Introit

Role of Equities in Endowment (2013)

Some twenty years ago, David Swensen's thinking on diversification changed how Yale invested its endowment. As John Authers points out in this weekend's (October 26-27, 2013) Financial TImes, "Mr Swensen argued that he was most likely to find value away from the public markets. [...] He moved out of bonds and cash, and into hedge funds, private equity and real assets such as forestry. Yale now holds about 6 per cent of its assets in US equities. This reaped impressive investment returns for decades, and many endowments imitated it."

Authers goes on to illustrate that Yale, like everyone else, lost money (lots of it!) during the financial crisis. Interestingly, due to how it is diversified (as noted above), it has not seen the flattering returns of the S&P 500 index, though. And that's not a bad thing...Yale's endowment returned 12.5% last year, with its diversified model of looking for value in private markets. Yet, the main thrust of his article ("This is no time to get off the equity train") is that the notion of portfolio diversification hasn't worked terribly well over the past five years, mostly because large institutional investors diversified out of stocks, sometimes by a wide margin. Consequently, not having as much at stake in equities equated to a reduced return.

He is very supportive, though, of Yale's strategy of diversification, to the point that he supports endowment managers considering the application of the Yale process when purchasing assets, while being clear that managers shouldn't strive to imitate the portfolio's holdings. Basically, "look for assets that may be inefficiently priced and would not fall with equities."

What I appreciate is that Authers is looking ahead to the time when stocks lose their momentum, as is inevitable.

I don't hear this kind of talk from many, so it's refreshing to consider it.

Caveat Emptor!

Buyer beware!

From a perusal of many independent school websites, it seems clear that the financial crisis that began in Fall 2008 spurred donor interest in providing money to schools for the purpose of financial assistance for students. To be sure, such funding is a noble objective, and schools should be glad for the gifts.

Yet a number of schools should remain cautious about employing too many of those dollars. The reason? Those funds could leave just as easily as they arrived. Donors are making these gifts on an annual basis (or even on an as-needed basis), not by means of a longer-lasting vehicle, such as a planned gift.

If a school is accepting, let's say, $100,000/year from a wealthy alumnus to provide financial assistance, that represents a good chunk of change for most schools. Such schools are able to stay afloat financially--and keep enrollment at certain levels--precisely because the alumnus is giving that gift. What happens, though, when that gift goes away? How does the school absorb the $100,000 in its already-weakened operational budget?

So I say: caveat emptor!

Despite the best intentions of all donors and schools, this financial arrangement promotes a certain level of risk for the institution. The intentions are the very best, but the model is flawed. The best case scenario would be for the school, before entering into such an agreement for funds for financial assistance, to work with the donor to set up a planned gift that will continue to provide such funding in perpetuity. In other words, unless a school and its prospective donor can set up 1) an endowed financial aid fund or 2) a charitable trust (lead, remainder, or dynasty), the annual gifts for financial aid should be counterbalanced in the annual operating budget. Do not back out those amounts from the budget!

Caveat emptor!

Rethinking Institutional Advancement

Institutional advancement is now more important than ever for independent schools, yet I believe that the traditional understanding of the term “advancement” is changing.

Going forward, advancement must be the locus of innovation; it is no longer “just” fundraising. There must be creation of substantial revenue sources: ones that, over time, will not only complement traditional fundraising programs, but rival—and perhaps exceed—them. The recession has made clear that endowment growth needs to be the primary driver of advancement energies, and these new revenue sources will be directed to support such growth.

The position of Director of Institutional Advancement, then, will be a hybrid of Chief Operations Officer and Business Development Officer. As such, this leader will manage a portfolio of complex projects, all of which involve teams of various constituencies (alumni, business leaders, parents, teachers, and even students) that report directly to the leader, insofar as each project is concerned. In short, independent education is being changed and shaped by the combination of a remarkable recession and tremendous advances in technology, both of which are forcing the necessity of innovation.

Meaning-Based Computing

The May 10 issue of Forbes has an interesting two-page ad by a company called Autonomy, "The Dawn of a New Era -- Meaning Based Computing."

The writers of the ad proffer that "we now live in an era of unstructured data." They point out that companies that keep their data in rigid, structured databases will have difficult succeeding in a world that, from a data point of view, is seemingly chaotic. Their solution is an approach called Meaning Based Computing (MBC), which has been sweeping every industry.

I wonder how schools might benefit from this approach to mining what appears to be unstructured data, or if the independent education industry is different from all others (highly doubtful). Like many other businesses, we are using data-collecting websites, Facebook, Twitter, YouTube, and the like (some schools do this more than others, obviously). These social networks turn the tables on traditional data-gathering strategies, meaning that customers (families, in our case) are more in control of how they communicate with our schools...and about our schools...on these networks, apart from how they communicate with us via our website, email system, etc.

The authors of the ad provide a scenario that should be of interest to us: "After observing a dramatic spike in positive sentiment on Twitter around a particular product line, a company automatically updates its homepage to give that product more prominent billing. The company then tests which messages about that product are most effective in engaging customers on its website, and then passes along those insights to agents in the call center, and updates its online advertising campaigns. By injecting this understanding throughout every phase of the marketing cycle, a business can maximize revenue across all channels."

