The most fundamental axiom of investing is, don’t put all your eggs in one basket. It’s a principle that the Indianapolis-based Lilly Endowment has largely ignored since its founding in 1937 with bequests of Eli Lilly and Co. stock by a trio of Lilly family members. Even so, the endowment has swelled into the nation’s second-largest private foundation, with assets as of the end of 2018 of $15.1 billion.
But as the disclaimer in investing ads says, past performance does not guarantee future results. While we can all be thankful the appreciation and dividends from Lilly stock have turned the endowment into a philanthropic behemoth that doled out $547 million in grants in 2019, that doesn’t change the reality that it’s taking undue risk.
That’s why we are glad to see the endowment’s torrent of recent sales of Lilly stock. Since September, the endowment has sold more than 2 million shares in some two dozen transactions, raising more than $450 million.
The endowment says the sales are primarily to raise cash for more grants—though the sales combined with dividend payouts are generating hundreds of millions of dollars more than the organization would need for that purpose.
The recent stock sales might sound substantial, but we’d prefer to see them occur at a stepped-up scale. Even though the endowment announced a diversification strategy in 2006, Lilly stock as of the end of 2018 still accounted for 90.4% of assets.
That’s partly because Lilly shares have appreciated nicely in recent years, climbing 74% since February 2018. When your principal holding keeps swelling in value, it’s tough to make it a smaller slice of the overall pie.
And it’s clear that the endowment board, which sets investment policy, doesn’t want to see the percentage plunge, anyway. Endowment officials say that, even as they branch into other investments, they intend for Lilly shares to remain the endowment’s primary asset.
For true diversification, financial pros say, Lilly shares would need to account for well below 20% of endowment assets. They say continuing to rely on a single stock is more akin to gambling than investing, subjecting investors to wild swings that would be smoothed out by the broad mix of assets in a diversified portfolio.
One likely reason for the endowment’s tight grip on Lilly shares is that having so much Lilly stock in friendly hands helps protect the pharmaceutical giant from an unwanted takeover. Even with the spate of recent stock sales, the endowment owns 114.5 million Lilly shares, or 11% of the total.
Helping keep Lilly independent is a noble goal—one we wholeheartedly support. Even so, we think the endowment’s primary focus should be maximizing its own financial firepower and operational impact.
In the big picture, that’s what would be best for the community, too.
As it stands today, the city’s most important company and most important not-for-profit are tethered to the ups and downs of a single stock.
God forbid that Lilly one day crashes. But if it did and the endowment remained primarily invested in Lilly shares, it would wipe out two pillars of our region, not just one.•
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