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Foundations Shift Investing Strategy to Weather Bad Economy

(Baltimore Business Journal) -- Just over a year ago, the Horizon Foundation in Columbia had virtually no alternative investments -- holdings like hedge funds that aim to profit in all kinds of markets.

Today, the Horizon Foundation has about 15 percent of its portfolio in alternative investments, said CEO Richard Krieg. The health and wellness foundation's board includes bankers and investment specialists who began last year to try to brace the portfolio for a stock market downturn, Krieg said. The Horizon Foundation is making other changes in its assets, such as shifting money into investments in developing countries, he said.

"This is probably the biggest challenge we've faced in our 10 years in existence," Krieg said of the investment environment. The Horizon Foundation had nearly $92 million in assets for fiscal year 2007, roughly flat from a year ago, according to Baltimore Business Journal research.

Nearly all of Greater Baltimore's 25 largest foundations saw their assets grow or stay at the same level for their 2007 fiscal year, the BBJ's List of largest charitable foundations shows. But most are keeping their expectations for 2008 modest -- and trying to find pockets of profitable investment in a difficult climate.

Like Horizon, many sizable foundations have branched out beyond traditional stocks and bonds. They are following the same principle that applies to your retirement fund: The more diverse types of investments you have, the more likely it is that at least one will profit, even when the markets get bumpy.

For many foundations, investing is the primary way they can grow their assets, allowing them to keep making grants. Some foundations receive gifts and do other fundraising, but many rely heavily on the profits they make from investing money donated by their founders.

At Baltimore investment firm Cavanaugh Capital Management, nearly a quarter of the client base is foundations and endowments. While some small foundations have stuck with a "plain vanilla" mix of stocks and bonds, many have moved into holdings like commodities and real estate investment trusts, said Chief Investment Officer James Dugan.

For 2007, the Baltimore-based Annie E. Casey Foundation produced an investment return of 8 percent on its endowment, said Chief Investment Officer Burton Sonenstein, compared with a 5 percent return for the Standard & Poor's 500 index. Over the past few years, Casey has worked to build a portfolio with a "defensive bias," a mix of investments that can keep the foundation growing even when economic times are tough, Sonenstein said.

At year's end, Casey had only 20 percent of its $3.2 billion endowment in domestic stocks. Another 20 percent was in international stocks; 16 percent in fixed income; about 27 percent in alternative investments ranging from hedge funds and venture capital to natural resources; 14 percent in UPS stock; and 1.5 percent in "social investments" like the East Baltimore technology park that aim to provide community benefits as well as a financial return. The Casey Foundation was started by UPS's founder.

Long stock-market downturns can affect foundations' ability to write grants and fund programs. Most of Greater Baltimore's major foundations say the current market doldrums shouldn't lead to program cuts.

Foundations fund grants at a level they can support based on the average results of their investments over a period of time, rather than pouring out grant money when the economy is strong and slashing grants when the economy is weak.

The Casey Foundation, which focuses on services to children and families, has never had to cut grants in its 60-year history, and doesn't expect to do so this year, Sonenstein said. Casey typically spends 7 percent to 8 percent of its endowment on grants, and its board would allow the ratio of spending to endowment assets to go up before cutting spending, Sonenstein said.

The Harry and Jeanette Weinberg Foundation's investments are down by 5 percent to 6 percent over the last two months, said treasurer Barry Schloss. But the foundation isn't making a lot of changes, because its diverse $2.3 billion endowment should hold up through a downturn, Schloss said.

Like Horizon, the Owings Mills-based Weinberg Foundation has about 15 percent of its investment portfolio in alternative investments, Schloss said. That includes hedge funds, which are private investment pools that can use many different strategies -- such as investing in complex instruments called derivatives, or buying deeply discounted stock in troubled companies -- to try to profit regardless of what the stock market is doing.

Foundations like alternative investments because, paradoxically, "sometimes having some riskier investments within the portfolio reduces the overall risk in the portfolio," Schloss said. "We felt that if the market were to drop, alternative investments seem to hold on a little better or move in a different direction."