A Full-Time Leader Brings Steady Growth

Chart: Where Denver Foundation’s Endowment Is Invested

Table: Denver Foundation’s Endowment at a Glance

Related articles: View all of the advice and commentary from this special supplement on endowments
By JULIE NICKLIN RUBLEY

When David J. Miller became president of the Denver Foundation in July 1996, the fund had an endowment worth $50-million. Mr. Miller and his board realized, however, that the endowment was not likely to grow much if the foundation didn’t change its ways. Most of the endowment was controlled by local banks that were investing the money conservatively, primarily in bonds, and the foundation didn’t even have a full-time fund raiser soliciting new gifts for the endowment.

Mr. Miller acted quickly to remove those stumbling blocks, and the foundation’s endowment was worth $263-million at the end of December 2003, thanks to shrewd investing and strategic fund raising.

Among the steps Mr. Miller took was to put the assets under the foundation’s control. They are now invested in a variety of areas, including stock, real-estate, and hedge funds, and the returns have been beating market indexes. He also hired the foundation’s first professional fund raiser, and since then donations have soared. In 2003, the foundation brought in $50.1-million, compared with $6.6-million in 1995.

The Denver Foundation was created by a group of Denver bankers in 1925, and is one of the oldest community foundations in the country. It raises money from donors in the metropolitan Denver area and supports charitable causes in the city and surrounding counties. The organization has made nearly $100-million in grants since 1995, mostly to groups that focus on the arts, education, health, and human services.

Like many community foundations, the Denver Foundation has two main ways of operating:

• It invests unrestricted gifts and gives away a portion of the interest earned.
• It allows people to set up restricted funds, including donor-advised funds, that the organization manages and invests. Grants from those funds typically are made according to the donors’ wishes, although the foundation is not required to follow the donors’ advice. The foundation has 400 such restricted funds.

A volunteer ran the foundation from 1936 to 1973. It was led by a paid chief executive from 1973 to 1989, and a part-time leader served from 1989 to 1996.

“The growth was slow, but steady, for the most part,” says Mr. Miller. “It was a steady, uphill slope, rather than a steep hill followed by a plateau.”

The board had decided that when the endowment hit $50-million, the organization would need a full-time leader who would make major changes. Mr. Miller seemed a logical choice. A Harvard University-educated lawyer, he had worked for 10 years in budget and planning positions in Colorado state and local governments. From 1989 to 1996, he was a principal in a communications consulting firm. When he became the head of the Denver Foundation, he found his biggest challenge was getting the foundation’s message out.

“Virtually no one had heard of the foundation,” says Mr. Miller. “When I told people where I was going to work, they said, ‘What’s that?’”

Mr. Miller hired a full-time fund raiser, who was charged with building relationships with potential donors and soliciting gifts.

He also set out to change the local banks’ ways of thinking. Instead of looking at what each individual trust was earning, the banks were encouraged to look at the concept of a “total return” — or what all of the accounts were earning when considered as a whole. Mr. Miller also set up a “unitized accounting system,” in which each fund was given a certain percentage share of ownership in the overall fund, much like a mutual fund.

“It allowed all of our investors to think more about the long term,” says Mr. Miller. “And it allowed us to look at the funds as a whole so we could get more strategic.”

At the same time, any new money raised was invested by the foundation, and Mr. Miller took steps to move the organization’s assets that for years had been controlled by the banks to the foundation. By 1999 all of the transfers had been made, and the foundation had set up a structure and policy for investing.

“We became increasingly sophisticated in our investing,” says Mr. Miller. “And we could show donors impressive results, and that encouraged them to donate more to us.”

Today, the foundation’s assets are diversified: 36 percent is in stocks, 17 percent in bonds, 18 percent in absolute-return funds, 12 percent in hedge funds, and 17 percent in other assets, including real estate and private equity. (Absolute-return funds and hedge funds typically use investment strategies that are not tied directly to the performance of stocks and bonds.)

Foundation officials call it a moderate portfolio, neither very conservative nor very aggressive. “The strategy wasn’t designed to give us astronomical returns, but to protect us when the market is stagnant,” says William P. Johnson, a Denver lawyer who serves as chairman of the investment committee.

The committee, made up of seven people with experience in business and finance, works exclusively with Monticello Associates, an independent asset-management-consulting firm in Denver. To avoid any concerns about conflicts of interest, the Denver Foundation has a policy that no employee or trustee can have any ties to a business that provides services to the fund, a rule that governed the selection of Monticello.

The foundation pays Monticello a fixed quarterly fee to monitor the endowment’s performance, recommend money managers, and evaluate strategies. But the foundation makes the final decisions. “Our investment committee doesn’t just rubber-stamp what Monticello says,” says Mr. Miller.

The strategy has done its job. In 2000, when the Standard & Poor’s 500 Stock Index dropped by 9.1 percent, the foundation had a positive total return of 3.84 percent. In 2001 the foundation earned 0.96 percent, compared with a decline of 11.9 percent for the S&P 500. Even the foundation’s 4.04-percent decline in 2002 was stronger than the S&P’s loss of 22.1 percent.

