5 Smart Finance Leaders

The past five years have been no day at the park for investors. Take the Dow Jones Industrial Average (DJIA) as an example. The DJIA posted a roughly 1,100 point gain during the five-year period beginning Jan. 31, 2006 and ending Jan. 28, 2011. Between those dates, it ranged more than 7,000 points – climbing greater than 14,000 during the fall of 2007 and falling to less than 6,600 during the late winter of 2009.

Nonprofits have ridden out the market’s whiplashes during that time and did so with varying investment strategies. Collectively, the 100 largest nonprofits posted investment income of $400.66 million in their 2009 fiscal years, a decrease compared with the nearly $2 billion posted the previous year, according to The NPT 100 data, an annual report on the largest nonprofits that raise at least 10 percent of income from individual donors.

United Way Worldwide (UWW) ($58 million) and Habitat for Humanity International ($6 million) are among the leaders in investment income in the latest NPT 100, published this past November in The NonProfit Times, a sister publication of Exempt. The Salvation Army (negative $250 million), American Heart Association (negative $32.5 million) and American Cancer Society (negative $27.9 million) are near the bottom of investment income on paper but surviving pretty well.

As optimism returns to the market, several nonprofit leaders shared their organizations’ investment strategy approach for this article. Their response to the aftermath of the housing market collapse and subsequent Great Recession has influenced current and future investment strategies.

“There are some characteristics of the Salvation Army’s approach to management of assets that lent well to a successful journey through that time,” said Gary Haupt, national treasurer of the Salvation Army National Corporation, headquartered in Alexandria, Va.

Four U.S. territories comprise the Salvation Army. Each territory manages its share of the operating portfolio, yet, they share commonalities in investment approach, Haupt said. During the bleakest days of the downturn some markets and loan instruments essentially froze. Liquidity — or the lack of it — became a significant issue in the market.

The Salvation Army had already made moves to increase liquidity, which was beneficial, Haupt said. For example, the organization did not immediately press incoming cash flow back into services. In general, the Salvation Army managed cash and operating budgets carefully to avoid an undue liquidity crisis.

“We exercised patience in riding out the storm, not selling off unduly, but maintaining positions to allow the market to regain its footing,” Haupt said. “Where wise counsel directed us to opportunities and liquidity permitted, we have exercised careful stewardship in rebalancing the portfolio.”

As a result, Haupt said: “We have recovered most or all of the losses and are moving into positive territory.”

The Salvation Army’s investment strategy approach could be characterized as one of faithfulness. The organization relies on an asset allocation approach, based on board policies and investment advisers, that guides investment activities, Haupt said. “We stick to that policy and allocations faithfully,” and rebalance as is reasonable, he said.

In the broadest sense, the general allocation is 60 percent equity, 30-35 percent fixed income and 10 percent cash with additional segregation within those asset pools, Haupt said. “We tend to be reasonably conservative,” Haupt said. “Generally, we’re not taking some aggressive stance, such as 80 percent equity. We’re pretty consistent. We do not chase fads.”

UWW in Alexandria, Va., took a different tack, seizing on the downturn as a chance to re-examine, and even transform its overall approach to revenue streams, including investments. “From a cash standpoint, we have been working with our network in terms of assessing what is an adequate level of reserves for an organization and coming up with national benchmarks,” said Robert Berdelle, UWW’s senior vice president and chief financial officer. “In these difficult economic times, if you had that fortress, the level of operating service could have weathered the storm better.”

More and more local United Way operating reserves are declining and some are dangerously closer to zero, he said. “We’re working with them to build them back up to be prepared for the next recession,” Berdelle said. A benefit of that approach is that even if campaign donations were to decline, community-based programs needed to advance the common good would have an adequate level of cash reserve, he said.

Part of that process is diversifying revenue streams beyond the workplace campaign, such as pursuing government and foundation grants, reviewing investment spectrum to better match how money is coming in, and using a 12 to 24 month income forecast to inform that investment strategy, Berdelle said. This includes taking a closer look at investments in the “middle.”

