That’s why Larry Kochard, who oversees the University of Virginia’s $8.6 billion endowment and sits on the board of the $18 million Virginia Environmental Endowment, says the simple solution, equity and bond index funds, makes sense for smaller institutions.
Finding good outside advisers is possible for institutions without deep pockets, he said, but it is very difficult. “The odds of a small endowment finding the right managers are very slim,” Mr. Kochard said.
For the most part, he advocated modest goals, saying: “If we are watching our allocations and spending and rebalancing, we are meeting our obligations.”
Ms. Shuman also favors index funds for nonprofits, but warns that the success of index funds over the past several years has largely been driven by companies like Facebook, Amazon, Netflix and Google.
“They drove a disproportionate return,” she said, and if these stocks decline, the indexes will fall, too. She recommends Vanguard’s managed equity and international funds for low-cost but actively managed alternatives.
When considering whether to hold hedge funds, which often do not allow immediate liquidation of investments, many nonprofits may need to examine whether they can afford to forgo access to their money for long periods.
That’s not always an issue, however. Before Patti Birch died in 2007, for example, she directed that her Patti and Everett B. Birch Foundation spend down all of its funds in the years ahead. The foundation’s president, Vartan Gregorian, said it still gave money to “the arts, women’s rights, religious and ethnic tolerance, freedom of speech and strengthening American democracy,” all causes that were important to Ms. Birch. Mr. Gregorian is also president of the Carnegie Corporation.
The foundation’s remaining funds are all being held in low-risk short-term bonds, said Mark Imowitz, whose firm, Imowitz Koenig and Company, handles the finances.
“Patti was not worried about having great appreciation in her investment assets,” he said. “It was natural to keep them in low-return funds since the money was being spent down.”
Many nonprofits have to think much longer term, however, and don’t have the luxury of holding all of their assets in a single low-risk asset class.