Philanthropy – The Road Ahead

Conference Title: Philanthropy, The Road Ahead

Conference ID: 5367267_1_lI3ktW

Moderator: Tanzina Ahmed

Date: April 14, 2020

Operator: Thank you for joining today's Bank of America call on Philanthropy, The Road Ahead. The views and opinions expressed are those of the presenters as of April 8, 2020, subject to change without notice and may differ from views expressed by Bank of America Corporation or its affiliates.

This is presented for informational purposes only and should not be used or construed as a recommendation of any service, security, or sector. Please listen to the end of the call for important disclosures. I will now turn it over to Ann Limberg.

Ann Limberg: Hello everyone. I'm Ann Limberg, Head of Philanthropic and Family Office Solutions. We created today's audio cast to help our non-profit endowment and foundation clients address some highly complex and unique challenges you face today as a result of the Coronavirus.

I'm joined by Ken Shepard, Head of Wealth and Portfolio Strategy who leads our investment team serving not for profit and pension clients. Bill Jarvis who oversees Philanthropic Thought Leadership and Research. And Dianne Bailey who heads our National Philanthropic Strategy team advising clients across all aspects of their organizational sustainability and impacts.

We understand the value of your work, running your non-profit organization today and we greatly appreciate your time in joining us. We've heard from many of you and today we're pleased to share our latest thinking to help guide you during a period of unprecedented volatility.

Ken will lead us off with an investment and market overview. Bill will cover best practices for effective and responsible governance and we’ll finish with Dianne on the importance of active board leadership and donor engagement. Ken, I'll turn it to you.

Ken Shepard: Yeah, thank you, Ann, and thank you to everyone joining today. Let me start with a quick review of where the market stands as we approach April. It's hard to believe that a month and a half ago, on February 19th the S&P 500 stood at an all-time peak of 3386.

As news of the Coronavirus began to impact the equity markets we witnessed the S&P 500 decrease 34% over the following months. It reached its current year low of 2237 on March 23rd. Stocks were significantly impacted by the Coronavirus but they were not the only asset class that was impacted.

At the same time that we saw volatility in the equity markets, we experienced a significant decrease in bond yields and liquidity. For example, at the beginning of 2020 the 10 year U.S. treasury had a yield of close to 2%. By early March that dropped to a low of .38%.

Same as we saw a slight rebound in the equity markets towards the second half of March we also saw a slight increase in yields. And as I speak the 10-year treasury sits close to the .75 level. So, the question is, where do we go from here? Ultimately we believe the answer to that lies with science.

As we move forward the markets will look through economic struggles and start to take their cues from the health data. Data such as a flattening of the curve as well as advancements of potential testing and treatments that we expect to see in the coming months. Fortunately, we've already seen some indication of potentially improving health data.

For instance, there's some evidence that New York and some European countries are seeing a flattening of the curve and the markets have reacted accordingly with the belief that the rest of the country will follow. While we believe we've begun to see a bottoming process with the stock market, we feel there are five phases we need to work through before we come out the other side. The first four will take us through the end of 2021 while the fifth will take a little bit longer.

The first phase is a liquidity phase. This phase was characterized by the freezing of liquidity in the bond markets. As I mentioned a minute ago, we believe we've already begun to move beyond this stage as we have seen stabilization in the fixed income markets.

We are calling the second phase the bridge or economic buffer phase which is where we currently sit. This phase is where the recent and likely future actions in the form of fiscal and monetary policy help buffer the contraction of the economy. This is due to the U.S. passing the biggest government support program relative to the rest of the world. During this phase, we continue to see a deterioration of economic data, however, these policies help set the stage for the third phase which is when we see a U-shape recovery. The U-shape recovery is where economic data bottoms for a period of time before we start to see more sustained improvement with businesses reopening.

