The stock market’s stomach pains have continued into the new year, raising fresh concerns about whether the volatility is a sign of serious economic troubles ahead that could affect fundraising, grant making, endowments, and more.
Nowhere is the strength of the stock market more important than in overall giving trends. Affluent individuals and foundation grant making are both affected by investment trends. For instance, “Giving USA” reported last year that one reason giving by individuals rose so much was that the Standard & Poor’s 500 Index grew 19.4 percent. Charities that depend on those sources of funds could be in for shakier times if the market drop is sustained. And if the overall economy sours, the impact will be more widespread as demand for nonprofit services rises and donors at all levels feel more pinched.
But right now, experts say it’s time to plan ahead and not panic.
Here are some of basics to know:
How Endowments and Foundations Are Responding
Managers of nonprofit endowments mostly saw trouble coming. Four out of five said in a recent survey that they believed the market’s volatility would be a long-term trend rather than a short-term blip, according to one study from NEPC, an investment consulting firm. Still, three quarters of those studied last spring said they made no changes to their investment portfolios because of the market.
The inevitability of a downturn has caused some foundation leaders to focus on thinking now about how to avert trouble in coming months and years. Most foundations determine how much they can afford to give based on a three- to five-year average of their endowment returns, so a bad year or two can have a prolonged impact.
The National Philanthropic Trust, as a result of new market trends, received more cash gifts and fewer appreciated securities and alternative investment gifts than in previous years, said Rene Paradis, chief operating officer, in a statement. “People waited right up until the end of the year to give, which may have been partly because they wanted to see what the market would do.”
Larry Kramer, president of the Hewlett Foundation, issued a warning signal last August, noting in a memo, “We are now in the ninth year of what is already the second-longest economic expansion in U.S. history, making it all too easy to act as if the growth will continue indefinitely. But it won’t.”
Speaking of the cycle, he urged foundations to consider the welfare of current grantees, “whose work and institutional health will suffer if we abruptly reduce or terminate funding in the face of a downturn.”
Thinking long-term, he said, can halt more escalated future pain.
Allow for some financial flexibility and think of what will happen in a down year, he said. In the worst-case scenario from 2008, when the foundation’s endowment’s value dropped by 23.6 percent, Hewlett honored commitments already made.
“No one wants to see a downturn — but we know a downturn is coming,” he wrote. “While we hope it doesn’t happen soon, we want to be responsible by planning ahead and being transparent about our plans with our partners and other stakeholders.”
At the Commonfund, which manages many nonprofit endowments, officials warned not to jump in and make changes in investment strategies.
“Nonprofit fiduciaries are subject to the same emotions and behavioral biases as everyone else, so the increased volatility and drop in the stock markets has certainly gotten their attention,” said Tim Yates, managing director at Commonfund, in a statement. “Mostly, our clients have been asking about where we are in the business cycle as everyone recognizes that this has been an unusually long period of expansion,” he added. “Due to their long-term focus, the most relevant, material risk for nonprofit portfolios is not volatility but rather a severe drawdown in portfolio value that compromises the ability to spend in support of a mission.”
What Fundraisers Should Do Now
One strategy to calm concerned donors is to give the most generous and loyal supporters extra attention. Shelley Robson, senior director of trust, estates, and gift planning at the University of Texas M.D. Anderson Cancer Center, told the Chronicle during the last stock-market shudder that checking in with donors more may make closing a gift take longer, “but it’s about being patient and spending the time.”
In donor meetings, fundraisers should “go back to basics,” Robson said. “When you talk to a donor and they’re interested in making a gift, it’s critically important to say, ‘Would you mind sharing with me which asset you’re thinking about using to make this gift?’ "
That opens the door to a discussion about the tax benefits of giving appreciated assets, including not only stock but real estate or other possessions. The major tax advantage: Stocks and other items that have grown in value since donors bought them can be deducted at full value. If those assets are sold, donors have to pay capital gains on the difference between the purchase price and their current value. At the same time, stocks that are losing value from the peak highs may also be good candidates for donations.
(Read more advice about dealing with the stock market in this Chronicle article.)
Prepare for Continued Ups and Downs
The unexpected bad year for stocks may go on for a considerable amount of time, said Jane Wales, chief executive of the Global Philanthropy Forum and World Affairs Council. “There are a number of shocks coming from Washington and elsewhere,” she said.
“When it comes to large, staffed private foundations, they tend to set their grant budget based on a five-year rolling average,” she said. “My sense is that we will feel the effects on the giving of individuals much sooner than we will feel the effects on the giving from private foundations.”
Giving from the ultrawealthy in Silicon Valley will be key. Recode reports new IPOs will create new millionaires, which will in turn create new sources of wealth. But experts say that if those sources of wealth are primarily based on tech stocks, which are experiencing wide fluctuations that cannot as easily be blamed on the U.S.-China trade dispute and government shutdown, there could be signs of a larger problem.
“For some of the very wealthy, much of their investments are concentrated in tech,” Wales said. For a donor who doesn’t have their investments as evenly diversified away from the volatility, special considerations may be necessary, she said.
