This pair of sentences from the Chronicle of Philanthropy neatly encapsulates everything that’s wrong in the world of foundations and endowments:
Experts say the ambitious returns most nonprofit endowments seek — usually 7 to 8.5 percent may be difficult to sustain. If so, organizations might need to trim what they pay out in investment fees, reduce how much they give away or spend on programs each year, or even intensify their fundraising.
I particularly love the last line, where the prospect of intensified fundraising is treated with a Lady Bracknell sneer. Going out and raising money? Is so déclassé.
The idea behind the article is that endowment returns are lower than they “have to” be, that they’re “missing the target”, and that’s a big problem.
But of course the much bigger problem is that the real choice here is never mentioned. What is mentioned? Investment fees. Ha. Those are tiny, they’re measured in basis points, reducing them is not going to make a significant dent in the problem. And then there’s reducing annual expenditures, which runs directly against the whole reason why the endowment exists in the first place.
So here’s a much better option. You might want to be sitting down for this – but why not just give your money away? I mean, that is quite explicitly what it is for. No one is forcing you to keep the value of your endowment constant, in either nominal or real terms. But in the Chronicle’s story, that’s not even presented as a possibility.
Somewhere along the lines, the idea of endowments as perpetuities went from being crazy to being so deeply embedded in managers’ minds that any alternative is almost literally unthinkable. In a world which is getting richer and better off every decade, there’s no good reason to save your money so that you’re going to be able to spend it on the neediest people alive in 200 years’ time. All of them are going to be better off than any of us, and in any case there’s going to be no shortage of future-world philanthropists giving away trillions of dollars. The future doesn’t need us, the present does.
So here’s a sensible way of looking at investment returns. When they’re high, they allow you to grow your endowment and ultimately do more good. When they’re low, they don’t. So instead of investing your money, just spend it. If investing money, these days, isn’t going to generate high returns, then don’t invest it.
Endowments: You have a choice. Be serious about it. Don’t assume the answer without even asking the question.