In the wake of a tumultuous year, is there an opportunity to change the giving paradigm? We revisit age-old “rules of thumb” around sustainable payout levels for donor-advised funds and private foundations.
00:00 - 00:30
In this time period that has been defined by disruption on so many levels, we are living through the re-imagining of so many things: how business is done, where money is spent, and maybe most importantly, for so many of us, what we truly value and what we prioritize every single day. And this type of thinking is really playing out in the philanthropy world, where existential questions and fundamental concerns just about how philanthropy is conducted have really now become a call to action. I'm excited to learn more with our guest today.
00:39 - 01:08
Hi, everyone. Welcome to Inspired Investing. I'm your host, Claire Golla, head of foundation and institutional advisory at Bernstein. This podcast is where we strive to connect and share insights with listeners like you who are engaged in the nonprofit and broader philanthropy sector or who just want to learn more. Today, I'm excited to be joined by Alan Davis, who is the president of the Leonard and Sophie Davis fund and also the chair of the Crisis Charitable Commitment. Alan, thanks so much for joining us today.
01:09 - 01:10
Thanks, Clare, for inviting me.
01:11 - 01:52
So I was thrilled when we were introduced recently and I learned a little bit more about your work. So I'm going to jump right into this. I'm going to provide some context. I promise there is a question in there. So over the last year, as the pandemic spread and tragedies unfolded into this national reckoning around racial justice and racial equity, so many foundations and philanthropists felt this urgency to step up, quote-unquote step up. And what does that mean? What are other foundations doing? We had so many questions like this. We ended up doing a webinar with Exponent Philanthropy. We published blogs. One was titled Donating When There's a Need for Speed for individual donors. Another one was titled Four Things
01:52 - 02:14
Wish Grantors Knew Now, mostly about general operating funds, but all of this emphasized, right, this is not a time for business as usual. It was so impressive to see that your foundation was so agile, dramatically increasing your spend from an already significant 8 percent to 12 percent. And I think you did this in like two months and you didn't stop there.
02:14 - 02:21
So can you tell us a little bit more about the events of 2020, how these events really drove you to reimagine the giving paradigm?
02:22 - 02:59
Sure. Well, we make our grants early in the year, so we thought we had made our grants for 2020, in January and February of that year. Then the pandemic hit, and it was a crisis like no other that we'd seen. So, you know, exacerbated by racial justice issues in a very controversial election that was unfolding. So we went from a $12 million grant making budget to $18 million in a matter of two months, a 50 percent increase. Keep in mind, this was done while the market was crashing, so we were taking a big risk. But as a charitable foundation, we felt it was something we had to do.
02:59 - 03:01
Tell me a little bit more about that.
03:01 - 03:51
It's a family foundation, which I run full-time without staff or an assistant. So those two months were as difficult as any I had experienced, especially when we as a rule do not do direct service grants, which were needed to respond to the crisis. Fortunately, I was able to rely on two consultants as well as program officers at two community foundations to figure out how we could best meet the need. When we finished the process, it was like, so what? Like, what difference did we make? So I wondered how other foundations were responding, and I was hearing how foundations, despite being a hundred times larger than us, were increasing their grant-making by not much more than we did. So that led in July, actually on Bastille Day, which we felt was appropriate to launch. Yeah, yeah, really. To launch the Crisis Charitable Commitment.
03:51 - 03:53
So help me unpack that a little bit.
03:53 - 04:17
And basically, we had three goals. One was to give recognition to other philanthropists who are stepping up to the plate to encourage others who hadn't done so yet to do so. And third, to begin to establish a benchmark for the donor class as to what is an appropriate percentage of assets, whether it be personal or that of a private foundation to give; the how much question. That's what we're trying to do.
04:17 - 04:37
And then at a high level, the Crisis Charitable Commitment. The aim is to get more dollars, right, more funding to charitable organizations by really challenging the conventional wisdom on how much to give. Maybe you could talk with us a little bit about that approach to philanthropy that tends to inform most conversations, in your view.
04:37 - 04:46
Well, there are three questions that foundation executives or philanthropists ask themselves or should ask themselves, which is where to give.
04:47 - 04:49
How to give and how much to give.
04:50 - 05:16
And they tend to answer those questions in that order and almost never get to the question of how much; they also kind of rely on the mantra, which is never touch capital. So in the case of a private foundation, that means give at the IRS required five percent level. So we're trying to get people to ask the how much question and to answer that question, we turned to some prominent guideposts
05:16 - 05:57
last year. We looked at the giving pledge, which is the one where billionaires pledge to give away half of their wealth. Second was there's draft legislation called the Emergency charitable stimulus bill that was floating around, that called for a three year requirement of a 10 percent payout for donor advised funds and private foundations. There was also an effort called One for Democracy, which asked donors to give one percent of their assets to support voting rights and other election related efforts. And the fourth guidepost was the wealth tax proposals that have been floating around. So we used those guideposts and we came up what we call the charitable standard.
