Charities Seek Ways to Offset Financial-Investment Losses

Charities, including many on this year’s Philanthropy 400 list, have lost billions

of dollars in the value of their investment portfolios this year, prompting some to rethink how they invest and spend money.

Colleges, hospitals, and other nonprofit organizations suffered investment losses of 7 percent, on average, from January 1 to October 15 of this year, according to the Spectrem Group, a financial-consulting and research company in New York. The company estimates that 21,700 groups have endowments valued at a total of about $602-billion, down from $618-billion at the end of last year.

The losses, a result of a roiling stock market and sputtering economy, mark the first negative returns in a decade or more for many organizations. And while many groups are sticking with the investment strategies that paid off well in the high-flying economy of the 1990’s, others are shifting assets — at least slightly — to stave off deeper losses.

With earnings from venture-capital investments drying up, Memorial Sloan-Kettering Cancer Center, a New York organization that is No. 85 on the Philanthropy 400 rankings, has put a hold on investing in any new such deals, which typically involve buying an ownership stake in a new company.

To avoid selling securities at a time when share prices are so low, Ducks Unlimited (No. 174), in Memphis, has slowed plans to change its investment allocation to include more value stocks, undervalued equities that often pay high dividends. And concerns about a bear market have led the Art Institute of Chicago (No. 235) to move a bit more money into hedge funds, pools of money that are used to purchase securities meant to balance market risk.

But even at those organizations and others that are tinkering with investments, charity officials and their financial advisers are trumpeting a stay-the-course approach.

“We’re not going to make major changes just because we’ve had one year of negative returns,” says Robert Mars, the art institute’s executive vice president of administrative affairs. For the 12-month period ending June 30, 2001, the museum had posted a negative 3.3-percent rate of return.

To offset investment losses, some charities are aiming to cut spending. The Minneapolis Foundation (No. 284), which estimates that market returns were about minus 11 percent last quarter, has postponed hiring anyone for a new fund-raising position it had planned to fill last month. Ducks Unlimited is cutting back on travel by staff members and reviewing employee benefits.

Not all charities count on their investment portfolios to make money for their operating expenses. Some invest only what they consider to be their savings or reserve funds, rarely drawing from their accounts even when they produce high earnings. Charities that do regularly draw from their investment portfolios usually spend a certain proportion of the assets each year.

Community foundations, for example, which raise and distribute most of their money in specific geographic areas, typically spend between 4.5 and 6.5 percent of the average of their assets over the most recent three-year period. “Many of us may have looked really chintzy in years when market returns were 20 percent and we were giving out 5 [percent],” says Raymond J. Biddiscombe, vice president for finance and administration at the Columbus Foundation (No. 199), in Ohio. But, he says, the market’s recent downturns show the value of sticking to spending limits and saving money when times are flush.

Mr. Biddiscombe estimates that the Columbus Foundation’s investments will lose between 8 percent and 10 percent this calendar year. But since some of the investment losses will be made up through new gifts, the fund’s total assets will not drop at the same rate, he says, and grant making next year will probably decline by only 3 to 5 percent.

National Jewish Medical and Research Center (No. 380), in Denver, is among what is probably a small group of charities that posted double-digit gains for the year ending June 30, 2001. The center’s treasury manager, Jennifer Powers, attributes the 22-percent return to the group’s heavy emphasis on value stocks, as opposed to those with high-growth potential and high risk. But, she notes, holding such stocks also meant that earnings were relatively flat, even occasionally down, during last decade’s unprecedented bull market. “Once again,” she says, “we learn that patience is a virtue in the market.”