The Council on Foundations has acted to support its members, their nonprofit partners, and the people and communities hit hardest by the impacts of COVID-19 by asking members to sign a pledge of action. The Pledge, which over 750 foundations have signed so far, commits foundations to be more flexible with their grantees.
A group of leaders of philanthropy-serving organizations (including the Council) also issued a call for philanthropy to increase their giving to nonprofits.
As foundations consider whether to increase giving from their endowments in response to the growing needs of the COVID-19 public health crisis, we offer four key considerations:
Revisit stress tests and liquidity needs: It is critical to understand where the stresses are and the liquidity sources in your portfolio. Liquidity, in the context of wanting to spend more, means that foundations have to discern where they will get the extra cash to spend from their portfolio. For example, due to the lag in reported valuations of private assets (i.e. private equity, real estate) vs public assets (stocks and bonds), many portfolios will see an increase in percentage of illiquid assets over the short term. This may put pressure on your liquid assets to serve as your primary source of cash to fund increased grantmaking at a time when public market values are depressed. A full stress and liquidity test analysis of how liquidity in your portfolio can change in times of major stress events like this pandemic can provide important insight into how and when a foundation can spend more. Done right, the model should consider more than just the impact of a stock market drop. It should also factor in how other assets might be impacted (hedge funds limiting withdrawals, for example). Each foundation will have its own unique set of circumstances to consider.
Review your Asset Allocation Policies: Foundations who are considering spending more will have to pay attention to their asset allocation, especially when the organization is looking for sources to be able to increase spending. Committing to spending more is one thing but identifying where in the portfolio is best to raise cash is another. In the near-term, rebalancing your portfolio (maintaining a balance of asset classes to manage risk and return potential) to your investment policy targets following a sizeable downturn may help boost long term investment performance, even beyond the historical average, as it forces the discipline to “buy low, sell high”. With that said, any short or longer-term changes to your policy should be driven by dynamics at your foundation, not a view on the market. History has proven unkind to those that try to time the market through changes in asset allocation. Look no further than the past two months for a good example. Those that were motivated to sell stocks and put more in cash after the dramatic sell-off in March have missed one of the sharpest rebounds in the history of the U.S. equity market in the six weeks that followed.
Revisit your Spending Policy: In a typical crisis, there’s often a tension between reducing spending due to lower portfolio values and increasing spending due to higher community need. During the depths of the 01-02 recession, Commonfund worked with many clients who wanted to spend more if it meant sustaining the mission. Although nonprofits are long-term oriented institutions and investors, you also have to survive the short term to make it to the long term. Understanding how your spending policy will behave, i.e. how much you will have vs. how much you may need to spend in the coming years to meet your commitments, is paramount to spending more now and being prepared for the future.
Your foundation may want to move away from the rolling average formula toward a weighted average spending calculation. Commonfund research has shown that a weighted average formula can result in a more consistent, less volatile payout than the rolling average formula. We conducted a simple analysis of a $100 million portfolio that invested 70/30 in the S&P 500 and Bloomberg Barclays U.S. Aggregate Bond Indices. We calculated the dollar spend using a 5 percent rolling three-year calculation and using a weighted average formula that considers both inflation (CPI +1 percent) and market value. Interestingly, both spending formulas produced roughly the same level of aggregate spend yet the paths were quite different. The rolling average formula resulted in a decline in spending of more than 20 percent from 2000 to 2004 and took 13 years to reclaim the high-water mark of 2000. The weighted average spend calculation didn’t reach the same heights yet also didn’t experience the same decline. Or more simply stated, it resulted in a more consistent (i.e., less volatile) payout than the rolling average formula.