IV. Stewardship

The Rhode Island Foundation is a unique steward. On the one hand, we must be banklike, to ensure that the charitable dollars entrusted to us are preserved for perpetuity. That requires long-term investment strategies and considerable stability. On the other hand, we exist to serve community needs. That requires the Foundation to maximize dollars available today. An array of tools, from expert investment to prudent spending, meets both goals.

An interview About Finance.

Michael J. Jenkinson
Director of Finance and Administration

To me, endowment means preservation of principal. There’s comfort in living off the earnings, always ensuring a steady income. I read a story about the life of John Quincy Adams. He said he felt his family came on hard times when they had to invade principal.

Our spending policies are geared to preserve the “buying power” of the original gift, namely the gift value plus annual inflation. The princi-pal, and principle, if you will, we’re trying to preserve is the “gift that keeps on giving.”

We make that possible by limiting spending from an endowment (other than donor-advised funds) to 5.5 percent. Any income beyond that accrues to each of our 650 endowments.

A spending rule report took a representative stock portfolio over a 44-year period, and showed that, with a 5.5 percent spending cap, an endowment would have grown in real value by 25%, and would have spent nearly seven and a half times the original gift. With a 6.5 percent spending rate – only one percent more – during the same period, however, the real value would have dropped 18.8 percent, and the beneficiary would have received fewer dollars in grants. At 7.5 percent and higher spending levels, the difference becomes a chasm.

Admittedly, with a spending rule the beneficiary receives less in the early years of an endow-ment. But because Foundation endowments are all about long-term — in fact, perpetual — charitable support, the value of limiting spending now is to provide continuing support at rising levels in the future.

If I would advise someone whether to make a $20,000 outright gift or set up a $20,000 endowment on behalf of a nonprofit organization, I would ask, ‘how long do you want to care about this organization or cause?’ You create an endowment if you’re willing to support it for years.

Endowment is the foundation of the Foundation, I guess you could say. It’s what makes us different from every other group, from Fidelity to most charitable groups other than colleges and hospitals and some others.

Investing for Stability and Growth
One of the Foundation’s charges is preserving the financial integrity of its assets, presently about $400 million. At that size, the growth of the assets through investment generally raises more dollars than new gifts, which is just another way that we develop philanthropic dollars for Rhode Island.

That takes us into risk models. What does best return/least risk mean for the Foundation? The Foundation’s target is inflation plus 6 percent, which simply allows us to preserve buying power. We’re not telling our managers just to meet the target, though. We expect them to exceed bench-marks, the S&P 500 for large cap stocks, for example. Risk isn’t determined by the managers; it’s determined by our asset allocation, by our decision to put so much in large cap stocks, so much in international, etcetera.

Prime Buchholz, an independent investment firm, guides our investment strategies in partnership with our investment committee made up of directors and committee members with investment management experience. Our Board has past bank presidents and business owners; four out of five committee members have 30 years apiece of investment experience.

With this amount of assets, we are able to pool the money and attract the best investment. We recently hired several new managers. Our process started with reviewing our investment strategy and the asset allocation. We reviewed data showing the returns over the past ten years by a couple hundred managers. Then we interviewed nine within each category, then three. We hired the best investment managers available.

Internal Management
In just the three years I’ve been here, the assets have nearly doubled, from $200 million to $400 million. With our growth has come growth of sophisti-cation. Three of our four accountants have public accounting background; two are CPAs. We’ve updated the automation.

We follow normal accounting processes. In fact, we are subject to an audit that’s tighter than in small or family businesses in Rhode Island. We’re a public agency; our corporate resolutions and internal controls have to be the best they can be. Our expenses are scrutinized by the Board of Directors with a responsibility to the community to have a clean operation, to have the right controls in place. Those controls are developed by the accounting industry.

So we’ve kept up with the swing of things. We have an experienced Board, professional staff, up-to-date automation, more internal controls than most private companies, and a careful investment package that’s able to attract the best managers. I’m optimistic about the future.