Ideal Funding Strategies
The ideal funding strategies for the Museums
Traditional fundraising plans typically focus on raising capital for projects, and largely ignore building endowment funds. The case for an endowments-focused funding strategy is very persuasive. With sufficient endowment funds, the Museums have income streams in perpetuity, and are freed from the onerous and draining efforts to continuously raise funds.
The best way for the Museums to be financially sound is with good endowments. Our goal is to build endowment funds sufficient to allow the smallest possible museum entrance fees, reduced Member dues, a stable annual budget, and the best possible programs.
What size endowment funds do the Museums need?
Conservative institutions such as museums, libraries and universities are typically operating their portfolios with allocations of 50% of annual returns from current income. Their long-term predictions for their investment pools are to earn returns of an average of 8.2%. This would be sufficient to provide 4.1% income streams.
The Museums’ endowments will be perpetual funds, with the principals remaining in perpetuity and invested, with the yields available to support Museum programs. At 8% yields, in the long term the Museums’ endowments need to reach a value of $100 million to yield $4 million annually, sufficient to have a stabilized support of operations, eliminate concerns about inflation, and ups and downs of the economy.
Ideally, the Museums need an annual budget of at least $1 million, which translates to the portfolio size reaching at least $25 million as quickly as possible. Given the size of our audiences, there are millions of people and thousands of organizations who can help us reach this goal. For instance, the 2.9 million hams (amateur radio operators) worldwide contributing 83 cents per month for a year would fund the Museums’ endowment to $29 million.
A Few Words on Portfolio Management
The rate of return for conservative institutional portfolios, such as for universities, museums and libraries, has ranged as low as 3% to over 25% in the past few decades. However, even the most inexperienced portfolio manager knows that the annualized compound annual growth rate (True CAGR) of the S&P 500 from 1985 through 2017, adjusted for inflation, was 8.57%. So for example, every 1985 dollar in a simple portfolio indexed to the S&P 500 would have grown to $15.07 by the end of 2017. Well-managed institutions are currently predicting returns of between 7% and 8.9%, and long-term returns averaging 8.2%.
Considering the complexity and volatility in the investment landscape, the Museums will use a portfolio management strategy that is responsible, sustainable, and balanced.
Equity managers, banks, debt managers, and support services vendors will be carefully selected, and continuously monitored with extensive due diligence systems with the latest measurement, reporting, standards, assessment and ratings systems. Continuous monitoring of key functions includes managers’ value-drivers, active risk management, competitive returns, socio-economic risks and impacts, consistent visions, and track records. Conservative policies will also be closely monitored, including managers’ risk-return trade-offs, investment structures, management approaches, financial trade-offs, investment horizons, liquidity, and capital preservation.
The Museums will follow good standards of loyalty and care, and will minimize costs in the management and investing of the portfolio and endowment fund. Management fees should be not greater than 1.0%, preferably under 0.5%; and custodial fees should be less than 0.1%. The Museums will follow current regulatory requirements, such as the Uniform Principal and Income Act, Uniform Prudent Investor Act, Uniform Prudent Management of Institutional Funds Act, and Uniform Trust Act.
Overall policies for the endowment funds will be conservative, including short and long-term investment policies, income and budget setting policies, permanent invested funds asset allocation policies, and rules limiting use of investment earnings to protect principal. The policy for income allocation from the endowments for annual expenditures will be limited by the endowment size. As the endowments grow, the percentage of income allowance for expenditures can grow. The reserve policy will include a land and buildings fund, and a cash reserve fund. The land and buildings fund can be reduced as buildings and real estate are donated, but not if buildings and real estate are required to be purchased. The policies for all fund-raising campaigns include allocating the maximum percentage possible to the endowment. A minimum of 33% will be preferred. The portfolio will follow careful balanced asset allocation distribution of domestic and foreign securities, fixed income, cash, bonds, real estate, alternative assets, and specialized financial instruments. The endowments will allow investing for the highest possible total return consistent with an acceptable conservative level of risk; will have a fair allocation of principal and income returns between the present and future needs of the Museums; governed by clear rules defining what may be distributed on a current basis from year to year; have self-adjusting mechanisms for unusual market volatility; and ability to modify the distribution rate for prolonged or permanent changes in economic or financial circumstances.