Big Gifts and Rising Stocks Fuel Growth

Database: View how endowment investments fared at 160 nonprofit organizations

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By HARVY LIPMAN

The endowments of 187 of the nation’s biggest foundations, universities, and other non-profit organizations grew by $23.1-billion last year, according to a new survey by The Chronicle of Higher Education and The Chronicle of Philanthropy.

The growth was fueled by a combination of donations and increases in the value of invested assets. The average return on those investments was 19.5 percent for organizations whose fiscal years ended in December, and 4.8 percent for organizations whose fiscal years ended in June. That variation was linked to the performance of the stock market, where more than half of all endowment assets are invested, the survey found.

Among the organizations with the biggest percentage returns:

• The David and Lucile Packard Foundation, in Los Altos, Calif., was worth $5.9-billion at the end of December, a gain of 31 percent.
• Ducks Unlimited, in Memphis, saw its endowment grow to $10.5-million by the end of June, an increase of 20 percent.
• Partners HealthCare System, in Boston — which operates Massachusetts General Hospital and several affiliated hospitals — had an endowment worth $810.8-million at the end of September, a gain of 21 percent.

Other groups fared less well. Among those with the steepest declines:

• The United Way of King County, in Seattle, saw the value of its endowment fall to $42.6-million by the end of June, a drop of 8 percent.
• Emory University, in Atlanta, had its endowment decline to $3.8-billion by the end of August, falling 2 percent.
• The World Monuments Fund, in New York, saw the value of its endowment reduced to $14.4-million in June, down 7.3 percent.

The Chronicle survey is the first to compare returns of different types of nonprofit organizations. The endowments in the Chronicle survey totaled $248.1-billion last year, nearly equal to the total economic output of Colombia, which has the 31st-largest economy in the world. To get a glimpse of the state of nonprofit endowments, The Chronicle sought information from 457 organizations, including the wealthiest foundations and colleges, as well as a wide range of arts, social-service, and environmental groups and others that received at least $25-million in donations last year.

Few surveys have been done to determine the extent of nonprofit endowment holdings. In 1999, when the stock market was causing the value of endowments to soar, the Spectrem Group estimated that the total value of nonprofit endowments was $600-billion.

Even though many endowments have faced tough times because of turmoil in the stock market, some organizations have done well. One of the groups with the best returns on its endowment investments was the Associated: Jewish Community Federation of Baltimore, which earned 27 percent in 2003, bringing the value of its endowment to $263.7-million at the end of December.

“We definitely had a good year,” said Kenneth Karsh, director of treasury operations at the organization, which supports social-service organizations as well as Jewish community groups. “Everything we invested in hit. We didn’t have any losers.” Not only did the organization’s investments in American stocks perform profitably, Mr. Karsh added, but its investments in real estate and global stocks, which accounted for 15 percent of its endowment, earned a 35-percent return.

“The last three years we’ve had a good stretch, even in the bear market,” he added. “We tweaked our portfolio and avoided the market correction. Even when everything was down, we had very small positive returns, but we avoided losses.”

Like the vast majority of nonprofit groups in the survey — 93 percent — the Associated uses outside professional investment advisers to manage its endowment portfolios, Mr. Karsh said. “We just try to hire really smart managers, and we think we’ve been very successful,” he said.

Many organizations find that the ups and downs of their returns are determined by investment decisions made by their donors.

For instance, the Packard Foundation’s gain was largely the result of increases in the prices of Hewlett-Packard and Agilent Technologies stocks. The foundation’s donors, David and Lucile Packard, created the fund with Hewlett-Packard stock, and Agilent is an offshoot of that company.

Before he died in 1996, David Packard urged the foundation to keep the portfolio invested entirely in stock from the company he founded. It followed his wishes for several years, but doing so caused the endowment to drop sharply when the technology stocks slumped. The value fell to $4.8-billion in 2002 from its peak of $13.1-billion at the end of 1999.

Because of the asset decline — which caused the organization to make big cuts in grants and reduce its staff size by more than half — the foundation has started to diversify its investment portfolio and now has 80 percent in Hewlett-Packard and Agilent stock, said George A. Vera, its chief financial officer.

Other donor decisions can result in a nonprofit group’s not having complete control over how its endowment is invested. Several organizations in the survey said that at least a portion of their endowment assets were in trusts established by donors. Such trusts’ assets are for the benefit of the nonprofit group, but control of their investment decisions remains in the hands of the trustee appointed by the donor — often a bank or other financial institution.