To translate this concept in school terms, let us suppose that your school introduced an amazing service learning program, and that you informed your constituents about this program via multiple communication vehicles. If your school then received real-time (or as close as we might get) results that showed positive buzz about the program, you could update your digital, real-time media to reflect that positive sentiment. The next step would be to test several messages about the service learning program to see which ones push the most traffic to your website, then allow those same messages to permeate your communications. If you could do this each time you propose something innovative and/or meaningful, it would help your communications to remain fresh and interesting, and would result in increased attention to your school (i.e., your product); that increased attention, if mined correctly, could result in increased applications to your school.

This approach necessitates more time and dollars allocated to marketing and communications, but I submit that, in the "new normal," such a hard turn in this direction is necessary, and it may remain so for a long time. It would require education of the faculty and staff as well, as everyone would be participating in this marketing effort. Admissions is the name of the game, and everything that we can do to 1) retain current families and 2) attract new families will be central to our existence, going forward.

Pay Attention to Endowment

For those schools who think they have enough endowment: they probably don't. "But we have $50 million in our endowment," a school might counter. Schools with that kind of endowment, especially day schools, tend to have complex programs and services that have become normal, i.e. expected by families. If, however, the school does not follow a conservative spending policy coupled with a consistent inflow of cash to the endowment, it will not be able to sustain those programs and services in the future. And the future is not as far away as some would believe.

Case in point. Last week, I attended a demo for a software product that allows the user to project endowment corpus based on a number of variables. One variable is the school's spending policy, which is a piece often overlooked by too many schools. Their answer to the downturn in the economy is a simple reduction is spending percentage. This tactic, while arguably effective in the immediate term, is not a silver bullet. Why? Too many of these schools are not pursuing endowment growth as a matter of practice, and that is what will come back to haunt them.

During the demo, we looked at a university endowment valued at $350 million. The size of the corpus is not important for what I'm about to state, so please keep that in mind. When we looked at a 20-year projection of that endowment, we used the following assumptions:

• an annual draw of 4.75%
• an average annual return of 8.5%
• an average annual inflation rate of 3.5%
• an average management fee of 0.5%

With those variables, the endowment began to LOSE its purchasing power, more or less immediately. Each variable led to a loss in endowment, albeit a minimal one (-0.25%). If the variables change slightly (i.e., inflation is higher, or average annual return is lower), it is easy to see how precarious things become.

Variables aside, though, in simple terms, future dollars do not (will not) hold the value of current dollars. The aforementioned scenario highlights the fact that programs and services supported by the endowment will have to be cut in the not-too-distant future, if schools are not actively stewarding their endowment. Stewardship involves not only investment and risk management, it involves regular injections of dollars into the endowment.

This trend calls for independent schools to pay serious attention to their endowments. Schools with no endowments or small endowments must employ strategies to increase them sooner rather than later; schools that wait will suffer, perhaps dramatically. Schools with larger endowments will need to increase theirs as well, if they count on keeping the same level of programs and services down the road.

This is not a ploy to hire more planned giving officers; that's merely one part of the strategy. It calls for a new, aggressive way of thinking about how to sustain endowments.

Are you still trying to grow your Annual Fund while leaving your endowment on the back burner?

The Difference Between Development and Advancement

Why is it that some schools have a "Development" office while others have an office of "Institutional Advancement"? Is there a difference between the two, and, if so, what is it?

To my knowledge, no one has ever attempted to distinguish the two terms, so I'll attempt to do so. I encourage others in the field to respond in the "comments" section below, so that, collectively, we can hash out a working understanding!

Permit me two anecdotal statements:

1. For some schools, "Development" and "Institutional Advancement" are synonymous. Simply put, nomenclature is not important for these schools. One "sounds better" than the other.

2. "Development" is the more traditional, time-tested title; "Institutional Advancement" sounds a bit more progressive and comprehensive. (But is it really?)

I submit to you that there should be a difference in the terms. Following are my proposed definitions.

By Development, we mean an office whose sole raison d'etre is to raise funds for the school. The Director of Development is the person who is responsible for organizing the fundraising efforts of board members, development officers, and volunteers, and who does his/her own solicitations for the annual fund, major/planned gifts, capital gifts, and/or endowed gifts (among others). The development office works in concert with communications and marketing, but these two areas do not necessarily fall under the managerial purview of the director of development.

By Institutional Advancement, we mean an office that is, by nature, more complex in terms of its structure. This office comprises all development functions listed above, plus marketing, communications, all voluntarism within a school community, social networking, strategic planning, and has a strong partnership with (or even oversight of) the admission department. The director of institutional advancement might oversee a director of development, among other reports. The raison d'etre of this office is to advance the mission of the school from multiple perspectives, all of which require agility, a strong sense of vision, and the ability to manage disparate points of view on a massive scale.

Any other thoughts out there on what the difference in terms ought to be?

As Schools, How Much Do We Care?

