Guest Column: About the Business of Charity
Charitable organizations teach us how change can occur through generosity and dedication to a mission. But while generosity of spirit certainly drives the work of charities, nonprofit organizations also apply principles of business excellence every day. While it is often noted that charities can learn from businesses, individual investors can learn from the investment management practices of large charitable organizations.
Founded in 1925, with more than $500 million in assets today, The Denver Foundation is the oldest and largest community foundation in the Rocky Mountain region. We steward a community endowment and administer charitable funds for more than 800 families, individuals and businesses - including numerous charities that invest their endowments with us.
It is essential that we practice the utmost care as we manage assets for our donors and the community's future needs. Through the leadership of our volunteer Investment Committee and our investment consultants, Monticello Associates, The Denver Foundation has achieved outstanding investment performance.
• Over the last 10 years, The Denver Foundation's investments have averaged a return of 6.21 percent each year, compared to the S&P 500 of -0.15 percent. The foundation has outperformed the S&P 500 by 6.36 percent per year.
• The foundation ranks in the top 6 percent of more than 2,000 institutional investors, including endowments, foundations, pension plans and universities.
• If an individual invested $10,000 in the S&P 500 on Jan. 1, 1999, it would be worth $10,646 as of Sept. 30, 2009. The same investment in The Denver Foundation's portfolio would be worth $19,773 - almost twice as much as the stock market.
What are some lessons that individual investors might glean from the success of institutional investors such as The Denver Foundation?
Carefully establish your goals. The starting point for investing is to articulate in writing your investment goals, including time horizons and tolerance for risk.
Develop an investment strategy consistent with your goals. Once the goals are set, the asset allocations fall naturally from them. Asset allocations refer to what percentage of your portfolio you put into various classes of assets: stocks, bonds, private equity, etc. Your goals may change over time, so plan on rebalancing your allocation periodically.
Conduct research and implement your strategy. Within each asset class, you then need to determine how much to put into different investment strategies. For example, with stocks, there are foreign and domestic; small, medium and large companies; value-oriented investments and growth-oriented investments.
Stick to your strategy. Do not be distracted by short-term fluctuations or fads. Don't chase "hot" investments based on historical performances.
Diversify your portfolio. No matter what your strategy, it is important to be well-diversified. One of the keys to The Denver Foundation's success is that we have 46 different money managers for the $500 million plus that we manage.
Monitor. Keep abreast of current trends and events and monitor your individual money managers. Pay attention to investment fees. If you do not have the time, interest or expertise to do this, hire someone who does.
Strike a balance between being inflexible and being too flexible. Be true to your goals and strategy. React to changes in the world but don't overreact.
To demonstrate the outcome of these principles, we frequently cite a somewhat unusual equation: $8 million minus $16 million equals $35 million. No - we're not bad at math. This equation describes our use of $8 million donated to The Denver Foundation through the estate of Irene Rothgerber in 1984. Since that time, the foundation has given away more than $16 million to local charities from a charitable fund in her name. This fund is currently worth more than $35 million.
We'd all like to see that math at work - in our own portfolios and in those of the charities we support. Of course, The Denver Foundation has certain advantages that an individual can never acquire. For example, some of our investment vehicles have $10 million minimums and are only available to large charitable foundations.
Nevertheless, by applying the principles used by major institutional investors, we can all learn to be more disciplined - and hopefully more successful - in our investing.