Friday, February 8, 2008

"My Foundation was Invested in What???"

The NY Giants Superbowl victory was a surprise. Let me prepare you for another upset, there's a strong possiblilty your foundation has mortgage backed bonds in it's portfolio and you may be about to take a loss. So many family foundations rely on their brokers and asset managers to manage their foundation's assets. Because it's not "their money", they do not scrutinize the holdings like they would if it was "their money" and many times the brokers know this. They place higher margin securities in this portfolio for many reasons; they get paid more to, there is more internal pressure to sell these assets, and since the assets are higher yielding, it may enhance the performance of the portfolio. The problem is, they are probably AAA rated and look good, the kicker is, many times your broker or asset manager does not really even know how they work.

The rearranged cash flows from mortgage backs enables the structurer to make many different types of securities, some of which are appropriate investments for a foundation, some of which are not. If your asset manager or broker does not understand the complexities of these new securities, you may be invested in inappropriate pieces and none of you are aware. Not until there are significant defaults or interest rate shifts, both of which we are experiencing now, will you know, and by then it is probably too late.
  1. What exactly do you own? Is it collateral or is it structure? What types of mortgages?
  2. How will it perform in a volatile interest rate environment? (Prepayments/Defaults)
  3. At what price do you own it? (Extent of Premium or Discount)
Collateral is pooled mortgages, structure is taking those pools and rearranging the cashflows to create "tranches" in a deal. Find out specifically what your collateral (what types of mortgages) is or where in a structured deal your bond is. Interest rate volatility will determine what extension or shortening risk your security has. As the speeds or prepayments on your collateral change, so will the life cashflow characteristics. The price will determine your yield. If you purchased your security at a significant premium and the security speeds up, your yield will go down. Conversely, if you purchsed your security at a steep discount and the prepayments sped up, your yield would be enhanced. Knowing what types of mortgages you own, the structure they have (if any) and at what price will enable you to understand your true mortgage exposure. The bottom line is, does your broker or asset manager understand mortgages enough and are you comfortable enough investing your foundation's money in them??

Friday, February 1, 2008

Intergenerational Passage of Family Foundations

The Jewish religion calls it l'dor v'dor or from generation to generation, but it doesn't seem that simple when it comes to handing down a charitable family foundation from one generation to the next. The first generation has tremendous financial success or sacrifices to accumulate wealth. They many times raise the standard of living for their family to significant heights. They may also have certain philanthropic goals they would like to have met, specific areas they would like to have a portion of their wealth go to. They may just have a need to not be forgotten, to leave a personal legacy. Many times however, second and third generations forget the sacrifices the donor generation has made, the charitable goals they had or the legacy they intended for themselves. Those people closest to them change the game plan.

In a New York Times article (Sept. 29, 2007) entitled "Donors Gone, Trusts Veer From Their Wishes", Stephanie Strom points out how banks and most specifically large bank trust departments, abuse "orphan trusts", or those trusts or foundations with no living member to assure that the donors wishes are met. She outlines how many trust departments , which are very transient areas for large banks, manipulate these charitable vessels for their own goals, completely ignoring the wishes of the originator. In fact, many times the bank employee that has given the donor their comfort level and has the understanding of what the donor would like to accomplish, moves on and is quickly replaced by another employee with no knowledge of the situation. These asset managers also play with the principal, investing in inappropriate vehicles or finessing the cashflows for the banks best interest.

For a stranger to capitalize on a deceased donor is inappropriate and sleazy, for a family member to do so is unconscionable. Many times the donors own children wipe them from the title, eliminating their legacy. The Robert and Roberta Smith Family Foundation may become simply The Smith Family Foundation. Sons can replace the parents names for theirs, changing the previous example with The John and Joan Smith Family Foundation, and a daughter may actually take the family name off the title, eliminating the family legacy with The John and Joan Jones Family Foundation after her new married name.

Taking advantage of the deceased is nothing new, but to take advantage of those that simply want to help others, we need a higher conscience. Family members should be sensitive to say, "This isn't my legacy, it's my relative's." If it's impossible to work within the donors wish list, let the new breed of sensitive, nurturing professionals do it, for everyone's sake...the donor, the grantee, the needy.