“Historically, we have looked at investment income more from a securities standpoint than yield standpoint — very risk averse,” Berdelle said. “Virtually the entire portfolio was held in money markets that were very liquid and accessible but not yielding much return.”

At the other end of the spectrum were endowment investments, leaving nothing in the middle, Berdelle said. Now, the UWW is looking at investing cash reserves in liquid assets needed to operate the business; investing the endowment in a balance of equity and fixed income; and viewing the middle range as a growing area with longer duration instruments.

“We’re taking a look at (cash) inflows and outflows and looking at the middle for a blend of government and corporate bonds with relatively short durations (one-two years) to expand yield and also give us access to funds if we need it,” Berdelle said.

UWW’s roughly $25-million investment is in three buckets — operating ($5 million), restricted ($15 million) and endowment ($5 million).

“Looking back to three years ago, when money market rates were sitting at 3.5 to 4 percent, people were content to keep money in money markets,” Berdelle said. “They didn’t have to think about it. As those declined to zero, nonprofits were not receiving any funds. Nonprofits have to be able to enhance yield somewhat to better enable the nonprofit to deliver on mission.”

The American Cancer Society (ACS) has felt the effects of declining interest rates, too. “Almost no one is getting any interest or dividend income,” said Catherine Mickle, ACS’s chief financial officer, headquartered in Atlanta, Ga. ACS did benefit from a security lending program that helped set off other market implications, she said.

That is a vanilla program with a lot of fixed income, shorter and intermediate-type durations, and a touch of equities. “One instrument we hold a lot of is (U.S. Treasury) bills,” Mickle said. “When everyone runs for safety, which happened in ’08 and ’09, our securities came into favor and people wanted to borrow them. We made about $1.3 million income from that, which is another $1 million plus that we can deploy into mission.”

ACS sticks with a disciplined approach with a general mix of 43 percent government, 21 percent money market and 27 percent equity. Yes, that leaves 9 percent wiggle room.

“No one was able to ignore what happened to them the past few years,” Mickle said. “We hold ourselves accountable to not go chasing things or away from things. We try to use these types of conditions to force us to continually reassess. We typically don’t make wide-sweeping strategy changes in response to market conditions, because that’s when you tend to make bad decisions. We did a good job at staying focused on long-term strategy and not jumping in or out of things that felt right for the day, but not for the long term.”

ACS posted a negative $27.9 million in investment income in its FY 2009. That number is a little misleading. Indeed, Mickle said one of the greatest challenges during the downturn was the false impression of the investment portfolio that the reported numbers gave due to generally accepted accounting principles (GAAP).

“We have a lot of noise that you have to run through the financial statements to comply with GAAP,” Mickle said. “It looked like we had severe losses in our active portfolio, even though the majority of it was due to planned giving fair values, which is not real, but just accounting.”

ACS is open to allowing for some additional penetration in equity market in domestic and emerging markets, but there are a few things that won’t make the organization’s investment list.

“I can tell you what we’re probably not going to look at,” Mickle said. “We’re not big on less liquid instruments, such as private equity and hedge funds, and fund to funds. You’re either a believer or not in those types of investments. We stay more to a middle line of the road. We don’t get the high highs, but we don’t get the low lows. From a volatility standpoint, we find that more attractive,” he said.

The American Heart Association’s (AHA) FY 2009 investment income was a negative $32.5 million. Part of that loss was attributable to a lower interest rate environment, and the fact that companies are not paying dividends as they did in the past, said Sunder Joshi, Dallas, Texas-based AHA’s chief financial officer.

In addition to the challenging interest rate and dividend environment, the loss reflected transactions completed by outside fund managers — rather than AHA liquidating investments, Joshi said. That is, it represented realized gains or losses as recognized on the books. “These liquidations were normal portfolio turnover,” Joshi said via email. “Although AHA incurred realized losses, the proceeds of those transactions were reinvested in stocks at low prices that AHA’s investment managers believed to be better investment opportunities.”