05:57 - 06:01
So interesting. Can you tell me a little bit more about the charitable standard?
06:01 - 06:47
The charitable standard is divided into three categories: donor advised funds, flat 10 percent payout for private foundations, it's six percent up to $50 million, and $50 million, by the way, represents about 98 percent of all foundations, and then 10 percent above that. And for individuals, it's a sliding scale ranging from one percent up to the first $50 million. Two percent up to $150 million. And up to five percent for those lucky enough to have $25 billion or more. So we have 105 signatories, foundations and individuals who met what we call this charitable standard. And if any of your listeners think that they met the standard in 2020 and would like to sign on, that would be terrific, and they should go to charitablecommitment.org.
06:48 - 07:02
That's great. Thanks, Alan. And you just gave us a lot of information. One question I have before we move forward is how does the membership or how do the people that have signed on really break out? Is it mostly private foundations, mostly individuals? Or is it a pretty donor advised funds? Or is it a mix?
07:03 - 07:04
It's a pretty even mix.
07:05 - 07:05
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Yeah. Yeah, about a third each, each category.
07:10 - 07:10
07:10 - 07:46
So not surprisingly, being from Bernstein, I want to dig into the math a little bit. So because that's what we do, right? I love a numbers person, I love it. Yeah, and I won't even go nearly as far as some of my colleagues would, but I have to ask, for so many people. I'm curious about the feedback on the charitable standard across the industry, because many people in Bernstein in some cases would say that those pay-out rates are just not sustainable. What you've laid out, that six percent even maybe is not sustainable, and so help us unpack a little bit on your assumptions and in how you came to these numbers.
07:47 - 08:34
Sure. So first off, I should point out that our standard is for the...what we call the crisis period, which we're thinking of as three years. So 2021 and 22 hopefully will be beyond the crisis. After that, after 2022, we would think that the numbers we're proposing would come down a little bit and we'd go back to five percent for the first 50 million and nine percent above that. So that would mean that a $100 million foundation would have an average payout of seven percent. And our guesstimate and of course, obviously nobody knows, but our guesstimate is that well-managed money could achieve returns that would allow them to have a seven percent payout in perpetuity.
08:34 - 09:28
Now there's a big question about whether perpetuity is really the goal here. And I think that for smaller, what one would call smaller foundations like $100 million and less cash, in perpetuity might be OK. You know, I can imagine families wanting to have their children or even grandchildren have the opportunity to be philanthropic. The problem we have right now is tremendous inequality in the foundation world. So we have zero point one percent of the foundations have 40 percent of all the assets, in which there's 100 foundations that have 40 percent of all foundation assets. So if we leveled the playing field a bit, even in philanthropy, I think we'd all be better off. And that's partly how we structured the... That's why we have the $50 million
09:28 - 10:25
And this is one of the problems when you see studies that are being done about foundation returns, they conflate all foundations. You know, again, 98 percent of foundations have less than $50 million. Well, they have a different experience than that top 0.1 percent does. And that's been borne out by a recent study by the Council on Foundations, along with Common Fund Institute, where they've shown that the returns are fairly dramatically different among different size foundations. So, for example, they broke the categories into foundations over 500 million, 100 to 500, and less than 100 million. For over 500 million in 2020, they had returns of sixteen point one percent. The group from 100 million to 500 million, had returns of thirteen point one percent, and the group under 100 million had returns of eleven point six percent.
10:25 - 10:26
10:26 - 11:17
Those differences will make a big difference if you have a certain payout benchmark. And I think a lot of it has to do with, you know, asset allocation. So the Council of Michigan Foundations put out a report where they were projecting 10 years into the future and saying that there's no way that foundations are going to be able to sustain a five percent payout. But what they used for their asset allocation was 50 percent equities, 25 percent fixed income, and 25 percent global equities. Whereas the Council on Foundations, the Common Fund, their asset allocation is 25 percent equities, 9 percent fixed, 17 percent global and then 45 percent alternative investments. Yeah, that makes quite a difference in your returns.
11:18 - 11:21
It does, depending on the time period it does, too.
11:21 - 11:42
I'm thrilled that you brought up this sort of disparity across the different types of investments that the different sized institutions are invested in, and also the disparity in terms of the different projections, right? So I think there are two gaps here. The first I want to touch on is the forward-looking return assumptions because as you mentioned, a rate of return of about seven percent, right?
