Who's Managing the Other 95%, and What are They Charging You?

I've always found compelling the argument that foundations, which put so much attention into how their 5% (or more) payout is invested in grantees' work, could do more to look at how the other 95% of their assets are invested. There are many levels to this issue, and an underattended panel yesterday on "Emerging Liquidity Issues for Foundations" addressed one that is particularly timely: when endowments shrink, how available are investments for grant commitments? As the title of the session implies, in this strange new world where the financial-services industry has been turned inside out, the assumptions funders make about the seemingly simple transaction of turning investments into cash to make a grant may be called into question. The panelists, Jeffrey Haber, Controller of the Commonwealth Fund, and David Nee, Executive Director of the William Caspar Graustein Memorial Fund, shared a wealth of examples of challenges foundations are facing with regard to liquidity. Certain types of investments are changing the terms of liquidity, sometimes several times within a few months. For foundations invested in hedge funds, concerns arise about when money will be available to convert into cash, and some funds have even begun "metering" -  charging more to withdraw after 20% of funds have been withdrawn. These funds are concerned about large withdrawals en masse as investors seek safer havens for their money. Some foundations, faced with having to sell assets whose value is significantly lowered in order to make payout, are trying instead to get short-term loans (!!) to meet their grant commitments, on the idea that the interest paid on the loans would be less than the lost value of selling assets toward the bottom of the market. The experiences of foundations seeking to secure such loans have been "remarkably divergent", according to Haber. Also divergent have been the experiences of foundations with fund-management fees. One audience member shared a successful experience, in which his foundation, which was in the 3rd year of a set of 5-year grant investments, chose to maintain its existing grant commitments rather than try to renegotiate them, and as a result sought savings in other places, such as investment-management fees. They were able to renegotiate these with their investment managers, making it easier for the foundation to meet its existing grant commitments.

These are not topics with which I'm conversant, so the session was a fascinating learning experience (and I don't doubt that I've failed to capture the full nuance of a rich discussion) and an eye-opening look into the types of discussions that are happening at foundations across the country.

The discussion put me in mind of one of my favorite non-philanthropy blogs, Marginal Revolution. It's two economists from George Mason University who write about every topic under the sun, from the quality of Portuguese cuisine to arguments about using fiscal policy to get out of the recession. A recent post revisited the work of J.M. Keynes, the touchstone of thinking on the idea of an economic stimulus whose work first became influential during the Great Depression. The post looks at what is (apparently) a pivotal chapter in Keynes' key work, which points out that all investors buy into a "convention" or assumption that in terms of the economy,  "the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change." All the rosy projections of the intergenerational transfer of wealth a few years ago were based on that convention, indeed much of our economy and society have bought into this convention. But the last eight months have shown us what the world is like when the convention no longer applies. The Marginal Revolution post is a bit of an uphill climb, but worth it. Key passage, directly from Keynes:

"It has been, I am sure, on the basis of some such procedure as this that our leading investment markets have been developed. But it is not surprising that a convention, in an absolute view of things so arbitrary, should have its weak points. It is its precariousness which creates no small part of our contemporary problem of securing sufficient investment."

Precariousness, indeed. As they like to say on Marginal Revolution, these are "sentences to ponder." What would it look like to plan philanthropic investments for a world where the convention of "business as usual, indefinitely" doesn't necessarily hold?

Chris Cardona is a Consultant at TCC Group, a thirty-year-old consulting firm that provides strategic planning, evaluation, grantmaking services, and program design and implementation to foundations, corporate giving programs, and nonprofits.