Foundations tend to hold tightly to equities, and lose billions in slump

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The David and Lucile Packard Foundation had $17 billion in assets and was the second-largest nonprofit organization in 2000. It financed child care in California, sex education in Ethiopia and rain forests in Alaska. Packard’s assets have since shriveled to $5.3 billion. Most of its holdings are tied to Hewlett-Packard Co. stock, which has plunged 74 percent. The Los Altos, Calif., foundation has slashed grants by two-thirds and may fire half of its 160 staff. Packard, though forced to cut arts and science funding, is still betting stocks will rebound. So are institutions from the Ford Foundation to Berea College in Kentucky: U.S. foundations and endowments have about $337 billion, or 70 percent of assets, in equities, according to consultants Greenwich Associates. “Hewlett-Packard stock has served us well in the long term,” said George Vera, Packard’s chief financial officer, who didn’t sell the computer company’s shares after they began falling in 2000. “Any diversification would be over a long period of time,” he said. “We have not started yet.” The Bill & Melinda Gates Foundation, the largest U.S. foundation, has only 2 percent of its $23.8 billion assets in stocks — and has outperformed 95 percent of other organizations. Other foundations are taking a huge risk by refusing to shift out of equities, say some financial advisers. “I’ve been begging clients on bended knee to take money off the table,” said Peter Bernstein, a New York-based consultant to institutional investors. “Not one of them did.” Stocks ruleFoundation managers say their faith in stocks has been rewarded. Equities returned 19 percent a year on average from August 1982, when the Standard & Poor’s 500 Index was at 102, until shares hit a record 1527 in March 2000. Even now, with stocks 42 percent down from their peak, the index shows a nine- fold increase over the past 20 years. “We’re long-term investors,” said Linda Strumpf, the Ford Foundation’s chief investment officer. “We want a 5 percent return in real terms so we can stay whole.” U.S. law requires nonprofit organizations to disburse 5 percent of their assets every year — or lose their tax-exempt status. This makes the case for stocks over bonds or other fixed- income investments, according to nonprofit groups that say research proves equities offer the best returns in the long term. From 1926 through 2001, for instance, stocks returned 6.9 percent versus 2.1 percent for Treasuries, according to studies by Jeremy Siegel, a professor at the University of Pennsylvania’s Wharton School. The Gates Foundation prospered by shunning the conventional wisdom. Its annual returns averaged 8.96 percent in the five years ended last September, beating 95 percent of foundations, according to consultants Cambridge Associates LLC. Michael Larson, who oversees the foundation’s investments, has directed its holdings into fixed-income securities. These include U.S. and international corporate and government bonds, mortgage-backed securities and inflation-protected Treasuries. Larson declined to provide specifics on the foundation’s current investment strategy. The Ford Foundation, now second-largest with $10.7 billion in assets, lost $2.9 billion, or 20 percent in assets, in the 12 months ended September 2001. It dropped an estimated 12 percent in the most recent 12-month period. Foundations must file annual financial reports that provide details on grants, contributions, investment income, and capital gains or losses. They aren’t required to file interim data, and don’t furnish definitive reports on 2002 until later this year. Faith in stocksFord still has about three-quarters of its holdings in U.S., international and privately held companies. Though stocks have slumped longer than she expected, Strumpf said, “We don’t want to overreact. At this point, we think that stocks are fairly valued because interest rates are so low.” Others have sustained similar losses. Berea College’s endowment fell 26 percent to $647 million the past two years. The school, which doesn’t charge its 1,500 students tuition, depends on investments to cover 74 percent of costs. “We are looking at significant cuts in our expenditures,” said Ron Smith, vice president for finance. Berea may have to drop courses and cut pay of professors but isn’t changing its view of stocks as investments, Smith said. “We are the ultimate long-term investor, and stocks outperform bonds in the long term,” he said. The Rockefeller Foundation lost 6.7 percent of its $3.32 billion in assets in 2001. It fared better than many because 34 percent of its money was in bonds and real estate. The foundation, which cut spending 18 percent in 2002 to $162 million, was established in 1913 by John D. Rockefeller to help the poor. It now funds projects from job creation and arts programs in the U.S. to AIDS prevention in Africa. The Packard Foundation, set up in 1964 by Hewlett-Packard co-founder David Packard and his wife, Lucile, has 87 percent of assets in the computer company and a spinoff, Agilent Technologies Inc., CFO Vera said. “The last two or three years, we’ve had a contraction,” he said. “But if you go back to 1985, the assets were around $118 million — and we crossed $1 billion in 1993 and from 1994 onward saw big growth.” Vera, 59, didn’t mention the key to this growth: When he died in 1996, Packard left $6.2 billion in Hewlett-Packard stock to the foundation, bringing its assets to $8.5 million. In his bequest, he urged that the shares be retained rather than sold. Rise and fallThe assets doubled to a peak of $17 billion in June 2000, then tumbled with the stock: The shares David Packard donated now are worth a billion dollars less than when he bequeathed them. Packard has already lowered grants to $200 million this year, far down from the $616 million it funded in 2000. It has cut fellowships to science and engineering students, grants to dance programs, and research into children’s exposure to gun violence. Grant recipients expect more cuts in arts and education financing. Packard’s diminished status hasn’t caused the foundation to change the predominant role of equities, and of Hewlett-Packard in particular, in its investment strategy, said Vera, a former partner in Arthur Andersen LLP’s Silicon Valley office. “In the last year, we have begun thinking about diversification,” Vera said, though the board hasn’t decided whether to adopt a “more normal profile for a foundation” and place less reliance on one company’s shares.