11:42 - 12:26
So the assumption behind this. So if you look back interestingly, over the last decade, from 2011 to 2020, interestingly, a 70 percent global stocks that includes US and international emerging markets, global stock portfolio in 30 percent taxable bonds, right? Sort of a standard publicly traded markets type of portfolio. That portfolio actually returned eight point seven percent annualized. And so those are pretty strong returns on an annualized basis for public markets. Plus inflation was really, really low. If you actually subtracted out or accounted for inflation there, the annualized return was probably in that seven percent ballpark, right, that you're talking about in terms of the forward-looking returns.
12:26 - 12:59
But here's the thing, as we know, after a decade of really strong equity returns and low inflation and declining interest rates, the story for publicly traded assets, right, looking ahead is very different as well. And I think you're absolutely right that the larger institutions out there, the very largest institutions, have a much higher percentage by and large in private investments than smaller investors. They don't have to take the roller coaster ride, right, at the whims and the fears of the publicly traded markets that others do. And so they don't. We see this with wealthy investors across the board.
12:59 - 13:57
However, a number of smaller institutions, there are opportunities to invest differently. There are more and more as the capital markets sort of adjust and change, there are opportunities out there for foundations to do things differently from an investment perspective. Many just haven't gotten there yet. I think folks are allocated in a certain way now because it's just how we have been, and our argument to investors out there, both institutional and otherwise is, you really need to look at how you've been invested historically, if you have been very, very heavily in the publicly traded markets, and think about where you can incorporate different sources of both risk and return going forward, so that you can sustain, to your point earlier, you can sustain that five percent plus in terms of the payout. NAKUBO, the National Association of College and University Business Officers, does a similar report every year on asset allocation, among other
13:57 - 14:39
And while they're not foundations, you know there's a parallel there because the billion dollar plus institutions in this case reported 60 percent of their portfolios were in a combination of private equity, venture equity, other marketable alternatives. You know, real assets like things like natural resources, did 30 percent in publicly traded equities, right, and 10 percent in bonds. Those under 100 million reported just under 60 percent in publicly traded equities, 30 percent in bonds, and roughly 10 percent in sort of that combination of other alternatives. So we absolutely see the difference in the return potential ahead, even though looking in the rearview mirror, if you were just invested in the publicly traded markets, you in all likelihood probably
14:39 - 15:01
probably The big shift is coming forward. So I would just say that there is an opportunity. I think maybe your assumptions around returns may be a little high, right? A little high versus what we would project. That being said, they're completely unreasonable if many, many foundations don't do things very, very differently, right, in terms of their asset allocation.
15:01 - 15:53
Well, I totally agree with you, but I think it's important to keep in mind that it's a concern if the bottom line is, we have to maintain our assets in perpetuity because basically what we're suggesting is that there might be some risk that you won't have the same real dollar value in assets 40 years from now as you do now. But frankly, so what, right? What is the real downside here? Keep in mind that the donors to a foundation or a donor advised fund, they've already gotten the tax deduction. They were given support from the government in order to be charitable, but if the money doesn't go to the charities, I'd say it's not charitable yet. So I think there's very little downside in the kind of numbers we're talking about.
15:53 - 15:59
I think you're right. But if you think about it 10 years ago, we could have been having the same conversation.
15:59 - 16:26
In fact, think about 2020. I mean, I remember what April looked like in 2020, and here we are giving away all this money and we're looking at the stock market collapsing. And I'm thinking, well, this is going to change things. But obviously it came roaring back. So... Yeah. What we're proposing definitely challenges investment managers and foundation managers, but I don't think the risk is really very great.
16:26 - 17:07
You make a really good point around... I see perpetuity as another kind of just rule of thumb or sort of part of the paradigm that people have... sort of that knee jerk. Well, of course, the foundation is in perpetuity, right? And does that really have to be, right? And do you really have to adhere to that over time? We're having this conversation at a foundation where I'm on the board of directors really thinking about, you know, if we continue to spend more than five percent which we have done historically, we're not going to increase in all likelihood our inflation-adjusted balance of our portfolio year in, year out. But is that OK? We're looking at that right for the first time that this institution has ever looked at it.
17:07 - 17:12
And it's important, you know, I appreciate I'm curious to hear more from you on the perpetuity thought.
17:12 - 18:03
Well, I think there's a question of like why perpetuity? One answer has been that you want your children or grandchildren, I guess, to have the experience of being philanthropic. I understand that. But if the argument is we've been doing this a long time, so we're better at grantmaking, there's absolutely no evidence to support that. I mean, I would actually argue the opposite is probably true. So it's not a quality of grant-making that makes it... it's not like, oh, we've learned from experience, but there's the argument of... the rainy day argument like, OK, we just had the rainy day. I mean, we are talking about raining cats and dogs, right? We had. It's like putting your thumb in the dike. Like, which crisis am I going to try to address. Is it going to be climate or racial justice or whatever?
