America’s foundations spend many millions of dollars every year on investment advice. What do they get in return? Bubkes.*
You read that right: Money that could be spent on charitable programs — to alleviate global poverty, help cure disease, improve education, support research or promote the arts —instead flows into the pockets of well-to-do investments advisors and asset managers who, as a group, generate returns that are below average.
This is redistribution in the wrong direction, and why it hasn’t attracted more attention or debate is a mystery.
The latest evidence that foundation executives make dumb investment decisions arrived recently with the news that two energy funds managed by a Houston-based private equity firm called EnerVest are on the verge of going bust. Once worth $2 billion, the funds will leave investors “with, at most, pennies for every dollar they invested,” the Wall Street Journal reports [paywall]. To add insult to injury, the funds in question, which were invested in oil and natural gas, raised money in 2012 and 2013, just as Bill McKibben, 350.org and a handful of their allies were urging institutional investors to divest from fossil fuels.
Foundations that invested in the failing Enervest funds include the J. Paul Getty Trust, the John D. and Catherine T. MacArthur Foundation and the California-based Fletcher Jones Foundation, according to their most recent IRS filings. Enervest operates 33,000 U.S. oil and gas wells, more than any other company, according to a profile of its founder, John Walker, in Shale magazine. Stranded assets, anyone?
Of course, no investment strategy can prevent losses. But the collapse of the Enervest funds points to a broader and deeper problem–the fact that most foundations trust their endowment to investment offices and/or outside portfolio managers who pursue active and expensive investment strategies that, as a group, have underperformed the broader markets. Continue reading