The Alzheimer’s Disease and Related Disorders Association, in Chicago, whose endowment was worth $28-million on June 30, suffered a 4-percent loss in its endowment portfolio last year, in part because “our endowment includes an interest in a perpetual trust which is overseen by a third-party administrator, over which we have no direct control,” said Timothy Morgan, director of financial operations.

Much of the rest of the endowment was heavily invested in technology stocks, he added, causing losses. The charity also decided to liquidate some of its stocks and transfer the funds into other investments, Mr. Morgan added, because its investment managers felt that it was unwise to continue to keep 90 percent of the portfolio in stocks. The organization has reduced the share of its portfolio in stocks to 64 percent, having transferred most of the remainder to bonds. But by selling the stocks off when the market was depressed, the association suffered losses to its endowment.

Other groups lost money simply because of timing.

Irene Bareis, chief financial officer of the World Monuments Fund, in New York, said the group’s endowment was started two years ago, just as the stock-market slump began. “We needed to sell some funds that were depreciating,” she said. The organization, which works to preserve historic art and architecture around the world, lost 7.3 percent on its endowment investments in its 2003 fiscal year, which ended in June. The investment losses, combined with spending from the endowment, cause its value to fall from $16.2-million in June 2002 to $14.4-million last year.

Most nonprofit groups earned considerably more through investing their endowments than they spent. The endowments in the survey distributed an average of 5.3 percent in 2003, mostly from earnings on investments. Of 154 organizations that answered a question about whether they spent money from their endowment principal during the year, only 32 said they did.

Of the 141 groups that reported how they spent money from their endowments, 134 said that at least some was used to support programs; 74 said they used some endowment earnings to pay staff members; 70 reported spending some of the funds on general overhead; and 50 said the money was used on construction projects.

The Metropolitan Museum of Art, in New York, which had an endowment worth $1.8-billion at the end of June, uses earnings from its endowment to offset operating costs, said Emily Rafferty, the museum’s senior vice president for external affairs. Ms. Rafferty said that about one-fourth of the museum’s $160-million operating budget comes from its endowment earnings. The endowment has also helped finance expansions that have doubled the size of the Met in the last 30 years.

Not all nonprofit organizations believe having a big endowment is important. Fifty-two organizations responded to The Chronicle survey by saying they had decided not to set aside resources. Groups that focus on environmental issues, human services, international aid, and religious activities were the most likely not to have endowments. Of 67 organizations surveyed that deal with those subject areas, 27 chose not to create endowments.

It is not simply the mission of a group that dictates whether it wants an endowment; it is also the approach the organization takes. For instance, two of the most prominent organizations that seek to preserve land say the way they accomplish the task shapes their endowment views.

The Trust for Public Land, in San Francisco, raises money to buy land for parks and other public uses, usually turning the property over to government entities, while the Nature Conservancy, in Arlington, Va., manages the land that it buys.

The trust does not have an endowment. “Given the urgency of the need for what we do, we feel we can use our money most effectively by buying as much land as we can,” said Will Rogers, the trust’s president.

Holding money back, he said, would be counterproductive, because land values rise over time, making property more expensive to purchase. “We’re trying to get the maximum impact out of our resources,” Mr. Rogers added.

Meanwhile, the conservancy has the biggest endowment among environmental groups, $633.2-million. David Whitehead, the organization’s director of philanthropy, said the endowment was needed to guarantee the Nature Conservancy will be able to take good care of the land it purchases.

“Our mission is stewardship,” Mr. Whitehead said. “We have a preserve system, and we have a policy that says that for every preserve we add to our system, 20 percent of the funds raised to obtain it have to go into an endowment for its ongoing stewardship.”

Officials of international-aid groups, including those that have endowments, said they recognized that their first responsibility is to deal with pressing needs around the world.

Curtis R. Welling, president of AmeriCares, an international-aid organization in Stamford, Conn., said the group does not have an endowment because it is focused on meeting immediate needs: “We spend all our revenue on humanitarian assistance.” Last year the group spent $659.9-million.

CARE USA has an endowment, although officials said they also believe their focus must be on spending resources to meet immediate needs. While CARE reported having $121.7-million in endowment assets, most of that money is already allocated to be spent on multiple-year aid and development projects, according to Marshall Burke, vice president for private support. Only $12.4-million, he added, is set aside in endowment funds that are not to be spent in the short term.

However, Mr. Burke said that in the aftermath of the September 11 terrorist attacks, CARE officials began discussing whether they should establish a larger endowment “so that should some other catastrophe happen like that, we would be able to keep functioning.”

“That idea is counterbalanced powerfully by the fact that there is so much that we need to accomplish now,” he added. “It’s an ethical dilemma.”

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Section: Endowments
Volume 16, Issue 16, Page B1