Phase four is where the economy moves from recovery to something more robust and where the profit cycle moves close to the previous levels due to pent-up demand. The fifth and final phase is admittedly years away. This is the beginning of the new frontier where we see long-lasting impacts on consumer and business behaviors. While this phase is a long way off, we've already started to write about this as a topic in some of our publications.

Ann Limberg: Ken, that’s valuable insight and it really sets the stage for a potential path forward I'd like to drill down if we can specifically around our not for profit, institutional, and our foundation clients. How is this very important sector especially impacted by what's happening today?

Ken Shepard: Yeah, sure, Ann. Yeah, conversations with non-profit clients during the past couple of months we find that questions and concerns can differ depending upon the type of client. You know, we're engaging discussions with staff and investment committees that stand both our operating assets as well as our long term reserves and endowments.

And while we see different challenges based on the type of endowment or foundation let me first focus on some of the more common questions coming from all clients in the philanthropic sector. The first question is often, is now the time to de-risk their portfolios?

Unless there's been a significant change in liquidity, needs of the organization’s portfolio, we generally advise resisting the temptation to sell risk assets, such as equities during, you know, times of stress. Since the Great Depression, the S&P 500 total returns have averaged 27% in the two years following a bear market.

In addition, an investor who missed the ten best days of each decade saw a 91% return in equities whereas those who stayed invested earned 14,962%. So not staying invested meant missing most of the long term market upside and it's just too difficult to time the market.

Many of the foundations and endowments that we work with have long term time horizons that are managing for the future in a perpetuity. It's critical to remain focused on the investment policy now and actually Bill Jarvis will discuss this more in detail in a few minutes.

So even though we don't feel now is a time to de-risk, we do believe in being tactical in looking to re-position risk in a portfolio to take advantage of opportunities is wise. For example, in March we started to take profits in fixed income by selling longer-dated bonds.

In addition, just this week we started to reduce our emerging market exposure and reallocate to U.S. large company stocks, which we feel will add positive attribution to our clients' portfolio. So, a second question is, if now's not the time to de-risk, is now a time to start to re-balance to targeted allocations?

An endowment that has not adjusted their portfolio has likely seen a decrease in the percent of equities as the value of those equities is less than they were in February. As a result, many portfolios are now below their target allocations. So as I mentioned earlier, we do feel that we have started the bottoming process, but given this belief, we have begun to tactically re-balance portfolios especially when the S&P moves in that 2100 to 2600 range. This range is based on our projections for earnings in 2021 as well as our forecasts around an appropriate market multiple. This doesn't imply that markets can't go down further.

You know, as I mentioned during the discussion on the phases of the workout process, we expect a U-shape recovery. This is where the bottoming process lasts for some period before we see improvement. Very different from the V-shaped recovery where we reach a bottom and then immediately recover. So, as a result, we're thoughtfully beginning to purchase risk assets with the anticipation that a full re-balance will take time. At the same time, we're actively engaged with all of our clients to understand their specific liquidity and distribution needs given the current environment.

Ann Limberg: Mm, Ken, clients have certainly expressed concern around a lack of liquidity in the bond market lately. As we know, many clients are relying on access to these funds to cover everything from operational needs, capital calls, and payroll, for example. It brings some of us back to 2008. What are your thoughts on comparing those two periods?

Ken Shepard: Yeah, so when we entered, you know, phase one of the workout process, you know, we saw limited liquidity in many areas of the bond market. Someone described it as, you know, we were driving along at 55 miles per hour and then suddenly hit a brick wall.

So, like individuals that are going to an ATM, institutions tap into their revolvers at banks, drew on their money market funds and try to issue commercial paper. The problem was that the money simply was not there waiting for them and this was because at the same time institutions were trying to get liquid by issuing commercial paper money market funds were having to sell holdings into that market.

