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The Boston Globe OnlineBoston.com
Boston Globe Online / Giving

Stock markets don't reward good intentions

Slump's proving to be tough test for endowment managers

By Steven Syre, Globe Staff, 11/18/2001

    Change of heart
It used to be we worried about other things, like what was on the racks at the mall. Now we're not buying as much, but we are giving money away like mad.

Internet surge
Since Sept. 11, charitable donations have been pouring in over the Internet. But will online giving have a sustained impact on nonprofits?

Keeping faith
A unique mission to join secular foundations with black churches is boosting services to some of Boston's poorest neighborhoods.

Guidance for giving
The tremendous creation of wealth that occured during the 1990s has many individuals seeking guidance for how they give.

Education collaboration
How the Boston public schools and the local business community finally got working together.

The new Boston
It's not always easy to get residents who work in Boston and identify themselves with the city to abandon their longtime patterns of giving.

Corporate outsourcing
Donor-advised funds have become wildly popular with individuals over the last decade. Now some companies are trying them, too.

The nonprofit 100
A ranking of the top Massachusetts nonprofits by public support, revenue, expenses, and assets.

The people who manage nonprofit endowments count on investment gains over time to help pay the expense of purchasing art, hiring professors, treating the sick, and helping scores of smaller charities.

But the slumping stock market hasn't cut them a dime's worth of slack for their good intentions.

Like most other investors, endowment managers have struggled for more than a year amid stock market declines that sliced the value of their assets. But so far, the poor investment results have had only a modest impact on the amount of money from endowment accounts that's being spent for charitable purposes.

Most larger endowments are invested in a broad range of securities, including stocks, bonds, and ''alternative'' investments, such as venture capital funds and hedge funds. They generate cash for charities based on a formula that, with a few variations, works like this:

Calculate the average value of endowment assets over a rolling period of time, typically the last 12 or 16 quarters.

Then, calculate a small percentage of the average, usually 5 to 5.5 percent.

That amount of money is distributed to the nonprofit organization, out of the endowment, so it will have money to spend.

Most endowments have been hurt in the past year, but because they are diversified, they have not suffered nearly as much as portfolios whose holdings were concentrated in technology stocks or other volatile securities.

The standard practice of measuring the size of an endowment over several years to calculate distributions means that the flow of cash has suffered just a bit so far.

But endowments are still struggling through one of their worst investment years in at least a decade.

Here's a look at how some of the people responsible for investing the money are managing.

Joe Murphy
Northeastern University

Murphy was overseeing a $450 million endowment by the end of September, about 10 percent smaller than it was a year earlier. Eventually, he faced a common task known as rebalancing.

Like other endowments, Northeastern's fund earmarks a certain percentage of the money for each type of investment. It commits 10 percent each to large growth stocks, large value stocks, small growth stocks, and passive stock indexing; 15 percent for two different international stock categories; 20 percent in alternative investments; and 25 percent for fixed-income securities.

The categories all perform differently in the course of the year, skewing the shares of the total financial pie as some assets gain and others lose. Managers move money around once a year to rebalance each category's share of the fund, but that usually means giving more money to the worst-performing categories and taking it away from the past year's best performers.

``Honestly, it's a painful process,'' said Murphy, who manages the portfolio at the direction of an investment committee. ``When growth was going gangbusters, it was difficult to take money away from it and put it in value. Last year, we were putting more money into fixed income to bring it back into balance.''

Northeastern's endowment suffered an 8 percent investment decline during its last fiscal year, which ended June 30. But the fund earned 33 percent in the previous fiscal year and did well the year before that. So the endowment's contribution toward Northeastern's spending hasn't been pinched yet.

``But if we have another down year, it will start affecting how [the endowment] will support the budget,'' he said.

Jim Pitts
Vice president of finance
The Boston Foundation

Like many nonprofit financial executives, Pitts suffered through a rare double-digit investment loss during the third quarter of 2001.

