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Savvy investing – Duke Endowment posts growth

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By Cindy Stiff

CHARLOTTE — Shrewd investment strategy caused assets of The Duke Endowment to increase 15 percent in one year despite the poor market performance of the utility company that James B. Duke used to seed the charity in the 1920s.

“We have rapidly increased the amount of money we’re paying out as the value of the endowment goes up,” says John Mebane, the foundation’s chief investment officer.

By the end of 1999, assets had grown to $2.3 billion. The growth made it possible for Duke to contribute $83 million — up 63 percent from $51 million in grants five years ago.

“These have been unprecedented years, some of the best years ever,” Mebane says.

The foundation’s strategy, he says, has been to diversify investments so strong performance in one area offsets a drop in another. The key, he says, is to think for the long-term.

“Stick with the mix you’ve thought through and periodically rebalance,” he says. “Everybody’s talking about Internet stocks, but you don’t want to jump to those and then go back to energy.”

Six years ago, three-quarters of the foundation’s assets were tied to Duke Energy, founded by James Buchanan Duke, who endowed the foundation in 1924.

In 1994, however, the foundation’s board decided to diversify a major portion of its holdings in Duke Energy. The foundation now has16 percent of its assets in power company stocks.

“That was his primary asset, but it doesn’t have the impact it did,” Mebane says.

“From 1982 to 1993, Duke Energy substantially outperformed the U.S. stock market,” he says. “It wasn’t a question of whether it would continue to be good or not. It was really to reduce the risk.”

The strategy worked well last year. Duke Energy stock fell 18 percent, Mebane says, but other investments grew 25 percent.

The endowment’s venture fund alone rose 140 percent.

Mebane says it’s too early to compare the foundation’s growth to that of other organizations because figures still are being compiled throughout the state and U.S.

A foundation invests endowment funds to generate earnings that can be spent to fulfill its goals. Typically, only a portion of the return is spent, and the rest is invested to increase the assets and protect the foundation’s purchasing power in years of inflation or deflation.

The higher the return, the more cash is generated. Seldom — if ever — does a foundation dip into its principal.

Foundations are required to distribute at least 5 percent of earnings to charity. There has been much debate about raising the required payment, but Mebane worries about the possibility of downturns.

“Most foundations are just now recovering from the poor ‘70s,” he says. “If we want to be able to treat today’s beneficiaries and tomorrow’s equally, we don’t want to favor one over the other.”

He says the goal is maintain a real return of at least 5 percent despite inflation.

At The Duke Endowment, assets excluding Duke Energy stock are allocated to different funds to protect against changes in the marketplace.

Seventy percent of the assets go into the foundation’s equity fund. Of that, 25 percent goes to domestic stocks, 10 percent to foreign stocks, 15 percent to investments that historically maintain positive market returns, 15 percent to private equity, including venture capital firms, and 5 percent to high-yield debt.

“The main vehicle for growth is the equity fund,” he says. “Asset allocation is not based on what you think will happen over the next year but where it makes sense to have money. It’s a global economy out there.”

He says the Duke equity fund hedges against inflation by investing 10 percent of assets in such areas as real estate, oil and gas that historically keep their value. It also tries to protect against deflation by investing 20 percent into high-quality bonds.

Since the foundation was created, its bylaws have required it to pay $1 in indigent care per day to hospitals for each person who cannot pay the bill in the Carolinas.

At the time, hospital bills were $2 a day, so the endowment was paying for half the indigent care in both states.

“We could spend the entire endowment and it wouldn’t come near paying half today,” Mebane says.

The foundation still pays $1 a day for indigent care but also finds other ways to support health care.

In addition to health care, the foundation’s guidelines limit it to supporting the United Methodist Church in North Carolina; nonprofit hospitals, adoption agencies and children’s organizations in the Carolinas; and four private educational institutions.

Those four schools are Duke University in Durham, N.C.; Davidson College in Davidson, N.C.; Johnson C. Smith University in Charlotte, N.C.; and Furman University in Greenville, S.C.

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