Portfolio Stewardship and Alternative Investments
by Don Hubbs
One of the most rewarding aspects of my job is serving as the portfolio manager, or investment steward, for a charitable foundation. Charitable foundations provide financial gifts that improve our community.
A relatively small financial grant from a foundation can make a significant impact on an individual, a family, or a community.
Serving in a stewardship role for a charitable foundation provides a unique clarity to one’s responsibilities and one’s rewards. The responsibility is to apply expertise and wisdom to increase the long term rate of return for the foundation’s assets. The reward is the knowledge that any increase in the foundation’s assets can supply additional funds to improve the world in which you live. Conversely, failure to perform you role with diligence can take money away from your community.
Managing assets for a worthy cause, like a charitable foundation, provides an opportunity to perform consequential work, which has the potential to make a positive impact upon their community?
For the last several years, traditional conservative investment professionals have been seen as out-of-step with the newest trend in our profession, alternative investments. While alternative investments have looked promising, many old line portfolio managers haven’t been able to get past their exorbitant fee’s and unquantifiable risks.
However, many charitable foundations, and their portfolio managers have chased short term returns by continuing to increase their allocation to alternative investments. This is somewhat surprising, given the great asset destruction that foundations experienced only 6 short years ago, when many technology and internet stocks decreased by over 50%?
However, investors’ memories are short, and evidence indicates that the board members that control many of our charitable foundations are not immune from fear or greed; the two emotions that control most investment decisions.
Money has literally poured into alternative investments in the last five years. According to Reuters, total investments in lightly regulated hedge funds increased by 29% in 2006 alone.
From a short-term perspective, foundations that chose to increase their allocation in alternative investments have fared well. Those that avoided the temptation during the last five years may feel they need to jump in now, or miss out on the easy gains that other foundations have experienced.
Naysayers of alternative investments are currently seen in the same light as those stubborn value portfolio managers, who back in 1999, refused to sell their Proctor & Gamble to buy Global Crossing or CMGI. Once again, those investment advisors who have stuck with traditional time-tested investments are seen as out of touch with the “new economy.”
It is easy to become complacent, even greedy when profits are flowing. True stewardship requires reflection.
A snapshot of the current stock market is essentially a portrait of the current crowd psychology— over long periods it flows between greed and fear, optimism and pessimism. This is why legendary investor Benjamin Graham was quoted as saying that there are two requirements to successful equity management: “first, you have to think correctly, and second, you have to think independently.” He also believed that the highest priority should be placed on management of risk, not the management of return.
As a steward of a charitable foundation’s assets, it makes sense to focus on prudent principles and independent thought in seeking rational investments. The challenge is to apply the same processes and investment principles that have worked for all of modern investment history: properly manage your asset allocations taking into account inflation, interest rates and security valuations.
Your responsibilities as a steward of charitable foundation’s assets are the same as when you manage assets for any client. Seek to achieve strong returns over a full market cycle, without assuming undue portfolio risk.
The rewards you experience when you successfully manage an individual client’s assets are the same as they are when you manage the assets of a multi-million dollar foundation: your work is meaningful and you make a positive impact on society. 
Don Hubbs is Managing Director and Senior Investment Officer, The PrivateBank.
P | 816.286.1500
E | dhubbs@privatebankandtrust.com