So, because of the combination of those factors, there was no one to provide that liquidity. So, this is similar to what we saw in 2008. The difference this time is that we had experience in how to deal with this type of situation. So, in 2020, you know, we have the knowledge of how to get and keep markets liquefied by dusting off tools that we developed in 2008 versus having to create them for the first time. So, as a result, we did in seven days what took two to three months in 2008, plus we added a few additional policies for good measure.

So, this time the Federal Reserve acted very quickly. And additionally, they stayed in touch with the markets and if their ideas didn't work as planned, they changed it real-time. Our advantage versus other countries is a unified political system plus, we had a do whatever it takes mentality. Since the Fed's measure and just within the last week, we've seen increased liquidity in the short term markets, trading for the most part has resumed, and buyers and sellers are coming back together, not back to where we've been but we're getting there.

Ann Limberg: Ken, thank you. I'd like to turn now to Bill Jarvis. Bill, it's certainly important to understand what's happening with investments today but it's equally important to have the right investment governance in place. Can you talk a little bit about why?

Bill Jarvis: Well thanks, Ann. You know, when markets are volatile it’s important to avoid making decisions that are driven by emotion or to investment committees as we know have limited time to devote to investment issues, and this time limitation could be called their governance budget. And it's just as important as a financial or risk budget. Let me give you some factors that it includes.

First of all, the number, the experience, the knowledge of internal and external decision-makers and resources. Secondly and equally as important, the decision-making effectiveness of the group. And finally, how often it can meet. Periods of stress like this can expose deficiencies in this governance budget among boards and committees that meet just a few times a year. . .

So, following the financial crisis in 2008, there was in fact a recasting of the role of advisors. Organizations had to rethink where they spent valuable resources and many of them shifted to outside advisors like us to assist with better functioning, and they did this in three main areas.

First of all, fiduciary oversight in the management of endowment assets particularly regarding control over the liability issues, Ann that came from having non-fiduciary consultants advising on the portfolio. Second, was monitoring and managing the portfolio against their investment policies and investment guidelines. And then finally, of course, implementing those tactical decisions in a timely and agile fashion.

And Limberg: Mm, it certainly makes sense. Bill, we recently released a new paper, Investment Governance in Times of Market Volatility, where you covered a number of steps that boards and investment committees can take in the current investment climate. Would you share some of our key themes there?

Bill Jarvis: Sure, Ann, and there are of the five themes I'll go through each one in order. The first one is not to panic. Most non-profits are perpetual long term investors and this gives them a tremendous advantage compared to the limited horizon of individuals like you and me.

For those of us who are listeners at your next meeting try to think in terms of decades and resist calls saying that you should sell endowment assets now in favor of the perceived oh, safety of cash. Owning cash in a market downturn like this crystalizes your loss and second and more importantly, it requires you to have perfect foresight in determining when to get back into the market and most boards and investment committees are going to fail that second task.

And as we know, if you miss the days when the market is advancing most strongly, as Ken just said, your endowment is likely to underperform over the longer term as well. The second point from the paper is to use your investment policy statement or your IPS.

Perhaps you last reviewed the IPS after the global financial crisis a while ago, but it's not just a document. Ideally, it represents the distillation of your team's best thinking about issues, for example, and I'll name some of them.

First of all, roles and responsibilities what are the respective duties of the board, the committee, the investment service providers? And how does the board fulfill its fiduciary duty in overseeing this structure? In this current period with all the market turmoil ask yourself, did the structure live up to what you intended?

The secondary is Major - target asset allocations and ranges in the IPS. What is the function of each allocation? And how are these allocations expected to interact with each other in the portfolio as a whole? Spending policy, in some ways the central part next to asset allocation in an IPS, and in the current environment, we know that increased spending may be urgently needed to support your organization's mission, but reduced endowment values may put that mission and that long term sustainability under pressure. Particularly considering an important fact - the board's legal responsibility to maintain the endowment's purchasing power over the long term.