The Boston Foundation's $600 million endowment lost 10.3 percent during the quarter, which ended Sept. 30. The endowment had lost 17.5 percent over a one-year period at that point, though it still earned an average of 10.9 percent annually over five years.

``I would say in most cases, endowments haven't experienced anything like the current market environment in the last 10 years,'' Pitts said. ``Unless an endowment was between 95 and 100 percent invested in fixed-income securities, you couldn't have avoided a loss in the September quarter.''

The Boston Foundation's endowment divides its money into nine kinds of assets but broadly counts 70 percent of its assets in stock vehicles and 30 percent in fixed-income investments. Eight investment firms, all in Boston, manage specific types of securities for the foundation.

Pitts said the foundation's finance board has not reconsidered what types of investments it holds. But the foundation is scrutinizing the performances of its individual investment firms.

``We're putting managers under a microscope to make sure those who are under a benchmark can explain why and those who are above the benchmark can explain,'' Pitts said.

No one wants to lose more than the rest of the field in a bad market. But endowment executives such as Pitts want to make sure investment managers turning in surprisingly good results aren't winning by taking excessive risks.

Ed Rudman
Board of managers

Rudman has been close to one of the few endowments in Boston that made dramatic investment changes that helped it avoid any major market losses.

Endowments usually stay the course through the market's ups and downs. But serious operational problems at CareGroup made standing pat too risky for the people who oversee the fund.

CareGroup's $350 million endowment was moved almost entirely out of stocks and into cash and liquid fixed-income securities, though it is bound by contract to stay in some funds that own stocks. Most of the cash has been distributed to executives who run hospital operations, in case the cushion is needed quickly.

``We made the decision about a year and a half ago, because of the uncertainties going on at CareGroup and some concern with the market, that we would significantly reduce our commitment to [stocks] and took a defensive posture,'' said Rudman, cofounder of the Pell Rudman organization in Boston.

``We felt we couldn't afford the risk of the market in an uncertain time,'' he said. ``That turned out to be a very fortuitous decision, and it's preserved capital for CareGroup.''

Losses at CareGroup have continued to put pressure on the organization and its principal hospital, Beth Israel Deaconess Medical Center, prompting a management shake-up and a deterioration of bond ratings to junk status.

Rudman said Caregroup's investment returns have been roughly break-even this year. CareGroup funds will remain in cash or be invested conservatively ``until we feel we can be long-term in our thinking,'' he said.

John Stanley
Deputy director of operations
Museum of Fine Arts

Stanley talks about the museum's endowment as if one bear market can't make much of a dent in its investment philosophy.

``Clearly, like the rest of the world, we took our lumps,'' Stanley said.

``But unlike individuals who might invest differently in different parts of their lives, our investment horizon is infinity, or at least we'd like to think so. We have to take the long-term view.''

Stanley and his chief financial officer operate the museum's $408 million endowment at the direction of a blue-chip committee of trustees and overseers that is headed by Peter Lynch of Fidelity Investments and includes MFS Investment Management's president, John Ballen, and Scott Black, president of Delphi Management, among others.

The museum has invested 65 to 75 percent of its endowment in stocks and produced a 2 percent loss in its last fiscal year, which ended June 30. The endowment had been split about equally between stocks and bonds before Lynch became chairman of the committee more than a decade ago, Stanley said.

Like Harvard University's endowment, the museum's fund is actually hundreds of much smaller accounts. Stanley said the MFS endowment is comprised of more than 800 individual funds, many of them earmarked for specific interests, such as American decorative arts.

Stanley would not say exactly how much the endowment lost in September, but agreed the setback was probably not far from the 10 percent declines suffered by many other nonprofit investment funds.

``Who knows what the world will bring and how that will affect us,'' he said. ``But I think we all see this as perhaps an opportunity now.''

Steven Syre (617-929-2918) can be reached by e-mail at boscap@globe.com.

This story ran on page F4 of the Boston Globe on 11/18/2001.
© Copyright 2001 Globe Newspaper Company.