Foundation officials say the nontraditional investments, like the absolute-return funds, have helped ensure that the overall returns beat market indexes. One fund, for example, invests heavily in companies involved in mergers. By buying and selling stock at critical times, the money manager will make money for investors if the merger occurs, but lose money if the merger doesn’t happen. Mr. Miller explains that the fund invests in so many companies that over all, the annual return comes out strong.

While all but one of the foundation’s investments in U.S. stock funds had negative returns (ranging from losses of 29.84 percent to 2.97 percent) in 2000, 2001, and 2002, the three absolute-return funds in which the foundation is invested earned from 2.46 percent to 27.3 percent.

The foundation’s investment results during the stock-market slump have impressed other community foundations. “Their performance has been really, really good,” says Henry L.P. Schmelzer, president of the Maine Community Foundation, who previously was the head of an $8-billion mutual-fund group. “For those three years, there were a lot of foundations — big and little — that lost 30 or even 40 percent of their assets, so for a foundation to come out of it having lost virtually nothing is extraordinary. They came out of the dismal tunnel with their assets.”

The trade-off comes when the market recovers. Because the foundation’s portfolio is not heavily weighted in stocks, it doesn’t get the full benefit of a bull market. In 2003, for example, the endowment earned 19.84 percent, compared with 28.7 percent for the S&P 500. Foundation officials say they didn’t pull out of the “defensive position” in time.

In recent years, many foundations have become increasingly concerned that donors are placing restrictions on their gifts, earmarking them for specific purposes. About half of the Denver Foundation’s $263-million endowment is restricted, and the other half is not.

Mr. Miller says he has no problem accepting earmarked gifts. “It’s good because it shows that donors are interested and passionate about their giving, and they’ll give more,” he says.

He says the foundation makes it very clear that when donors set up a fund they can stipulate how the money will be doled out, but they have no say on investment decisions.

“We think the best way for performance is one way — one policy, one strategy — and we think if you start to give donors a menu of investment choices, then you dilute that performance,” says Mr. Miller. “We tell them, ‘This is what we can do for you. You can get great fees and great managers, but you don’t get any investment choices.’”

Two donors, however, were not ready to turn their assets over to the foundation to invest. Since 2001 John Morgridge, a real-estate developer, and his wife, Carrie, have set up two donor-advised funds. One supports reading programs at elementary schools, and the other supports numerous causes. Rather than give the foundation a big sum to invest for the long haul, the Morgridges each year decide how much they want to give away and then send that amount to the foundation to distribute. The foundation holds the money in money-market accounts until it is gone. Ms. Morgridge says the couple prefers to pick their own investments.

“Even though it doesn’t add to the endowment in the short term, it gives donors comfort which frequently leads to subsequent gifts to the endowment,” says Mr. Miller.

Although the foundation’s investments have been doing relatively well, officials say fund raising has been critical to the endowment’s growth. “It varies from year to year, but for the past several years, it’s had more to do with raising money,” says Mr. Miller.

In 2003, for example, the endowment earned $37-million, while the foundation raised $50.1-million. Of that, $30-million was an unrestricted bequest from a donor whom foundation officials had been wooing for many years. (The donor asked that the bequest be kept anonymous.) Since 2000 the foundation consistently has brought in more than $22-million annually.

Mr. Miller says he and his colleagues are motivated not just by the good causes the foundation supports today, but by what Denver will need decades from now.

Says Mr. Miller: “The driving force is to give future generations additional resources to help meet the community needs that they will face.”

WHERE DENVER FOUNDATION’S ENDOWMENT IS INVESTED

Hedge funds	12%
Stocks	36%
Absolute-return funds	18%
Bonds	17%
Other assets, including real estate, distressed assets, and private equity	17%
Total: $263-million as of December 31, 2003
SOURCE: Denver Foundation

DENVER FOUNDATION’S ENDOWMENT AT A GLANCE
		Assets as of December 31		Investment returns		Grant dollars awarded1		Gifts received		Operating expenses2
1995	$49-million	20.59%	$2.6-million	$6.6-million	$595,000
1996	$72-million	14.04%	$3.1-million	$6.8-million	$706,000
1997	$133-million	16.66%	$4.6-million	$41.5-million	$1.3-million
1998	$146-million	10.45%	$8.8-million	$7.6-million	$1.6-million
1999	$172-million	19.77%	$12.6-million	$14.8-million	$1.7-million
2000	$186-million	3.84%	$16.6-million	$22.6-million	$2.2-million
2001	$199-million	0.96%	$16.4-million	$33.7-million	$2.3-million
2002	$194-million	-4.04%	$17.4-million	$24.9-million	$2.6-million
2003	$263-million	19.84%	$16.5-million	$50.1-million	$2.7-million
1. Net of grants payable
2. Budgeted figures
SOURCE: Denver Foundation

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Section: Endowments
Volume 16, Issue 16, Page B14