So, even if it doesn't provide a specific solution, Ann, for this type of situation, the IPS needs to acknowledge the possibility that it can occur and provided principle guidelines in the document for balancing these important considerations. Another area that should be covered in the IPS, risk definition and risk tolerance.

Now risk is typically defined as volatility of returns, but we all know that there are other types of risk as well, including liquidity risk, risk of a deep decline in investment values and a long recovery period and reputation risk, very important in the stakeholder and donor community. The IPS should address and more appropriate try to quantify these risks.

The third area I address in the paper is to consider re-balancing your portfolios, something that Ken has referred to. Your IPS probably contains, should contain a target portfolio. If market volatility has caused these asset allocations to move above or below their permitted ranges, you need to consider selling investments that have performed better and purchasing investments that have performed less well, and this can seem very counter-intuitive. But if you consider your policy portfolio as your list of desired investments, re-balancing presents an opportunity to purchase those assets that you want for the portfolio at a discount.

The first thing that we mention in the paper is very important, to check your liquidity. Dianne is going to refer to this in a few minutes but your budget may have been set before the current market volatility occurred, where's that money going to come from now? You may have to decide which of the portfolio's liquid assets to sell to raise the cash. Obviously, a decision taken in close consultation with your investment counselor.

But your board or investment committee should also meet with your financial and fundraising staff. Get everyone together to address additional sources of liquidity. Here's some possible avenues to pursue. First of all, are you eligible for the many benefits that are available to qualified non-profits under the recently passed, Federal Coronavirus Aid Relief and Economic Security or CARES Act?

Second, is there another source of credit that can provide funds for the near-term? Third, what are your prospects for fundraising? And how will this year's annual campaign monies be used - a topic that Dianne's going to address in her remarks in a few minutes.

And finally, can you pull forward a perspective gift for a potential donor? Finally, in our paper we propose scheduling a portfolio, an IPS review session for a future meeting. As we've written, knowing what you own and why you own is a key responsibility of boards and investment committees.

Is your portfolio invested according to your policy and are these investment fulfilling your intended purpose in the portfolio? In this regard, consider appointing a committee to review the IPS, together with your investment council and staff and report back to the board later this year.

Ann Limberg: Thank you, Bill. Some great advice in there. So with that, I'd like to shift our focus beyond the investments to the bigger picture and that's the overall sustainability of your organization in today's environment and the ability for a not for profit to achieve mission.

Dianne, how does the Board of Trustees really impact a successful outcome today with that?

Dianne Bailey: Thanks, Ann. During this unprecedented time, boards must have the discipline to take a big step back and evaluate the overall financial health of the organization. Investment oversight as Bill has described of course is critical. But the boards also must collaborate with the professional finance team to model impacts of long and short term business disruption on earned and contributed revenue as well.

Where gaps exist? Board leaders and chairs, I'm talking to you now, must start by making their own pace-setting resilience gift to the organization.

Ann Limberg: You mentioned revenue, Dianne. Today, certainly questions around financial support with current business disruption is really on everyone's mind. And if the board has already contributed first to the crisis campaign, how and where should the non-profit look to next for support?

Dianne Bailey: The next outreach should be to loyal supporters. Divide your top donor list among the most senior leaders of your organization and call every single one. First and foremost check on them and their loved ones. These authentic connections, they nurture relationships with your donors but they also provide opportunities to explore how they might support your organization during this difficult time.

Some donors will re-evaluate their current giving by releasing programmatic restrictions and are-paying pledges. Many will also make new gifts. Our study of high net worth philanthropy provides a road-map for disaster giving. And the Coronavirus crisis in many respects is a slow-moving disaster.

Our research tells us that in times of crisis high net worth donors will respond to your urgent appeals. And 94% of them will maintain or even increase their overall giving. But be sure that your appeals are not too frequent nor too closely timed because our research shows that this is the number one reason why affluent donors stop giving.

This is the time to maintain focus on your major gift strategy because capturing the attention of donors this fall, it's likely to be difficult with the confluence of postponed and traditionally scheduled events and asks, so just avoid this trap.

