Community foundations guard nearly 1 billion

September 22, 2008
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First of two parts.

West Michigan’s 11 community foundations — which include three of the four largest in the state — shepherd assets of nearly $1 billion.

These foundations are turning toward investment expertise from outside the region, as nationwide best practices encourage them to maximize returns for their growing treasuries and to protect the public trust, said Rob Collier, president and CEO of the Council of Michigan Foundations.

At stake is millions in revenue for foundations and in fees for money managers and investment advisors. Grand Rapids Community Foundation alone tallied revenue of $32.8 million on investments — thanks largely to capital gains from securities sales — and paid $835,870 in fees, according to its annual report for the 2006-07 fiscal year.

In the early 20th century, foundations were rooted in the trust departments of local banks.

With the advent of professional management and public fundraising over the past 15 years, community foundations have either abandoned or are too new to have utilized the trust format that intimately tied them to local banks, said Kathy Agard, executive director of Grand Valley State University’s Dorothy A. Johnson Center for Philanthropy and Nonprofit Leadership. Today, they operate as nonprofit corporations, she said.

Many of Michigan’s smaller community foundations were created only about 20 years ago with seed money from the W.K. Kellogg Foundation, as a way to capture a portion of the unprecedented transfer of wealth from the World War II generation to baby boomers, Agard explained. As a result, every community in the state has access to a community foundation, which makes Michigan unusual, she added.

National Standards for U.S. Community Foundations, a list of best practices adopted in 2000 by the nationwide Council on Foundations, requires that “community foundations are doing the best possible job in managing the funds with which they are entrusted,” Collier said. “Conflict of interest is a huge issue, and the day and age of the local bank president managing the funds and sitting on the board is no longer.

“The investment policies require that certain community foundations take certain steps to ensure they are being financially prudent in managing the dollars they are entrusted with. It doesn’t say they should not invest locally, but they should use certain practices to make sure they are getting investment firms who can consistently deliver good returns for them.”

Plus, Collier said, at a time when bank mergers have created multi-state financial behemoths, a new question has cropped up: What is the definition of local?

“That is a difficult issue, because nowadays, what was once local is now global,” Collier said.

“As the banking industry began to regionalize and then became part of national systems, the idea of the locally owned bank went away,” Agard added. Still, when community foundations first started becoming nonprofit corporations, they continued to invest with local banks, she said.

“The final step has happened maybe over the last decade or so, maybe 15 years, where foundations took a look at what they could get in terms of returns,” she said. “As stewards of the money, community foundation boards felt they could get better terms on investments by broadening the number of people managing the money.”

With total assets of $237.4 million, Grand Rapids Community Foundation, one of Michigan’s oldest and largest community foundations, relies on a five-member committee to make recommendations to the 10-member Board of Trustees on investments. Ten years ago, the board chose a New York City company, Colonial Consulting, as investment advisor. Colonial specializes in nonprofits and community foundations.

In 2006, after years of study, the GRCF board agreed to reallocate investments among asset classes and concluded an 18-month request for proposals process to choose a new stable of money managers, CFO Lynne Black said. Today that stable includes 26 money managers divided among seven asset classes, plus the Bank of New York as the master custodian, a conduit and bookkeeper for investment transactions, Black said.

Of the 12 money managers listed in the foundation’s 2005-06 annual report, the GRCF board excised five: Comerica Bank, Huntington National Bank, LaSalle Bank (now Bank of America), Merrill Lynch, and Norris, Perne & French LLP.

Two management firms on that roster were locally owned: LaFleur & Godfrey, with an $8.1 million holding, and Norris, Perne & French, which handled $12.3 million for GRCF, according to the foundation’s annual report. While the foundation retained LaFleur & Godrey, Norris, Perne & French did not survive the request-for-proposals process. A representative declined an interview request.

Sources privately say the changes were criticized by some in Grand Rapids’ financial community, which would prefer to see those millions — and the fees they generate — housed locally.

GRCF President Diana Sieger said that she understands her critics’ concerns, but she contends the proof is in the returns. The foundation tracks how its former investments fared and compares that to current arrangements. The latest results reflect the current bear markets.

“We did a side-by-side comparison of how we had been invested previously and now. We were down 3.7 percent from July 2007 to June 30, 2008. Previously, we would have been down 8.44 percent,” Sieger said. “That’s real money. That is the proof why we did what we did.”

In Muskegon, the Community Foundation for Muskegon County has worked with Cincinnati-based investment advisor Fund Evaluation Group LLC for about 15 years, President Chris McGuigan said. From its founding in 1961 until two or three years ago, the foundation invested through local banks and brokerage houses, she said.

“Just in the last two or three years, we moved all our money away from trust departments and investment houses. It added a layer of fees that wasn’t necessary, because in essence we told them exactly what do. We couldn’t justify the fees any more,” McGuigan said.

“They weren’t happy to have funds removed, but we waited a long time to take that final step.”

GRCF’s Sieger said she is committed to making the most of money that donors entrust to the foundation, a goal she believes they share.

“I know that the donors who are coming to us, or people who are interested in us, the very first question — after they want to know who’s on our board — they talk to me about ‘your investments,’” said Sieger, who has led GRCF since 1987. “They want to make sure we do right by them.”

Added Bonnie K. Miller, GRCF Investment Review Committee chair: “We have to keep working at trying to generate the necessary performance to be able to give back to the community. That’s what it’s all about.”

NEXT WEEK: How West Michigan’s community foundations decide on investments for their millions.

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