Monthly Archives

September 2019
  • Are Investment Fees Draining Your Foundation’s Endowment?

    The success or failure of an endowment relies on many interrelated and important factors. Some of these factors are impossible to control or predict such as the level of next year’s donations? Or the return of the endowments investment portfolio in the years ahead? 

    However, foundations should strive to do their best in areas where they can take control and make a difference. An area we often see ignored or misunderstood by nonprofits and foundations is the cost of investment management. A keen eye on these costs can enhance significantly enhance long-term performance.

    In our opinion, most investors both institutional and individual pay too much for investment management. When one considers that most endowments strive to distribute 5% of the value of their asset base annually but also incur 1% in administrative expenses, any additional “above normal” expenses for investment management puts pressure on the endowment to take risks that may not be otherwise necessary. 

    For example, we often see foundations that have hired an outside manager or “consultant” who charges an annual fee, which is normal but then puts the foundation assets in investments that charge additional annual fees. These include mutual funds, exchange-traded funds, or even investments that have to compensate other outside managers. 

    This layering of fees may not look like much by decimal points or in any given year, but they add up over time and can significantly reduce the endowment’s long-term returns. 

    For example, consider a foundation that distributes 5% annually in grants, incurs 1% in administrative fees and pays 1.8% annually for investment management (we’ve seen higher fees!).  Combined, this adds up to close to 8% flowing out of the endowment annually. The investment manager is almost 25% of the total annual outlay! 

    Of course, there may be investment managers somewhere in the world who may deserve such a high fee due to their spectacular results. But the fact is, on average, this is not the case.  Indeed, given that the average endowment usually has a maximum of 60 to 70% stock exposure at any given time and the historical returns on a 60/40% stock/bond mix over the last 50 years has been a mere 6%, paying a high investment management fee might reduce your effective return to 4% or less. 

    For foundations and endowments, doing and understanding this math is essential to your long-term survival!

    To avoid these fee pitfalls,  foundations and nonprofits need to ensure that their investment management costs are competitive based on their endowment’s size. Most importantly, they need to avoid the layered fee arrangements that so often exist and go unnoticed – until it’s too late. Keeping an eye on the costs you can control will put your organization in better shape to remain sustainable for many lifetimes.


    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon

  • Your Foundation’s Long-Term Investment Success Tied to Your Risk Management

    Many elements affect the success of your endowment over the short term. Quality governance, leadership, and fundraising are among the most obvious. However, when looking at your endowment growth over longer periods of time, what counts is how it fares during downturns that regularly hit the financial markets.  

    It is no surprise that healthy financial markets put the wind at the back of your endowment sails. Advancing stock markets drive your endowment asset levels higher, and usually prompt increased donation flows — a perfect combination for success. In fact, during most bull markets the average foundation results are quite similar. It appears that the rising tide does, in fact, lift all ships in the endowment world. 

    Fortunately, most sophisticated endowments usually have 60-70% of their assets invested in the stock market during most of, if not all of the time. When one considers that the average bull market lasts 7-9 years and has returned investors 200%+ during most of those periods, it is easy to see why the average endowment enjoys success when the good times roll. 

    But it also appears that most endowments lose in a similar fashion when the proverbial “music stops.“ In fact, during market declines similar to 2008-2012, the majority of endowments lost significant value, in some cases as much as 50%. As the stock market tide pulls back, most endowment ships take on water! 

    Such market swings create more havoc than you may think. The negative impact of substantial stock market declines has a profound effect on the health and even the longevity of your endowment assets. This is mainly due to what we call the “ugly math” of big investment losses. 

    A 50% decline in the value of your endowment requires a 100% upward swing in the market to just get back to where you were.  (Think of it: if $100 loses 50%, down to $50, it takes a 100% gain to recoup to $100.) And this ugly math is compounded by your need to continue making withdrawals from your endowment, thus further depleting your principal during a down stock market cycle. On average it takes 6-7 years for stock markets to fully recover bear market losses.

    The moral of the story is this: you need appropriate risk management tools that prevent substantial losses and ugly math.

    No one can predict with accuracy when the next bear market will ravage stock markets, but committees can prepare for their inevitable arrival by having a few important policies and using certain tools. Here is a breakdown of four things you can do: 

    1. First, you need a finance committee who is not tricked by their own human nature or lack of knowledge when it comes to market history. Often committees can be prompted by current stock market strength to become overconfident about future stock market advances. They let the endowment remain inappropriately over-weighted in stocks – at just the wrong time.  This type of behavior is why the human brain isn’t great at investing and is one of the reasons that a strict, well-written Investment Policy Statement should be in place and adhered to.  
    2. Related to this, be sure your Investment Policy Statement specifies your endowment’s maximum stock exposure—and then adhere to it.  This policy should allow the investment manager to be significantly less exposed to stocks in bad markets – which I call “active asset allocation.”   
    3. Use “sector management,” by which I mean pay attention to the individual stock market sectors, which move differently.  There are periods of time when certain sectors of the stock market experience above-average growth to a point of dangerous valuation, followed by a crash. Tech stocks in 1999 (which later crashed) are a good example. Committees and investment managers should review their investment portfolios for those areas that have become significantly overvalued and reduce exposure to avoid catastrophic declines in those sectors. 
    4. Lastly, if you follow my advice and only invest in individual securities (individual stocks and bonds from around the globe), be sure to use “stop loss orders” which help prevent a huge loss in any one investment, sector or the whole portfolio. Stop loss orders automatically sell a stock if it declines by a certain specified amount, thus keeping your endowment away from catastrophic loss.

    No one knows when the next bear market will occur – but given how long it has been since the last, many smart forecasters think sooner than later. If there were ever a good time to get serious about risk management, the time is now by following these recommendations. Let’s make sure that when the next bear market is at your doorstep, you are prepared to weather the storm and make your foundation sustainable for many lifetimes!


    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon