Priceless trust Foundations seek top returns

September 27, 2008
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Editor’s Note: This is the second of a two-part series.

For years, the Grand Rapids Community Foundation ignored the advice of its investment counselor.

Colonial Consulting, a New York City company, told the foundation that it would make more money by mixing up the types of investments and working directly with more money managers. But, mindful of the foundation’s long relationships with the Grand Rapids financial community, GRCF leaders tread slowly.

After the foundation became a separate nonprofit corporation in 1989, it retained investments in what were then three major, local banks: Old Kent Bank, Union Bank & Trust and Michigan National Bank.

By the end of the 2005-06 fiscal year, the foundation had about $200 million invested in five asset classes with a dozen money managers and banks. Holding the largest chunk was Fifth Third Bank, the Cincinnati-based successor to homegrown Old Kent, which handled $83.5 million of the foundation’s assets.

In August 2006, after the Investment Review Committee’s six years of study and an 18-month request-for-proposals process, GRCF’s Board of Trustees finally agreed to follow Colonial’s advice and shook up its allocations mix and money manager line-up.

As the dust has settled in the two years since, GRCF counted 21 money managers in 26 funds over six asset classes, as of June. One money manager is a Grand Rapids company, and Fifth Third remains on the list; others are headquartered in cities such as New York, Boston and Los Angeles. The master custodian is Bank of New York.

At the end of fiscal 2006-07, GRCF had investments of $224 million and total assets of $237.5 million.

Disengaging from formerly local banks and other money managers was a long and difficult process, GRCF leaders said.

“That was tough. It was hard. But we had to do what was best for the foundation and building assets going forward versus local politics,” CFO Lynne Black said.

“Was it a hard decision? You bet it was. Have some relationships been spoiled? Yes, they have,” added GRCF President Diana Sieger. “What I’m wanting is to make sure that $100 that somebody gives us today is multiplied many times over by the time we start using the income from that asset.”

GRCF is mirroring investment approaches taken by other Michigan community foundations, such the Fremont Area Community Foundation, the Community Foundation for Muskegon County and Community Foundation of Southeast Michigan, according to information posted on their Web sites. Kalamazoo Community Foundation has taken another approach by lock-stepping its investments to county and city pension funds.

Bonnie K. Miller, chair of the Investment Review Committee and a foundation trustee, said GRCF’s assets had grown enough to be invested directly with money managers.

“The original philosophy of the foundation was to maintain investments with local banks, which it has done for a number of years,” said Miller. “Over time, the ownership of whatever were local banks changed. Many major decisions happened elsewhere. What we did was, over a period of time, we looked at the recommendations our consultant made. At that time, we decided not to do the things they recommended, and we kind of paralleled. We looked at if we had done what he said versus what we did.

“We saw over a period time (that) we should have listened to him. The circumstances were such that we were paying local people to be the intermediary between ourselves and money managers elsewhere. That was costing us.”

With investment income and capital gains often rivaling revenue from annual donations, many community foundations have sought to maximize their returns by turning to expertise outside their locales.

Chris McGuigan, president of Community Foundation for Muskegon County, said that even though her organization, established in 1961, never was in a trust form, its money was divided between three “then-local banks and their trust departments.” In the late 1990s, the foundation added the local branches of brokerage houses to the list.

“Then, in 1999, the foundation went through a process where we determined what each of our investment managers was best at and then rearranged the money based on that. Just in the last two or three years, we moved all our money away from trust departments,” she said.

McGuigan said the foundation, with 2007 net assets of $105.5 million, found it could eliminate a layer of fees. Its investment advisor is Fund Evaluation Group LLC, based in Cincinnati, which specializes in the nonprofit sector.

“Almost all of the funds that we held through the banks and the investment houses, we could hold their equivalent directly and skip the custodial fees,” she said.

Another FEG customer, the Fremont Area Community Foundation, was transformed in 1994. Fourteen years ago, its assets consisted almost entirely of Gerber Products Co. stock when Swiss pharmaceutical company Sandoz Ltd. bought the baby food maker at $53 per share, considerably higher than the market price at the time. The sale almost doubled the foundation’s size “literally over a weekend,” said foundation President Libby Cherin. At that point, foundation leaders realized they needed new expertise. “Because of the size of our endowment, we have decided we need experts whose expertise is beyond what we have on our board,” Cherin said.

At the end of the 2006-2007 fiscal year, the Fremont foundation reported $220 million in investments, overseen by a committee chaired by local businessman Bob Johnson, who also chairs the Board of Trustees. Johnson said the committee meets quarterly to review investment results.

“We have benchmarks that we have set for the different sectors that we invest in,” he explained. “We’ve been trying to do some study on hedge funds. A lot of foundations, especially larger ones, have been heavily involved in hedge funds, but we’ve been going slow with that. We’re a smaller community, and probably a little more traditional.”

Like the Grand Rapids foundation, the Kalamazoo Community Foundation started in a trust format more than 80 years ago, and for many years relied on local banks to manage an income-oriented portfolio, said Wes Freeland, advisor to the president/CEO.

“In the early part of the 1990s, the Board of Trustees decided to go from income-oriented portfolio management to a total return, which considered income and market gains, portfolio,” Freeland said. Eventually, the foundation turned to the same adviser that’s used in Muskegon and Fremont — Fund Evaluation Group — to help choose money managers, he said.

In 2005, the foundation underwent an examination of its governance, prompted in part by the Sarbanes-Oxley Act. Although as a nonprofit, KCF was not covered by the act, “we basically wanted to mimic every part of it we could because we thought it was good business,” Freeland said. During that process, the board decided to align the foundation’s investments with the pension funds of the county and city of Kalamazoo.

“What we saw in the potential for the new model was a past track record that was extremely positive, more so than any other nonprofit model we could find,” he said.

It also offered an opportunity to reduce fees, he added.

“There are three separate portfolios under the same committee with the same managers,” Freeland said. “It’s very workable for everyone.”

By the end of 2006, the Kalamazoo foundation reported net assets of $278 million.

The largest community foundation in Michigan is the Community Foundation for Southeast Michigan, which reported assets at the end of 2007 of $609 million, according to its Web site. Calls for comment from the seven-county foundation were not returned.

GRCF’s Black said she thinks it will take many years to completely align the foundation’s new asset allocations to targets. Sieger said she understands the concerns of her critics, but still thinks the foundation’s new tack is, in the long run, best for the entire community.

“When I have someone tell me the community foundations should have all their assets invested locally, I’ll turn right around and say, ‘Where is your money invested?’” Sieger said. “And you know what? It isn’t here.”

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