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Endowments and Grantmaking During a Market Downturn

A message from NDCF President & CEO Kevin J. Dvorak, CFP

As someone interested in the work of the North Dakota Community Foundation, you will know that our main business is the building of a permanent endowment resource to enhance the quality of life for North Dakotans not just today, but forever. This means that we must have sufficient long-term returns to cover our grantmaking and costs and provide enough excess return to allow for the grant payouts to keep pace with inflation. Over the last 40+ years of our existence, we have achieved that goal.

There have been many events that have caused the investment world to “go negative”. In every case, so far, the markets have recovered and gone on to new highs. While we can’t predict with 100% certainty that new highs are around the corner from this event, we are hopeful that it will be so. 

Questions that you may have going forward are as follows:

  • What effect will the market drop have on our funds?
  • What effect does the market drop have on the ability to make grants?

Before I answer those questions, a little background is necessary.  The critical point about endowment funds is the fact that they are not just for today, but that they are forever.

There is really no other investment that has a forever horizon, not 1-year, not 5 years, not 50 years, but forever. The only way to manage such an investment is to take enough risk, to provide the level of return that allows us to meet the goals stated above. The risk/reward ratio is managed for that forever time horizon. In years when the market performs well, any excess return remains in the Fund in order to “fill the gap” when markets perform less well. Because markets have performed consistently well for the last 11 years or so, many have forgotten that periods such as we are experiencing now occur relatively regularly.

The NDCF investment policy is designed for both good times and not so good times. We have

  • Established asset allocation guidelines that are expected to achieve long-term return
  • A portfolio that is diversified by asset class, strategy, and advisory firms which provides for returns in diverse economic and market conditions.
  • Maintained asset allocation through monitoring and rebalancing on a regular basis.
  • Not given in to the temptation to attempt to market time or to “chase” the latest hot strategy in the hopes of “beating the street”.

So, in answer to your first question:  What effect will the market drop have on your fund(s) at NDCF?  When you look at our fund balances, you will see the effects of current market conditions. They will be down from their recent peaks. It is always painful to see lower numbers, just remember that the numbers that you saw at the end of 2019 were all-time highs. Because of our asset mix/diversification and our disciplined approach, we expect that the fund balances will not reflect the totality of the stock market decline.

What effect does the market drop have on the ability to make grants?  You should know that endowment grantable balances are calculated on a 12-quarter rolling average market value for the Fund. This slows spending on the way up, but also “holds up” payouts when the market reverses. This evening-out of the payout helps our fund partners to continue to make important grants in times of market turmoil when one could argue that our grants are more important than ever. This formula also keeps NDCF in compliance with UPMIFA (the Uniform Prudent Management of Institutional Funds Act), which the North Dakota legislature passed several sessions ago.

Some of our fund advisors may choose to consider grants that specifically address COVID-19 impacts in their community or elsewhere in North Dakota.  That is certainly acceptable, provided the grantee is a 501(c)(3) or governmental entity. 

If you have concerns or questions, please connect with your staff contact person at NDCF, who will be happy to provide more information.

- Kevin Dvorak, President & CEO