Inside Philanthropy

A blog on philanthropy and nonprofit news and issues. A publication of Philanthropy Journal.

March 22, 2007

Foundations’ aggressiveness misplaced

Charitable foundations are aping the wrong role models and fighting the wrong fight.

Apparently coveting huge returns like those generated by the investment stars who manage the endowments at Harvard and Yale, foundations are allocating a bigger share of their assets to alternative investment strategies like those the Ivy League investors favor, such as hedge funds that offer high returns for taking high risks.

But spectacular as they have been, the returns at Harvard and Yale are not realistic barometers for most foundations.

The investment managers at Harvard and Yale, profiled recently in The New York Times, have the resources and expertise to forecast where the financial markets are going and to stay ahead of the curve.

That requires finely-tuned metrics, savvy financial know-how and the ability to anticipate the uncertain variables of inflation and projected costs and payouts.

Yet while they may lack their resources and expertise, foundations still try to mimic the big players.

In the process, foundations may fall short of the returns they need to meet the requirement that they pay out at least 5 percent of their assets each year in grants and overhead.

Lacking the clout and in-house expertise of Harvard and Yale, foundations pursuing alternative strategies depend on outside investment managers, and it can be tough for them to find hedge funds or other high-risk vehicles in which to invest the assets immediately, delaying the possible payoff and making it tougher to use investment income to meet the payout requirement.

And just as many foundations have tried to invest more aggressively than might be prudent, many also have been overly aggressive in fighting proposals to increase their required payout to 6 percent.

Instead of raising a stink to preserve the current payout rate and hoard their wealth, foundations should be looking for ways to invest their assets more prudently, address critical social needs and their underlying causes more strategically, meet nonprofits’ need for operating support more effectively, and work more actively to keep their investments and the companies they invest in more closely aligned with their philanthropic mission.

If they want to be aggressive, foundations should focus first on themselves by improving the way they invest their assets, make their grants and perform the policy role they can and should play in society and the marketplace.


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