The sale of a 93,000-acre elk ranch brought in $30-million for one nonprofit endowment. Royalties from a blockbuster multiple-sclerosis drug generated $27-million for another.
A six-state residential real-estate portfolio produced $15-million for a third.
The tens of millions of dollars reaped by nonprofits last year from such donations were certainly outliers among the 255 groups that participated in The Chronicle’s annual endowment survey.
But experts say the sky-high endowment returns those gifts generated for three organizations provide a lesson to the nonprofits in the study, which found median returns of 6.5 to 11.4 percent in 2012 and a similar pace for groups that have solid projections for this year or that have already finished the 2013 fiscal year.
Despite the decent returns, many endowments are still struggling to regain what they lost during the recession and beyond.
Nonprofits that sit back and rely solely on investment returns to build their endowments amid today’s economic uncertainties will never do as well as groups that aggressively raise money to land endowment gifts or employ creative ways to generate cash to add to their funds, experts say.
While larger groups such as universities have long understood that approach, small and midsize nonprofits have lagged, financial advisers say. But the recession, government cuts, and increased demands have made painfully clear the important role of a strong endowment.
“Everyone’s endowments are beginning to rebound, and now they’re saying, ‘We need to keep that going,’” says Dianne Johnson, president of Endowment Builders, a fundraising-consulting firm that works with small and midsize groups. “We can’t just do that through investment returns. We need to get dollars in the door.”
John Griswold, executive director at Commonfund Institute, a nonprofit financial adviser to charities and universities, says nonprofits would be wise to remember that extensive research has shown that nearly half of endowment growth from 1994 to 2003 came from gifts and other additions to endowments.
“We think that’s still true,” Mr. Griswold says. “Trustees and boards should be paying more attention to the fundraising side.”
Stock-Market Swings
Relying primarily on investment returns comes with a major hazard that has only worsened in recent years: unpredictable stock-market swings.
The ups and downs are clear just looking at the results of The Chronicle survey. Nonprofits that ended their fiscal years June 30 fared much worse than those that ended just two to six months later. The 236 charities, private foundations, and universities that provided two years of data showed an overall median investment return of 6.5 percent in 2012.
Yet the 130 groups without a June fiscal-year end recorded a median return of 11.4 percent, driven for most groups by the full-year’s 13.4-percent growth in the Standard & Poor’s index of the 500 largest stocks.
Groups with June 30 fiscal-year ends reported flat returns, mirroring the anemic 1.7-percent growth in the S&P 500 for the 12-month period beginning July 1, 2011.
The 209 organizations that provided year-to-date returns reveal that 2013 is shaping up to be a potentially robust year, as only one group, the Rotary Foundation of Rotary International, has reported negative returns. And only four groups have reported flat returns. The median return for fiscal year 2013 is 8.4 percent, up from 6.5 percent during fiscal 2012.
The group with the highest growth in this year’s survey was the Rocky Mountain Elk Foundation. The Missoula, Mont., conservation group’s endowment jumped 217 percent, to nearly $40-million, last year. The group has one man to thank: Bob Torstenson.
In 2002, Mr. Torstenson, who was dying of cancer, gave his 93,403-acre Double H Ranch in New Mexico to the foundation. At the time, the ranch was valued at $17-million. Mr. Torstenson also provided a cash endowment of $4-million to keep the ranch operating.
But a decade later, the organization came to a realization. “We got to a point where our executive staff concluded that we could do better things with the money rather than with the ranch,” says Doug Green, the foundation’s controller. “We went back to the family and came to an agreement that we could sell the ranch if we put the money into an endowment.”
The ranch sold for $23-million, and the original cash gift had grown to be worth $5-million from investment returns. In an instant, the foundation had a new, nearly $30-million endowment.
Working with the Torstenson family, the foundation agreed to spend 5 percent of the endowment to advance its mission.
The significant increase in the endowment has prompted big changes for the organization. It has hired three endowment investment managers and has been able to use the money to attract more organizations to participate in conservation efforts. And having a bigger endowment gives the organization more credibility, Mr. Green says. “It helps in general fundraising as well,” he says.
Sale of Patent Rights
One group that took a tactical step to making an addition to its endowment fund was the Fred Hutchinson Cancer Research Center, in Seattle.
Despite slightly negative investment returns in 2012 (its fiscal year ends June 30), the center’s endowment grew by 25.1 percent, to $117.9-million, last year.
Some $9-million came from a surprise estate donation. But far more—$13-million—came from the center’s sale of half of the royalties it projected to receive over four years on a patent it holds until 2016 on a medication that prevents inflammation from multiple sclerosis, says Herbert Bone, the center’s treasurer.
The center’s continuing ownership over the royalties it retains will generate $4-million this year—and more if the drug’s owner, Biogen Idec, continues to increase its current $1.6-billion sales of the drug. “We reinvest it back into endowment and hopefully earn a strong return on those funds,” Mr. Bone says. “You have to take advantage of the opportunities you have.”
Christian Relief Services Charities, the umbrella organization for 14 nonprofits, exercises a similar opportunistic approach to how it manages the properties it owns to serve low-income clients. The charity, based in Alexandria, Va., recorded a 75.1-percent increase in its endowment last year. More than three-quarters of the gain came from $14.5-million the charity contributed to the fund from the sale of an apartment complex.
The organization owns a portfolio of apartment buildings that provide low-cost housing to homeless people, working-class Americans, and battered women.
The group began to purchase the properties in 1991 through a U.S. Department of Housing and Urban Development program to increase the availability of low-cost housing, says Paul Krizek, the group’s general counsel. But whenever it sells a property, the proceeds are placed in endowment, he says.
“Using only the real-estate proceeds and designated gifts to grow our endowment is good stewardship and serves as an important cushion in the event of future fundraising issues,” Mr. Krizek says.
Over the last two decades, the organization has purchased thousands of properties in more than six cities, including near its headquarters. The group says its property holdings are worth $120-million.
“We’ve always been pretty aggressive about socking money away,” Mr. Krizek says.
Rainy-Day Fund
That has not been the case at the American Friends Service Committee, a Quaker organization based in Philadelphia that was founded in 1917.
It didn’t begin to focus on endowment until 2004, the first campaign that ever included requests for endowment. The group had planned to finish the campaign in 2009, but the stock-market collapse altered its plans. The collapse also changed how some reluctant board members thought about supporting endowment.
“We had board members who did not even support the idea of endowment, who believed that all of our funds should be put to use,” said Thomas Moore, director of development. “Since the market crash, everyone realized we need a rainy-day fund, so we are very actively seeking endowment funds.”
By 2011, the campaign had raised $15-million for endowment.
The 56.9-percent increase in the organization’s endowment in 2012—one of the best in the survey—was due to that effort, strong investment returns, and an unsolicited $6-million bequest.
American Friends Service Committee is now beginning a 100th-anniversary fundraising campaign dedicated to endowment funds. The goal by 2017, its centennial year, is to add $30-million to the endowment.
The organization has been sending letters to donors since 2011 that indicate how it hopes to accomplish that goal. The “Securing the Future” appeal summarizes the group’s work since 1917 to highlight how an endowment gift will help it continue its work. It tells donors how giving trends and financial conditions can “drastically change” the nonprofit’s revenue from year to year.
“Looking to the future, we see that it is prudent to diversify and stabilize our sources of income,” the letters state. “A healthy endowment gives an organization both stability and flexibility that annual giving alone cannot achieve.”
