Grants Budgets Take a Hit at Many Small Foundations

Most small and mid-sized foundations say the rough investment climate of the last two years will not cause them to make majors shifts in their portfolios this year, according to a new survey. But roughly half do plan to make changes to their spending and grant-making policies for 2010 as a result of the volatility.

Many of the 200 foundations polled by the Association of Small Foundations and Graystone Consulting, a business of Morgan Stanley Smith Barney, say they are eliminating grants they consider peripheral to their mission, as well as making across-the-board cuts.

Some foundations are using “carryover credit” from recent years in which they spent more than the required 5 percent of their assets to cover their grant-making obligations in 2010.

Cutting Back on Cash

Sixty-one percent of respondents say they do not intend to change the allocation of their assets.

Those grant makers that do are primarily focused on reducing their levels of cash and investments in small-cap U.S. stocks, and increasing their investments in international and emerging-market stocks.

Only 14 percent of foundations cited liquidity as a pressing concern, an issue that has received a lot of attention from the news media. While that number may seem surprisingly low, small foundations may have less exposure to illiquid assets than larger grant makers, said Henry Kaplan, director of Graystone Consulting, in a press release.

Meanwhile, 49 percent of those in the survey picked the federal deficit as the single largest issue influencing their thinking about how to manage their foundation’s assets, above the federal Troubled Asset Relief Program for banks, the Madoff investment scandal, and other issues.

For foundations that have a long-term horizon in mind, “inflation is a boogeyman,” said Timothy R. Walter, chief executive of the Association of Small Foundations.

Twenty percent of foundations reported that they do not have an investment policy statement, and 18 percent said they do not have a rebalancing policy to help them maintain their desired asset allocation.

Seventy-eight percent of those in the survey said that the market volatility of the past two years did not prevent them from moving ahead on plans to rebalance their portfolios to their desired mix, a finding that signals that “the thaw is beginning,” Mr. Walter said.