Warning to All Grantseekers: When Markets Tank, HOLD That Request!
August 24, 2015
You can't time markets but you can time grant requests. So when newspapers scream: "Massive sell-off on Wall Street as investors fear China slowdown" (New York Post), you should think twice before asking a foundation for money.
In good times, foundations can drive grantseeking nonprofits crazy with their demands for effectiveness and metrics to support those claims. At regional and national gatherings, foundation professionals speak passionately about effectiveness in sessions with titles like "Unlocking Impact...", "What Works...", and "The Cost of Achieving Outcomes..." What's more, every year it seems more and more foundations turn to online application and reporting forms that require nonprofits to produce copious amounts of detailed information about their logic models, theories of change, inputs, outputs, and outcomes.
But when stock markets head south, especially in the dramatic way they have over the past few days, there are only three indicators that matter: the S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite. If you are ever fortunate enough to make it into a foundation president's office, apart from the usual large desk you will be greeted by a television or monitor tuned to CNBC with its endless chatter about share prices and market moves. Remember, the vast majority of the 87,000 foundations in the U.S. are endowed, meaning the income that underwrites their grant budgets comes exclusively from the performance of their investments. Foundation presidents and the trustees to whom they report know that the ability to advance a foundation's mission depends on that performance, and they also know that they are being watched by state and federal regulators tasked with ensuring they are responsible fiduciaries and "prudent investors" of foundation assets.
For grantseekers looking to be strategic in such an environment, it is essential you do three things:
Curb the urge to ask for money. We all worry about our budgets at times like these and want to make doubly sure that an existing request is approved or that a new funder has received our proposal and is considering it. If you let your anxiety get the best of you, however, you might just provoke an ominous message from the funder about the impact of the market "correction" on your chances, or even an outright declination. Better to wait a few weeks to see let the markets settle and the focus of the media to turn elsewhere.
Take a hard look at your own budget projections. Nonprofits are able to take on the world's most challenging problems in part by insisting on optimism as an essential ingredient of success. But when the markets — and economic conditions that impact nonprofit funding — start to suggest that things are about to get bumpy, it is best to revisit you own budget and fundraising projections and adjust them downward. Erring on the side of caution will ensure that you are able to pay the bills and preserve your organization's reputation for responsibility should a less-optimistic scenario come to pass. Better to be surprised on the upside.
Ride the waves.Though an individual foundation may have reason to panic should the markets continue to go south (especially if its investment strategy has relied too heavily on overly risky strategies or illiquid assets), foundations as a sector are affected by economic downturns far less than you might imagine. That's because most foundations determine their 5 percent payout rate based on the rolling three-year average value of their assets, which tends to even out their spending over time and insulate them from the whipsaw effect of violent market fluctuations. Remember, too, that over the past three years markets in the U.S. (and globally) have been extremely good to foundation endowments, and it is the three-year average that matters more than an endowment's daily, quarterly, or annual performance. Foundation Center research about the impact of past recessions — and no one (yet) is linking recent market declines to a recession — shows that overall foundation giving levels have always recovered from bouts of market volatility and continued their long-term growth trend. Indeed, foundation giving rebounded much more quickly than anyone expected after the recession of 2008-09, one of the deepest in American history. All this suggests that, as a grantseeker, you should get out your surfboard and be content to ride the waves a bit until things calm down.
As I write this blog, CNBC is reporting that market losses have been pared in heavy trading. Whether the market ends the day up, down, or sideways is something no one can predict with any confidence. But, as grantseekers, we can hold back our requests for a grant for a while, use that time to review our own organization's budget projections, and, taking a long-term view, remain optimistic about the future.
Brad Smith is president of Foundation Center. You can read more of his thoughts and advice here.