The $491 million Central Indiana Community Foundation has switched investment advisers after the market crash of 2008, a year in which it saw greater losses than many of its peers.
CICF, one of the largest community foundations in the country, lost 31 percent of its assets in 2008. That was more than the 27-percent median loss among all community foundations, according to a recently released survey by the Council on Foundations, based in Arlington, Va.
“We could’ve done a little better, yes, definitely,” CICF investment analyst Belinda Scholl said.
Each percentage point gained or lost translates to millions in grant-making ability. CICF awarded $40.3 million to various charities in 2008. CICF encompasses the Indianapolis Foundation serving Marion County and the Legacy Fund serving Hamilton County, as well as administering several donor-advised funds.
To avoid a drastic drop in grant-making this year, CICF leaders adopted a new spending policy for endowment funds held on behalf of charitable organizations. Not all organizations opted to follow the change, which called for spending 7 percent instead of 5 percent of average assets in 2009. Community endowments, the Indianapolis Foundation and Legacy Fund, increased their spending policy from 5 percent to 5.5 percent.
CICF’s joint investment board also started shopping for a new consultant and began using Boston-based Cambridge Associates in September. The foundation let go of Cincinnati-based Fund Evaluation Group LLC after 16 years. CICF had begun considering hiring a new investment consultant before the 2008 market decline.
“Fund Evaluation Group has served us very well,” Scholl said. “Because we have grown, our portfolio has grown.”
Cambridge, headquartered in Boston, employs more specialist money managers and was chosen partly for its expertise in evaluating alternative investments, which include hedge funds, Scholl said.
CICF will pay more for money management advice because Cambridge takes a percentage of assets. The total cost in the first year will be about $240,000, versus $225,000 for Fund Evaluation Group.
The local foundation is not much different from its peers in moving heavily into alternative investments. The Council on Foundations reports that 20 percent of all community foundation assets were in alternatives in 2008, the highest level in the survey’s history. The survey included 200 community foundations, including several in Indiana.
CICF had 12 percent in hedge funds and 11 percent in real assets with intentions to increase both types of investment.
Under Cambridge, there’s no plan to abandon alternatives, but CICF will use more flexible asset-allocation targets, Scholl said.
Although CICF's assets fell 31.1 percent, to $480 million, in 2008, they have risen about 18 percent so far in 2009, Scholl said.
Many foundation trustees will see their assets begin to recover and breath a sigh of relief. Carmel money manager Greg Hahn, principal of Winthrop Capital Management, believes they need to do more to avoid a repeat performance. “This is really a break-down in risk management,” he said. “Asset allocation–some consultants and advisers believe that is risk management.”
Hahn, who sits on the Indiana State Teachers Retirement Fund board, said that over time, foundations have abandoned principal-preservation mechanisms in favor of maintaining overly high spending. “A lot of foundations have to back off and say 'We’re disciplined, and we’re ready to change our spending policy,'” he said.
Even on a long-term basis, community foundations aren’t maintaining “purchasing power,” the Council on Foundations noted. The median 20-year return in the survey was 7.9 percent. (CICF, which has existed since 1997, reports a 10-year return of 4.6 percent.)
With average inflation of 2.8 percent, and typical spending policies of 5.5 percent, community foundations are outstripping their 20-year return by 0.4 percent.