The year 2018 ended as a difficult one for community foundation investment returns. While daily swings of several hundred points are becoming common, virtually all asset categories – such as stocks, bonds, commodities, and real estate – finished in the red. The S&P 500 fell 6.2%; the NASDAQ dropped 3.9%. Bonds were no help, as they were flat or slightly down for the year. And overseas stocked tanked, with both Europe and Japan down double digits.
For community foundation leaders, these results will mean that you will likely face four types of difficult conversations. But, as Douglas Adams said in The Hitchhiker’s Guide to the Galaxy, “Don’t Panic”. Remember, a community foundation has a long time horizon – as we like to say, our time horizon is forever.
So, keep that in mind as you get ready for these difficult conversations.
Conversation #1: Your Board Members – It’s important to be candid with your board on the consequences of negative investment returns. You will have less money to award as grants and scholarships. And your administrative fees will probably be below what you projected. Be prepared to have a frank discussion with your board members on these matters.
Conversation #2: Your Investment Committee and Your Spending Policy – As you are aware, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) allows endowments to spend from “underwater” endowment funds, so long as the spending is prudent. Your investment committee and board have the discretion to determine what a prudent amount is to disburse by determining the spending policy from your endowments.
Because of 2018’s poor investment results, you will likely have a difficult conversation in determining whether to lower the payout rate in your spending policy. A lower spending rate will mean less to distribute in grants and scholarships.
Conversation #3: Recipients of Grants and Scholarships – You will likely have less to distribute in 2019 due, first, to a lower spending policy and, second, to a decline in the value of your endowment assets. Charities that receive annual support from you – such as from a designated fund – may receive less next year.
You may have a spending policy that minimizes the reduction of payouts in any one year by, say, using a 12-quarter rolling average to determine the endowment base. This will muffle the effects for 2019 – but will also mean the asset decline will be felt for at least the next three years.
Conversation #4 – Your Donors: You will be talking with your donors about several consequences of poor investment returns. First, they may have created a fund with your foundation that will experience negative investment returns. Second, they may be planning on making a gift using appreciated securities – and now the appreciation on those securities is a lot less.
What’s the common thread in each of these conversations? It’s that a community foundation invests for the long term, and that short-term market declines are to be expected. In my twenty-two years at a community foundation, I lived through the economic crisis of 2008-09, and watched the dot com bubble burst in 2000. I even remember a Monday in October of 1987 when the stock market fell 25% in one hour.
Each of these declines seemed horrendous at the time. But every time, the stock market bounced back.
So, have these conversations with your board, your investment committee, the charities you support, and your donors. Take a long view and remember that temporary declines are just part of the cycle of long-term investment performance. Share this viewpoint over a calming cup of tea. As the hero of The Hitchhiker’s Guide, Arthur Dent, is fond of saying, “A good cup of tea makes everything better”.