AHA’s investment declines did lead to investment portfolio adjustments, he said. When the 2009 fiscal year return was filed, AHA’s asset mix was 75 percent equities and 25 percent fixed income. AHA has gradually changed it to 60 percent equities and 40 percent fixed income. Recently, the AHA decided to reduce the equities allocation further to 50 percent, Joshi said. “When the economic crisis and downturn in the investment market hit, our focus immediately turned to active management of cash and short-term resources, to avoid having to liquidate our long-term investments, specifically equities, at the wrong time in the market,” Joshi said. “Essentially, it allowed equities to recover market-driven losses.”

Another key strategy was to pool association-wide cash and short-term resources, Joshi said. “Previously, affiliates and the national center separately managed their cash and short-term investments,” Joshi said. “Pooling these resources optimized use of cash throughout the association. It avoided individual entities needing to liquidate long-term investments to meet cash needs when other parts of the organization may have surplus cash.”

Managing cash and short-term resources will continue to be critical in the foreseeable future, Joshi said.

The AHA Investment Committee, comprised of volunteers, is now more actively engaged. “It meets more frequently, monitors portfolio performance closely, and acts quickly,” Joshi said. “In addition to reducing the allocation to equities, a recent decision was to move our equity portfolio primarily to passively managed funds.”

At Habitat for Humanity International (Habitat) the focus is on a liquid-focused investment portfolio meant to protect the capital value of donations, which typically have to be sent out for projects in a year or two, explained Mark Crozet, senior vice president of development, Habitat in Atlanta, Ga.

“If a donor gives us $7 million for a project in Kenya, we have to send $7 million to Kenya,” he said.

Habitat’s cash, cash equivalents and investments were valued at $138.96 million in Fiscal Year 2010. Its portfolio is comprised of roughly 46 percent cash, 13 percents in CDs, 1 percent bonds, 7 percent common stock and mutual funds, 6 percent in mortgage-backed securities, and 28 percent in auction-rate securities.

The auction-rate securities are primarily an investment in softwood lumber that came their way through a government contract that had soured a few years ago, Crozet said. It was a good investment with liquidity at the time. When the auction markets seized up in 2008, Habitat responded quickly and secured a line of credit with Bank of America that would release the securities if Habitat needed the income, Crozet said.

Habitat also received an opportunistic, yet brief, income windfall from a donation of mortgage-backed securities on Dec. 31, 2009. The gift was a testament to how far the house of cards that was mortgage-backed securities fell during the recession. The gift had a face value of $128 million but an appraised value of only $8 million, according to Habitat’s financial statements.

“It was essentially really bad bonds that the bank wanted off their books,” Crozet said.

Habitat received payouts from fast-defaulting bonds until they went to zero. For the first few months that amounted to roughly $400,000, but now it’s decreased to roughly $50,000 a month, he said. Through June 30, 2010, payments totaled almost $3.2 million, according to Habitat’s financial statements.

While Habitat’s focus is on maintaining capital value, the organization has set a five-year goal of growing its endowment fund to $10 million. “We recognize that there are donors who like to do things that are more permanent,” Crozet said. To that end, they launched an endowment fund named after former President Jimmy Carter last year that donors seeded and is currently worth roughly $1 million. “We’re trying build up the endowment slowly,” he said. “We’re trying to start to play in that world.”

Looking forward, the general sentiment among these nonprofit leaders is one of cautious optimism. The recent tax cut deal struck by Congress, a hint of the return of consumer spending, and a 10-percent stock market gain in the fourth quarter of 2010 — the best since 2003, are no doubt helping fuel that optimism.

And yet, the caution is still there. Although individually “cautiously optimistic,” ACS’s Mickle would like to see fundamentals such as job growth gain before believing in the stock market’s recent charge. “Is it real or heading for something that’s not great?,” Mickle asked rhetorically.

Though it’s been a hairy ride the past five years, these nonprofits’ focus on their organizational mission has influenced investment strategy and will continue to do so.

“Our outlook is always optimistic,” said the Salvation Army’s Haupt. “We always feel that we come out stronger on the other side.”


Jeff Jones, former senior writer for The NonProfit Times, is a freelance writer based in Pittsburgh, Pa.