Foundations’ Year-2000 Dilemma: Stick With Stocks, or Cash Out of the Market?

Foundations are beginning to grapple with a perplexing dilemma: how they should invest their assets in light of a potential market downturn related to the year-2000 computer bug.

ALSO SEE:

Preparing for the 2000 Bug

Where to Find Help With Y-2000 Problem

Year 2000: a True Emergency for Charities

Some financial analysts, including Edward Yardeni, chief economist at Deutsche Bank Securities in New York, say that economic disruptions caused by a date-related problem in many older computers and software programs are likely to cause a global recession similar to the one the world experienced during the oil shortages of the early 1970s.

Other economists rank the chance of a sustained bear market considerably lower, predicting that the world will muddle through its glitches without suffering any major system breakdowns.

Given those divergent scenarios, foundation officials face the prospect of either sticking with their stocks in the face of a forecasted recession — thereby potentially shrinking the amount of money available for their grantees — or shifting to fixed-income securities and perhaps contributing in the process to a flight from the stock market that could deepen and prolong any recession.

Some grant makers are expecting the worst. “It will become increasingly apparent that this will be a great source of economic disruption worldwide,” says Charles R. Halpern, president of the Nathan Cummings Foundation, in New York. “Endowment managers in foundations, universities, and pension funds will have to confront this reality.”

He adds: “To me it suggests that a defensive posture is appropriate. Most of us are in this for the long term rather than the short term, so we don’t need to turn our portfolio upside down — but our investment committee may disagree.”

The Jessie Smith Noyes Foundation’s investment committee met recently to consider the potential impact of economic turmoil on its stock holdings. It subsequently asked the fund’s president, Stephen Viederman, to review the foundation’s current portfolio to determine what percentage of its assets are invested in industries that may find it particularly difficult to weather any millennial downturn.

The board wants to be prudent, Mr. Viederman says, by insuring that the foundation has enough assets to finance its grantees’ programs, but also responsible, knowing that any major shift out of equities by Noyes and other endowed institutions would affect stock prices. “Our $70-million is not going to move the market, but if all of philanthropy, at $200-billion, were to start doing this, that would disrupt it,” he says.

Officials at some large foundations expect no changes in how they allocate their assets as a result of the year-2000 issue.

“We certainly do not plan to pull our money out of our investments prior to Y2K,” says Cole Wilbur, executive director of the David and Lucile Packard Foundation. “I think it would be self-defeating and would become a self-fulfilling prophecy if people started doing that.”

Linda B. Strumpf, chief investment officer at the Ford Foundation, says it has adopted a similar position. The central question for investors, she says, is whether they think something systemic will happen that will have a lasting effect on the market.

The global economy now depends on such a complex web of relationships, some analysts say, that breakdowns in one country or industry can ripple quickly through others — with potentially drastic results.

But Ms. Strumpf has concluded that economic cataclysm is unlikely, though there may be some limited market volatility in the first week or two of 2000.

“I don’t know of any major fund — whether foundation endowment or pension fund — that has made an asset-allocation shift because of year 2000,” she says. Shifting from one asset class to another is costly, for one thing. What’s more, she observes, “we’re long-term investors.”

Ms. Strumpf and other fund managers do worry about weak links in the many information chains that tie financial markets together, she says. Ford, like many institutions, will instruct its fund managers not to schedule any financial transactions for the weekend of Jan. 1, 2000, to avoid possible snafus of that kind.

Edith T. Eddy, executive director of the Compton Foundation, in Menlo Park, Cal., believes that many grant makers will emulate Ford and Packard. “Most foundations are advised by experienced investment managers whose attitude about bear markets is to ride through them so they’ll be well-positioned when the market starts to go up again,” she says. “I don’t think most foundations will get out; they will ride the market down,” she predicts.

But such a strategy, if the market declines steeply and stays down for a while, could affect grant makers and their beneficiaries. “If it goes down significantly, the amount foundations give away will also go down — and the same is true for wealthy individuals,” Ms. Eddy says. “The non-profit sector is looking at the possibility of dramatically decreased revenues, and I don’t think the sector has begun to get that yet.”

The Compton Foundation has decided to maintain its current giving level, regardless of any drop in the market, Ms. Eddy says. Its options include selling off some of its fixed-income assets when the market dives, to avoid unloading equities when their prices are depressed, or to begin switching into fixed-income assets now in anticipation of a bear market.

“There’s an ethical question that comes up,” Ms. Eddy observes. “In an effort to preserve your own organization’s capacity to make grants, you don’t want to become part of the problem.” She adds: “If the whole philanthropic sector switched to fixed assets during the course of the coming year, we would be exacerbating the problem in our effort to save ourselves. I don’t recommend doing that.”