Sunday, January 17, 2016

Charity vs. The Market

I am responsible for the performance of assets under management (“AUM”) for a few clients and my own, personal investments.

Asset management is not my primary job.

But, I like doing it. My methodology is replicable and simple and my performance has been pretty good since inception. Well, better than the returns posted publicly by many hedge fund managers anyway. No-one really beats 'the market' unless they get lucky. In gambling terms, 'the market' is the 'house.' The house never loses.

I’m not sure whether my achieved returns afford me bragging rights though, because hedge fund managers are often more adept at managing their earnings, rather than client returns. Their objectives can also be referred to as personal Key Performance Indicators, or KPIs.

I have a friend whose father has been managing retail investment portfolios for his clients for many years. He, my friend, recently shared with me that every time the market posts a correction or significant downturn, his father has to spend hours talking his clients ‘off a ledge,’ proverbially speaking.

What does all this have to do with charity?

Well, the thing is this… in general; wealthy people support charities generously. But, the generosity of wealthy people is either limited, or otherwise linked to a large degree, to the performance of ‘the market.’

In a bull market, everyone happens to look like astute and smart investors. Giving is easy when one is receiving (plenty of profit/cash)!

When the market turns negative, as it has been for the last couple of months, charitable generosity is also slowly eroded. Or fast, depending on the severity of the correction!

For example, a local foundation has about $200 million in AUM. This year to date (1/13/16 - at the time of writing the Dow was down 7.5% YTD), their investment portfolio may be down about $15 million. Last year the Dow finished negative overall, meaning that their January losses have exacerbated their investment losses suffered in 2015.

Even if their asset managers placed their portfolio entirely in cash, they would have lost money… at least in inflationary terms, in addition to having to fund their operations from their ever declining cash resources.

When a foundation generates less income (from investments), it needs to reduce costs in order to stay in business, or find new investors. I do apologize if that last bit sounded a little Ponzi-like.

Cost cutting, like letting go of staff, moving to more humble premises, etc. may be viewed as undesirable, especially near term. Not good optics. A less offensive option would be for the foundation to portray everything as ‘business as usual.’ Although they may simply be offering and/or making less grant funding available to the nonprofit agencies that rely on them for financial support, in order for them to do their charitable work.

The above offers at least one sound reason why nonprofit corporations should be managed - just like for-profit corporations - with a focus on financial sustainability, first and foremost.

‘Business as usual’ allows foundations to e.g. host a breakfast at a nominal fee to supporters; and then posting these events and activities to social media sites, or sharing updates via press releases, etc. This presents an opportunity to remain relevant and visible and in the forefront of philanthropy in a respective community. Handing out certificates to large groups of individuals as recognition for community services delivered, also attracts media attention, at very little expense to a foundation.

One of the directors serving on my nonprofit corporation’s board once said, “It’s easy to find a project, but difficult to source funding… manage the business accordingly!”

Being charitable requires a reasonable market return! If you would like to learn how your corporation would be able to achieve a return to profitability, drive net/new (organic) revenue and learn financial sustainability best practices, contact me for a free, no obligation chat.

I do not want to - nor do I have a need to - manage your personal and/or corporate investments… I am simply being charitable!