Nonprofit Investors Not Fleeing The Dow

August 28, 2015       Mark Hrywna      

The stock market took a roller coaster ride before the summer ended, turning nonprofit portfolios upside down after years of a bull market.

The last week in August opened with a mid-day 1,000-point drop in the Dow Jones Industrial Average, some days down as much as 5 percent. The big day was Aug. 24 when the Dow went from 16,459 to an intra-day low of 15,370 before closing at 15,871. It dumped another 205 points the next day before starting a mild recovery.

As some nonprofit investment managers called it a correction and wondered about a bear market. Several rallies during that same week saw U.S. markets recover somewhat from a six-day rout, amid concerns about China devaluing its currency.

“It would be disingenuous to say that markets didn’t rattle us but we have great governance … so what we do is focus on the long-term,” said Kim Y. Lew, vice president and co-chief investment officer at the Carnegie Corporation. “One day doesn’t impact how we manage our portfolio at all. We have over the past year or two been concerned that we’ve not been able to find where there’s fair value so we’ve been building cash,” she said during a conference call about the third annual Council on Foundations-Commonfund Study of Investments of Endowments for Private and Community Foundations (CCSF).

With all that cash, Carnegie actually has been waiting for a market correction to re-allocate it all. Lew said they’re thinking about how to outperform over the next decade – when expectations are much lower than recent years – and thinking about portfolio construction and rebalancing asset classes if the market goes down. The only way to do that, she said, is to have money ready to invest. “The crash is a little exciting for us. But it takes strong governance, fairly sophisticated staff, and spending some time thinking about what it means for us,” Lew said.

The Humane Society of the United States (HSUS) has an investment committee and advisors but doesn’t react to short-term volatility or fluctuations in the market unless “there’s something desperately wrong,” said Tom Waite, chief financial officer of HSUS.

Recent volatility wasn’t quite the same thing as 2008 when there was a fundamental banking crisis, said Waite. “It was a rather dramatic falloff but we’ve seen that before. We’d probably sit tight and look at the long-term,” he said.

The market volatility in August was to be expected since equities have been priced very high and all that’s going on overseas, according to Waite. “It seems like just a huge correction, coming for some time. The market is in a long run-up and from the looks of things, it doesn’t have anywhere to go in terms of returns,” he said.

In the case of “sustained economic problems, HSUS might tweak our portfolio one way or the other,” he said. The investment committee meets about each quarter and makes decisions in a regular, systematic way.

HSUS also hedges with other investments designed to not correlate to the market to make up for whatever returns on the equity side. “Bonds have not done particularly well but with the market falling, bonds will go up. It just argues for having a wise asset allocation and diversified portfolio, and where you’re comfortable with risks,” Waite said.

“One of things we’re fortunate at HSUS, we don’t live off our portfolio per se. It grows and we use a small portion of it to fund programmatic activities. Fortunately, we don’t count on it for our normal operating expenses. Other organizations might have more pressure to react to the market because they can’t fund this or that,” Waite said.

“Moments of volatility make people pay attention to their assets and their financial resources,” Antony Bugg-Levine, said CEO of the Nonprofit Finance Fund in New York City. “But it should be a constant and ongoing attention that’s paid to keeping in balance the resources you have and future resources, with the need for adaptability,” he said.

The vast majority of organizations doesn’t have endowments or invest assets to fund operations but look to funders that provide that, according to Bugg-Levine. “It’s important to understand what volatility means for your funders,” he said. “If you’re a nonprofit, it’s just so important to understand the cost of your operations and, if possible, to develop an operating model that enables you to be adaptable,” he said. That can mean when suddenly there’s rising demand for your services, you’re able to respond to that demand, or if there’s an opportunity to enter a new line of services, an organization has the reserves to invest in that.

Lots of boards will look at their income statement and see that operations are covering costs, Bugg-Levine, but financial health of an organization is not just about the ability to cover costs in the short-term but also about the ability to meet challenges and adapt to change. Building assets is great but organizations should think about the flexibility of assets they have, such as their liquidity. “You can get in a trouble when you don’t have liquidity,” he said. That’s what happened to foundations that made commitments in 2008 and had lots of illiquid assets.

An organization can be breaking even every year but still be in a fragile position if assets are not enabling it to response to change, Bugg-Levine said. “That could be because they don’t have a lot of reserves or have lot of assets tied up, and are illiquid,” he said. In NFF’s annual survey, roughly half of all nonprofits reported having less than 90 days of cash on hand. “What kind of reserves do we have and how liquid are our assets,” are some of the questions nonprofits should be asking themselves, Bugg-Levine stressed.