receives quarterly reports from the consulting firm and reconsiders the arrangement each year at a board meeting after receiving an advance written report.
The foundation president notes that similar sorts of arrangements are common with the boards of colleges (or their investment committees). He believes that independent outside consultants are best for choosing money managers (and of course, often an investment consultant firm also has money managers on its own staff). The president adds that asset allocation for a corpus will depend on such factors as the percentage of payout a foundation desires, whether the foundation intends to exist in perpetuity, etc. In the case of his foundation, which is perpetual, they have decided to grow their corpus by taking some risks in their investments. Their spending is then adjusted as needed, according to each year’s returns.
The specifics of their investment plan involve using five money managers who are each given responsibility for 20 percent of the corpus. The foundation has taken the unusual route of investing entirely in equities, but the reward has been returns, until recently, of as much as 20 percent.
A somewhat different argument was made by the family foundation founder who has experience himself as a money manager. He warned that outside consultants tend to churn through the money managers they help hire, which means a foundation’s assets are churned as well, often leading to lowered returns. Frequent switching of money managers helps consultants justify their existence; so they have an incentive to do just that. Another temptation consultants face, which also helps justify their own position, is to champion investment fads that in the long run don’t produce good returns.
The founder-money manager urged foundations to measure their rates of return on assets against overall market indices; if an organization is close to that mark over three- to five-year periods, it is shepherding its corpus well. He believes that most foundations, by this measure, are performing satisfactorily, while many investment consultants are not. His summary advice: Diversify and settle for decent returns, rather than chasing after the latest investment schemes.
He also warned of one other danger. Money manager consultants who specialize in foundation work often steer more than their clients’ money. That is, they tend to enmesh clients in the larger foundation “establishment” of associations and experts of all kinds, who in turn can take a foundation that is innovative and independent and slowly nudge it into complacent, establishment thinking and “safe” grantmaking. Far better, he concludes, to play it safe with one’s assets and take risks in grants that strive for excellence in the advancement of freedom, opportunity, and personal responsibility.
Scott Walter is editor of Philanthropy. The questions and answers presented here are illustrative only and should not be considered tax or legal advice. Please consult with a nonprofit attorney or other qualified adviser for answers to specific questions. Send your questions to DonorQandQ@philanthropyroundtable.org.