18:03 - 18:31
But yeah, there'll be future rainy days, but it's not like there isn't going to be any money to deal with those rainy days. There's 12 trillion dollars right now in the hands of the 0.1 percent in this country, 12 trillion dollars. A lot of that money is going to end up in foundations or donor advised funds, and that money will be able to address the rainy days in the future. I mean, we have a perfect example. Look at Mackenzie Scott.
18:31 - 18:33
This didn't exist two years ago, right?
18:33 - 18:44
All of a sudden, she is the largest donor in America. Changing the paradigm. And changed the paradigm. Well, she did it quickly. Extremely quickly and effectively.
18:44 - 18:51
effectively. I would challenge any legacy foundation to say they do a better job than she did in her current making.
18:51 - 19:20
So you mentioned, you know, sort of newer grantmakers, individuals who are newer to philanthropy, so that brings up donor advised funds. And clearly, there's, you know, there's bipartisan support for the ACE Act that they're looking at now. Donor advised funds have absolutely been a target, right? In terms of, you know, legislators seeing about. Is this a way for us to start to move some additional charitable dollars to the end game that they were intended to be a part of? And so I'd love to hear your thoughts on on that.
19:21 - 19:54
I'm concerned that it doesn't do very much with regard to private foundations, and I'm a follow-the-money type person. So donor advised funds have $120 billion in total, private foundations have $1.2 trillion dollars. So if you really wanted to get money out to nonprofits, which is what was intended, you can imagine a two percent increase in the foundation payout would be equivalent to a 20 percent payout for donor advised funds. So, yeah, my go-to place would be let's fix the private foundation payout.
19:54 - 20:26
Yeah, I mean, we see the role for donor advised funds. We use them all the time as wealth advisors for wealth creators, right, people who are earning significantly. They might have lumpy income, whatever, you know, from one year to the next. It's a fantastic way for folks who haven't really had the time or the wherewithal yet to focus on their philanthropy, to move assets into a charitable vehicle in the most tax-efficient way and build that up. And maybe there are causes and institutions they want to support along the way, but it really is a
20:26 - 20:57
I see it as sort of a gateway to philanthropy, almost part of that kind of like democratization of philanthropy because the levels are much lower as well. The barriers to entry are much lower. My one concern with the ACE Act is that by placing restrictions on donor advised funds right off the bat, you're going to discourage folks from gifting to these entities in the first place. I'm still struggling with that, so we've covered a lot of ground today while walking through the largest foundations to emerging donor advised funds.
20:57 - 21:42
Looking at this sort of paradigm of how business is done in philanthropy and seeing this as an opportunity to change that in many ways and looking at the effects or the impacts for different size institutions. One way that we're seeing a number of foundations invest differently today in terms of getting more dollars, at least aligning more dollars with their mission and vision and values is through how they invest that ninety-five percent, not necessarily how much they're giving, but how they're investing. That corpus and responsible investing happens to be the fastest-growing part of our investment platform at Bernstein, and we are not alone. You know, as a wrap-up, Alan, what are your thoughts on responsible investing and how that integrates into the portfolio?
21:43 - 22:19
Yeah. Well, the Common Fund Institute points out that 20 percent of foundation executives are now thinking about SRI or ESG investing, so it's a hugely growing field. Our foundation, we've been doing social investing for almost 50 years, which kind of shows my age, but I think we've had pretty good returns over that time. So it's not an issue. It's never really been an issue of sacrificing returns to put your money where your values are, and there are so many ways to do that. There are plenty of opportunities for investors. They do their homework. It will pay off for everybody.
22:19 - 22:23
It's great. Well, thank you so much, Alan, for being here today.
22:23 - 22:27
Well, thanks for having me and thank you very much for the work that you're doing.
22:27 - 23:03
I appreciate it. It's been great to have you here and thank you all for listening. If you'd like to learn more on Bernstein's Foundation and Institutional Advisory Services, please see the link to our blogs in this episode's description. If you enjoyed this episode and haven't subscribed to our podcast yet, please go to the iTunes store, Google Play, or wherever you listen to podcasts you subscribe and rate us. Also, please email us with your thoughts, questions, and feedback to insights@Bernstein.com and be sure to find us on Twitter at BernsteinPWM.
- Clare Golla
- Managing Director—Head of Foundation & Institutional Advisory Services