Allocating assets, part 4 – Community funds shift gears

[Editor’s note: This is the fourth of six articles examining endowment strategies by charitable organizations.]

By Todd Cohen

To cope with the rocky economy, community foundations are shifting their investments, and encouraging donors to consider alternative gifts.

The Greater Kansas City Community Foundation recently increased its equity holdings to 70 percent from 65 percent by converting its cash holdings, says Laura McKnight, senior vice president for development.

The foundation also is moving some equity out of indexed or “passive” funds, and into actively managed funds in which its investment managers pick stocks based on expected performance.

Actively managed equity has grown to 45 percent of the equity portfolio from 20 percent.

“What we’re trying to do is identify areas of the market that we think offer above-average returns over long periods of time,” says Pat Smith, assistant vice president for finance and investments.

“The ‘90s were like nirvana for the indexes,” he says. “It’s our belief that the market is not going to repeat that anytime soon.”

To provide more professional services to meet growing interest among donors in making gifts of real estate, while also protecting itself from potential liability associated with gifts of real estate, the San Diego Foundation five years ago formed a Charitable Real Estate Fund, says Duane Drake, the foundation’s chief financial officer and the supporting organization’s treasurer.

While stock prices have been falling, he says, real estate in Southern California has continued to appreciate in value, offering donors a good option for making charitable gifts.

The foundation’s Charitable Real Estate Fund has received roughly 25 gifts worth more than $20 million since it was formed, or about 10 percent of total gifts over the same period to the $400 million-asset foundation, Drake says.

Those gifts have ranged from homes and apartment buildings to a shopping center, parking lot and cattle ranch.

The real estate fund has its own board of directors, mainly real-estate experts, and assesses the proposed gifts and then manages and sells the property, with the proceeds placed in donor-advised funds.

“There is still continued interest in giving properties, given that properties have held or continued to increase, compared to stocks,” Drake says.

Foundations also are reviewing and sometimes replacing their investment advisers.

After seeing its endowment decline to $60 million from $65.5 million a year ago, for example, the Community Foundation of Greater Greensboro in North Carolina hired Cincinnati-based Fund Evaluation Group to help map its investment strategy, replacing Boston-based Cambridge Associates.

The foundation aims to work more closely with the new adviser, which she said represents more than 40 community foundations and will meet with the foundation and its donors, says Marie Schettino, vice president for finance and administration.

“We’re getting more involved with them,” she says. “We’re getting more pro-active.”

NEXT: Charities, donors turn to endowments.

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