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Fashioning an Investment Strategy

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Fashioning an Investment Strategy Fashioning an Investment Strategy Excerpted from: Virginia Esposito, ed., Splendid Legacy: The Guide to Creating Your Family Foundation (Washington, DC: National Center for Family Philanthropy), 136-155. By Jason Born ABSTRACT: This chapter from Splendid Legacy contains background, ideas, and suggestions to help family foundation boards develop investment policies and practices that meet legal requirements and are consistent with the goals and mission of their philanthropy. Sections in the chapter address linking resources to philanthropic purposes; establishing spending policy; overseeing the investment strategy; determining the family's role; reducing investment costs; and revisiting goals and objectives. Copyright © 2002 National Center for Family Philanthropy Copyright © 2002 National Center for Family Philanthropy / WWW.NCFP.ORG Linking Resources to Philanthropic Purposes ............................139 CONTENTS Considering Perpetuity ........................................................139 Establishing the Spending Policy................................................141 Developing an Investment Strategy and Policies ........................143 Calculating the Return Requirement ..................................143 Creating an Overall Asset Allocation Strategy ....................143 Considering Foundation-Specific Factors..............................144 Adopting the Strategy and a Written Investment Policy ......146 Overseeing the Investment Strategy ..........................................148 Determining Investment Committee Responsibilities ..........148 Finding Investment Advisors ................................................148 Selecting Investment Advisors ..............................................149 Working with Investment Advisors ............................150 Determining the Family’s Role....................................................150 Reviewing Disqualified Persons Requirements ....................150 Considering the Role of Future Generations ......................152 Reducing Investment Costs ......................................................152 Revisiting Goals and Objectives ................................................153 A Final Word: Reviewing the Checklist ........................................155 FIGURES 1. Glossary of Key Investment Terms for Family Foundations ......140 2. Example of a Family Foundation Spending Policy....................142 3. Calculating the Return Requirement ......................................143 4. The Sample Family Foundation Asset Allocation Decision ......144 5. Average Annual Returns on U.S. Stocks: Rolling Time Periods From 1925 to 1998 ....................................................146 6. Example of an Investment Policy for a Family Foundation........147 7. Family Foundation Investment Advisors ..................................149 8. Roadblocks and Bumps in the Road ......................................151 9. Checklist of Fiduciary Responsibilities ....................................154 FASHIONING an INVESTMENT STRATEGY AN INVESTMENT STRATEGY FASHIONING by Jason C. Born 137 Copyright © 2002 National Center for Family Philanthropy / WWW.NCFP.ORG The highest use of capital is not to make more money, but to make money do more for the betterment of life. —HENRY FORD— The returns on a family investment in philanthropy are — or can be — extremely high, both internally and externally.When such an investment is well executed, a family can achieve the cohesion that comes with a sense of higher purpose and cooperative effort. —PAUL YLVISAKER— Although Henry Ford and Paul takes to oversee management of an You will also be acting within an envi- Ylvisaker were not talking specifically institution’s portfolio and assets. ronment of your family: siblings, chil- about the investments that a family dren,in-laws,and next generations.You foundation’s endowment makes, their As the founder and a trustee of your may want to train family members comments are equally appropriate to family’s foundation, however, you will who may not be knowledgeable about this process. Investing the assets of a encounter very special circumstances their fiduciary responsibilities with family philanthropy is — or can be — related to your investments. You and regard to the foundation. both a challenging and rewarding your board will make important invest- experience, and is probably best ment strategy decisions about funding Most important, you will need a strat- thought of not only in terms of assets, a legal entity that is regulated by the egy that allows you to carry out your but also of what those increased assets Internal Revenue Service (IRS) and hopes and dreams for the foundation. can accomplish. state agencies.You and your board will A thoughtfully fashioned investment assume legal and ethical duties of obe- strategy, implemented with discipline As someone who has established or is dience, loyalty,and care to the founda- and flexibility, seems all the more about to establish a family foundation, tion. Those duties require you to important in today’s world. The first you may be familiar with and skilled at adhere to the foundation’s charter and year of the 21st century brought thinking about your own investment mission,avoid self-dealing and conflicts extraordinary levels of volatility to the goals and strategies. If you have served of interest, keep the foundation’s best financial markets. Concerns about ter- on boards of other nonprofits or cor- interests in mind, and act as a “prudent rorism, the collapse of Enron, and the III. A ESTABLISHING STRUCTURE porations, you may also know what it investor” on behalf of the foundation. bursting of the dot com bubble created 138 Copyright © 2002 National Center for Family Philanthropy / WWW.NCFP.ORG a new set of conditions for investment Your philanthropic goals will drive both foundation spending itself out over the managers. Although there will always the spending policy of the foundation next decade, the board felt that the sub- be uncertainties about the future, and the investment strategy designed to ject was important enough to warrant founders of family foundations today support that spending policy. such an approach. may face an especially challenging task in developing their investment strategy. Many founders spend considerable An equally compelling case can be time in the first few years of their foun- made for creating philanthropic funds This chapter contains background, dation’s life exploring these issues.You that build resources now and for the ideas, and suggestions to help you and may want to discuss your thoughts on future. This approach guided the your board think about how to develop these matters with other members of Harris and Eliza Kempner Fund in investment policies and practices that your family before passing the reins of Galveston, Texas. Started in 1946 by meet all legal requirements and are the foundation to the next generation. five members of the Kempner family, consistent with the goals and mission the fund has grown from an initial asset of your philanthropy. Sections in the Considering Perpetuity value of $38,500 to almost $50 million chapter aim to help you in: Consider perpetuity. Simply put: will today.The original donors, as well as I Linking resources to philanthropic your foundation last for a specific term the current trustees, recognized the purposes; of years,cease to exist when it achieves value of a perpetual foundation, as I Establishing the spending policy; a specific goal, or exist in perpetuity? described in the fund’s 1996-1997 I Overseeing the investment strategy; Depending on the answer to this ques- biennial report: I Determining the family’s role; tion, your investment strategy will be I Reducing investment costs; very different. The impetus for starting a founda- I Revisiting goals and objectives; and tion in 1946 came from the fam- I A final word: reviewing the checklist. If your main goal is to support an issue ily’s concern for the many local that requires urgent attention, you may charities it supported. They real- choose to focus your foundation’s grant- ized that conditions that typically Linking Resources making activities over a short and follow economic depressions and to Philanthropic concentrated period of time.One foun- wars could affect their ability to dation that took this approach is the support charities in times of great- Purposes Aaron Diamond Foundation.In the late est need.A philanthropic philoso- Some founders plan their philanthropic 1980s, foundation president Irene phy thus evolved:“Allow the more purposes well ahead of time, while oth- Diamond and the rest of the trustees rec- prosperous years to provide for the ers are more given to let those purposes ognized that they had an opportunity to lean ones.” evolve over time.In either case,it is help- make a real difference in AIDS research, ful for you and your board to have a an area that at the time was sorely lack- Many good reasons support either clear,shared understanding about invest- ing funding.With this in mind,the foun- spending out a foundation’s assets or ment goals and strategies.It’s desirable to dation increased its annual grantmaking establishing a foundation in perpetuity. agree on policies and practices regarding to a level that allowed it to become a key Key reasons for the former approach the management of money: bookkeep- supporter in AIDS research. Despite the include: I ing, reports, audits, archival records, etc. fact that this decision resulted in the The founders
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