The Promise and Risks of Receiving Appreciated Assets
It is not a risk-free proposition for nonprofit boards to make investment decisions that meet philanthropic goals. This is all the more difficult for those trustees without a background in finance. The simple answer is usually to allocate the investments conservatively and rebalance periodically to at least beat inflation and preserve capital. Large charities like university endowments turn to more sophisticated methods of portfolio diversification, expanding beyond stocks and bonds into vehicles like hedge funds, private equity, venture capital, and real estate.
The Conversation’s detailed article cautions that it is not enough to focus only on returns; in fact, it’s more important to consider risk-adjusted returns. In the case of digital currencies, it would have required nerves of steel for trustee investment committees to commit to pre-established decision-making processes to avoid the bitcoin crash in early 2018, after it rose by 1,318 percent against the US dollar in 2017.
These gains gave way to massive losses in the first eight months of 2018, when digital currencies plunged more sharply than the dot-coms crashed in the early 2000s.
Some charities that received massive cryptocurrency donations in 2017 may not have been able to convert them into regular money before they lost much of their value the next year. Silicon Valley Community Foundation, for example, disclosed in its 2017 audit report that for more than 45 percent of its investment assets, restrictions would prevent them from being converted to cash at any point in 2018.
The fact that charities only disclose their financial data once a year means that the scale of their at-risk wealth, as of now, is unknown.
There are more reasons than volatility to be concerned about holding onto investments of cryptocurrencies. Wallets and exchanges used to hold the investments can be hacked. Compliance issues abound. Regulators are still catching up to the IRS ruling in 2014 that treated digital currency as a form of investment property. The sweeping new tax billpassed into law last December may bring more change. Inasmuch as digital money ledgers for transactions are owned and maintained by the users of the systems rather than controlled by a government or a central bank, it is difficult to predict how government will eventually choose to manage this revolutionary type of money.
The Conversation article goes on to examine other forms of appreciated assets being given by a shrinking group of ever-wealthier donors and the “charitable middlemen” needed to help facilitate these donations.
Fidelity Charitable got 61 percent of its donations in assets other than cash in 2017. Other prominent donor-advised fund sponsors saw a similar result. Schwab Charitable obtained over 70 percent of its 2017 donations in non-cash assets. In the last month of the year, that figure was 80 percent for Vanguard Charitable.
These fast-growing charities bring a key skill: harvesting capital gains. That is, they accept tax-advantaged donations, hold onto that wealth, and—in most cases—transfer the money derived from those assets to the donor’s charities of choice when the donor asks.
For nonprofits, it could be said that today’s donor classes are creating as many challenges as solutions. As government funding continues to diminish for many of the issues addressed by the nonprofit sector, private philanthropy becomes all the more important, and along with it, the skills to properly raise,
Author: Jim Schaffer
Source: Nonprofit Quarterly