Connect with your most impactful donors now with empathy, of course, and a compelling case for support. You know, Ann, now is also the time to prioritize innovations in fundraising. Use your social media strategy including those powerful peer-to-peer campaigns to help replace the lost revenue from special events that have been canceled by social distancing measures.

Before the crisis, the average adult spent close to four hours each day working at their mobile screens Screen time has undoubtedly increased as we continue to stay at home. So, focus your social media strategy. Next Gen donors will be a priority of course, but also focus that strategy on women of all ages. Soon to be released research from the Women's Philanthropy Institute provides new and highly relevant insights on how women, in particular, are using technology for good.

Ann Limberg: Mm, so Dianne, as you look ahead, what concerns you most?

Dianne Bailey: The three top areas of interest and yes, potential concern for me, includes first, given what we know about the disproportionate health and humanitarian impacts of the crisis which breathe into high relief the underlying issues of income and wealth inequality and the lack of economic mobility. Will we change our grant making and operating models moving forward?

Second, I hope that long term investments in mental health will be adequate. We don't yet know the full mental health impact of this crisis but all agree there'll be significant and lasting effects particularly for children, first-responders and perhaps more importantly our healthcare professionals.

And finally looking forward, we're hyper-focused on potential shifts in the charitable sector including consolidation. Some organizations may not recover from the financial disruption caused by the Coronavirus. Small non-profits but also mature organizations are at risk. My hope is that these organizations will heed the lessons learned and also the cautionary tales from the non-profit mergers in 2008 and 2009. They were often unsuccessful and primarily it was because inadequate attention was paid to cultural integration and also strong purposeful board leadership.

Ann Limberg: Mm, that certainly makes sense. We do see some bright spots ahead too, Dianne. Can you share a few of your thoughts there?

Dianne Bailey: Well, my hope comes from the ingenuity of philanthropists as that term is broadly defined to include all four of the Ts - time, talent, treasure, and testimony. Although we're not able to volunteer our time, including on the front lines of social service, mentoring, tutoring, serving meal, many have used their voices and influence to provide comfort and create change even from a distance in this time.

Credit goes out to the large national federated organizations who are able to quickly activate the grassroots' advocacy infrastructure they built years ago to lobby for the CARES Act and other top legislative priorities. But most of all, I'm inspired by the breathtaking generosity of donors, foundations, donor advice fund holders, individuals and families, who as I previously have mentioned, prepaid pledges, released restrictions and often made new spontaneous unsolicited gifts to organizations they love most and others serving critical community needs.

The $100 million commitment from our Bank of America charitable foundation is a prime example of donor's commitment to give more, not less during this unprecedented time. We recently posted a new resource titled, Keys to Non-Profit Success in Complex Times, to our public website.

This article includes a long list of best practices for non-profit sustainability but because our time today is limited, I'll share just three. First, closely examine your current spending policy. As Bill mentioned, examine it to determine where you may have much-needed flexibility always balancing current needs with long term goals.

Also, remember the board members must be nimble but as fiduciaries, they also need to be measured and thoughtful in their approach making immediate, dramatic changes to your organizational structure, your endowment model, or staffing it could result in potentially unnecessary or unintended future consequences.

And most of all, communicate your case for support with empathy, but also with courage and conviction declaring why your mission is needed now more than ever.

Ann Limberg: Thank you, Dianne. Some great advice there, and thank you also from my colleagues Ken and Bill for joining us. We hope the insights that we shared with all of you today are helpful as you're developing strategies to help your constituents, to support your employees, and to operate for the long term in a financially stable way.

We know these are complex times. Know that we're here for you as resources to support and bolster the very important work that you're doing. Thank you for all that you do.

Operator: Important disclosures.

All information is as of April 8, 2020. Opinions are those of the presenters and subject to change based on market fluctuations.

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