Foundation says NO to Wall Street…and Outperforms

Central Carolina Community Foundation is in most ways a typical community foundation: Based in Columbia, SC, it supports social service organizations, colleges, churches and arts groups in the midlands of South Carolina.

In one important way, though, Central Carolina foundation stands apart: It invests most of its investable assets, which are worth about $94m, in low-cost index funds from Vanguard that track the markets, rejecting, for the most part, the lure of Wall Street asset managers who claim they can do better.

…most stock-pickers can’t consistently beat the markets or, for that matter, monkeys that throw darts at the stock pages.

This iconoclastic behavior has proven to be good for the endowment, and thus for the citizens of central Carolina served by the foundation. Central Carolina Community Foundation’s investment performance is superior to the average performance of other community foundations, of small and mid-sized private foundations and even of private foundations with $500m or more in assets, most of which turn to well-paid chief investment officers, consultants, hedge fund operators and investment banks to manage their money.

This should not come as a surprise. Numerous studies — here’s one from mutual-fund tracker Morningstar — demonstrate that actively-managed funds, taken together, lag index funds that track a market benchmark. This is because index funds typically charge lower fees than their actively-managed counterparts, and because most stock-pickers can’t consistently beat the markets or, for that matter, monkeys that throw darts at the stock pages.

“The only thing you can control with your investment is its cost,” JoAnn Turnquist, the president and CEO of the Central Carolina Community Foundation, told me by phone the other day.

At that job, Turnquist has done very well: When she joined the Central Carolina foundation as its CEO in 2009, its investments costs added up to about 0.29 percent of its assets; today, its all-in Vanguard fees are less 0.17 percent. 

It’s all but impossible to know what the typical foundation pays in fees, but you can be sure that their investments costs are substantially higher. What’s more, taken together, the people who manage foundation endowments have failed to beat the markets as I’ve reported on this blog, here and here

That’s quite a combination: Higher costs for mediocre performance.

It’s no wonder that, in his annual letter to Berkshire Hathaway shareholders earlier this year, Warren Buffett wrote:

When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.

Central Carolina Community Foundation, unlike most private foundations, discloses its endowment returns. As of Dec 31, 2016, net of fees, its annual returns were 7.37 percent for one year, 4.99 over three years, 9.06 percent over five years, and 5.06 over 10 years. Those returns beat the comparable returns for community foundations, private foundations and private foundations with $500m or more in assets, as reported by the 2016 Council on Foundations–Commonfund Study of Investment of Endowments for Private and Community Foundations®. 

Here, with apologies for my limited skills in data visualization, is a chart comparing the performance of the Carolina foundation to its peers:

chart (1)

Again, this should not be a surprise. What’s surprising is that so many foundations continue to play the fool’s game of chasing returnsAnd they do so at a high cost.

The Ford Foundation, David and Lucille Packard Foundation,  Robert Wood Johnson Foundation, William and Flora Hewlett Foundation, Gordon and Betty Moore Foundation, and the MacArthur Foundation all pay their chief investment officers more than their top executives. Some make in excess of $1m per year. They also pay substantial fees to outside money managers.

MacArthur, Packard and Kellogg, to their credit, disclose their returns. Ford says it will do so soon. The rest won’t say whether their investment officers and their outside asset managers are delivering market-beating performance.

To be sure, there’s an argument that a handful of the biggest foundations might be able to beat the markets, even after paying outsized fees to investment bankers and hedge fund managers. By virtue of their size, foundations such as Ford, the Gates Foundation and Bloomberg Philanthropies may get access to investment opportunities not available to other managers. We can’t say because, again, they won’t say.

Soon, though, that could change. Increasingly, data provided by foundations on their IRS Form 990s is becoming open, digital, free and machine-readable, as Brad Smith of the Foundation Center explains on its Glasspockets blog. This will make endowment returns available to anyone with the requisite math skills and computing power.

As it happens, a startup company called Foundation Financial Research is compiling that data on endowments. It intends to make it available for free to foundation trustees and to sell the data to asset managers.

John Seitz, the firm’s founder, who formerly worked as an asset manager, tells me that he started the company because he believes that foundations and nonprofits are not paying as much attention to their endowment performance as they should. By making data about their returns public, he hopes to create pressures on them to improve.

On a website called Foundation Mark, Seitz has published some of his aggregate data. Drawn from data on 40,000 foundations, it indicates that their average returns trailed a plain-vanilla index of 60 percent stocks and 40 percent bonds. 

“I was appalled at how little the trustees really thought about their investments,” Seitz says, referring in particular to small and mid-sized foundations. “This is less about the hundred foundations that are over $1 billion (in assets) than about the 40,000 that are not.”

 “The end goal is to have foundations with more money in their pocket to give away,” he says. “The way to do that is to increase transparency and provoke discussion.”

Turnquist, JoAnnThat’s why I was pleased by JoAnn Turnquist’s willingness to share Central Carolina Community Foundation’s monthly performance results from Vanguard with me. Those results are, of course, regularly shared with the foundation’s trustees, who meet annually in Columbia with representatives from Vanguard to review the endowment performance.

What’s most important about Central Carolina Community Foundation’s superior performance is that it has more money to invest in its community. The foundation made grants of about $16m last year, with about 92 percent of those grants remaining in the region and close to 97 percent staying in South Carolina. It manages money for about 400 funds as well as for its own endowment, and it works in collaboration with other funders, including the John S. and James L. Knight Foundation.

Last spring, for example, the community foundation made $448,500 in grants to 12 local nonprofits as part of an initiative called Connected Communities that aims to answer the questions,  “What makes residents love where they live?” and “What draws them in and keeps them there?” They supported arts groups, libraries and historic preservation. In an effort to insure that Columbia and its environs are welcoming to all, the foundation has also supported a museum exhibit on race, a playground that’s accessible to disabled users, a Jewish heritage program and Latino artistry.

What’s most important about Central Carolina Community Foundation’s superior performance is that it has more money to invest in its community.

Whatever you think of those programs, and they sound pretty good to me, they are surely better than sending more foundation dollars to overpaid Wall Street money managers in exchange for subpar returns.

This article was originally published by Non Profit Chronicles.
Marc Gunther 
is a veteran journalistspeaker, and writer who reported on business and sustainability for many years. Since March 2015, he has been writing about foundations, nonprofits and global development on his blog, Nonprofit Chronicles.