Arts Endowments and Money Management in the Recession

The Culture Crash by James Panero, City Journal 20 July 2009

The reductions in arts endowments reported over the past year have been significant, raising the question of how they have been managed. If the investment goal of arts endowments is the preservation of capital, how can they now face decreases of 35 percent, aside from the criminal actions of investors like Bernard Madoff?

For the answer, look to nonprofit money managers and “managers of managers,” such as the Commonfund, which was started with seed money from the Ford Foundation in 1969 and now manages managers for hundreds of nonprofit institutions, with $40 billion in assets under management as of 2007. These managers, now used throughout the nonprofit world, have encouraged arts organizations to seek “total returns,” including capital appreciation, from their endowments, rather than merely preserving capital and accruing dividend income. “In the post–World War II decades,” explained Commonfund in its 2005 report Principles of Nonprofit Investment Management, “the concept of prudence changed from one of avoiding risky investments altogether to one of balancing the risks of various kinds of investments against one another. . . . If you aim to get the most out of your investments long term, you have to own some that have a higher degree of risk.”

Endowment asset allocations thus moved away from the safety of fixed-income instruments, such as high-grade bond funds, to the volatility of domestic and foreign equities and even to “alternative investments,” such as distressed debt and venture-capital equity. This investment strategy paid luxuriantly during the good times, resulting in bloated budgets and massive expansions. Yet with only quarterly meetings, arts boards proved too slow to navigate away from the hazardous investments once the bad times began. In short, arts organizations adopted bad habits.

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