Great post yesterday on the Tom Peters blog. Guest blogger Raj Setty proposed a list of 9 questions to ask ourselves how much we care about someone/some group. Given the economic climate, I think it would be interesting for us as schools to ask ourselves these questions. His post is below:

Teddy Roosevelt said, "People don't care how much you know until they know how much you care."

So, how do you know you are caring enough?

Do a self-assessment on your level of caring by thinking through these nine questions:

1. Are you REALLY listening when they are talking OR are you thinking about what you will say next?
2. Do you care for them OR do you care about their opinion of you? (Inspiration from the book Leadership and Self Deception by The Arbinger Institute]
3. Do you usually call them when you want something from them or when you think you can offer something of value to them?
4. Are they in your "network" or are you both in each other's "networks?"
5. Do you leave them impressed with you OR do you make them feel good about themselves?
6. What do you see when you see people? (From a quote submitted by Mike Wagner of White Rabbit Group)
7. If time is money, they are making an investment by spending their time (money) with you. How are you ensuring that they are getting the right return-on-investment for this interaction (ROII)?
8. Are you treating them the way you want them to treat you?
9. Are they REALLY better off because you are in their life?

Your turn now. What question should you ask yourself to see whether you are caring enough?

Endowment: Hedging Against Inflation

Some readers may recall my late-August post in which I posed the following question: how do we anticipate/plan for the effects of inflation on our endowment portfolios?

I posited that, as schools, we need to be mindful of the composition of our endowments, and that they should look different from pre-2008 models.

Bloomberg News carried a story today on endowment management, in which it was noted that cautious endowment managers are transitioning their endowments to include significant holdings in commodities as a means of hedging against inflation. George Washington University is considering selling its fixed-income assets as well as some stocks to expand its holdings in commodities - a segment which may end up representing some 30% of the university's portfolio in three to five years (commodities currently represent 13% of the portfolio). Notre Dame and Pepperdine have been hedging in similar ways.

Universities have been much more aggressive with their endowments than the vast majority of independent schools; this time around, though, we need to be with the universities rather than behind the proverbial 8-ball.

Any independent school considering a campaign for endowment in the near future (or, for that matter, any school that is simply interested in the well-being of its endowment) ought to give serious consideration to the composition of its endowment now. No one can predict the timing of inflationary effects on an endowment, so the better strategy is to position the endowment now to handle that kind of pressure.

Preparing for the Challenges of FY 10

Tomorrow is the end of fiscal year 09; my office has been in planning mode for FY 10 for several months. I have gone out of my way to re-forecast revenue projections from the advancement office, and I've pushed all of them downward in an effort to be realistic for next year.

FY 09 had its share of challenges, to be sure. The fall was downright ugly. However, despite the challenges of this fiscal year, my deepest concern lies with the forthcoming fiscal year, FY 10. We need to think strategically about the challenges that it will bring.

I read with great interest an article in this week's The Chronicle of Philanthropy entitled "Worst Case Scenarios," by Ben Gose. He focuses on the need for us to create contingency plans with these steps:
1. Set priorities
2. Forecast your financial future
3. Identify "trip wires" (those areas that mean cuts)
4. Put specific people in charge of carrying out the plan
5. Don't expect miracles

As state and local governments "grapple with deficits, and foundations hit hard by endowment losses cut their giving," we need to plan "for an even worse environment - fund raising is likely to weaken before it gets better" (27). To buttress that point, Gose cites Fiscal Managment Associates, the spokeswoman for whom states, "We are suggesting to charities that they plan for a worse year in 2010 than they've seen in 2009" (27).

I'm not out to cry wolf or to instill fear in the hearts of my blog readers; rather, I simply want to point out the fact that it's prudent to prepare for the challenges of FY 10.

Focus on the compelling stories of your schools and stay positive, but assess your downside risk and plan accordingly!

My gut tells me that FY 09 was not the make-it-or-break-it year of many independent schools. FY 10 will be more challenging, and FY 11 may be the point where we begin to see the clouds break.

The Flat World and Niche Marketing

I just read a short article entitled "Full Benefits in a Flat  World" in the current issue of Advancing Philanthropy. It prompted me to consider a niche marketing idea.

Catholic independent schools - especially those sponsored by a specific religious order - find themselves in a remarkable position vis-a-vis philanthropic giving, particularly among the younger generations X and Y (aka Millenials). These groups, both of which use social networking heavily, are attracted to international causes.

For those schools among us who have the benefit of a religious order with international connections, we have an opportunity here to further ensconce the charism of that order by means of philanthropy.

Why don't we consider allocating part of our Annual Fund efforts toward international missions? As such, we'd be encouraging our younger donors to give toward international causes (relieving poverty, providing clean water, making micro-loans, etc.), but we'd be keeping them focused on the religious order that sponsors our school(s).

That sounds like collaboration to me...partnering with our donors - via their interests - to advance our institutions while making a greater difference in the world.

It stands to reason that, properly structured, it would increase giving. But why not take it a step further? Ensconce the idea in the school's marketing efforts, and maybe we'd be looking at a way to attract and enhance enrollment...

Seems like a win-win situation to me.