At the start of the 2010s, The Leona M. and Harry B. Helmsley Charitable Trust was only a few years old and determined to avoid some of the liquidity missteps made by its brethren during the financial crisis.
Helmsley's liquidity certainly isn't going to be an issue to start the 2020s.
The $6.2 billion philanthropic foundation has in the past 18 months allowed itself to amass an unusual, relative to peers, amount of dry powder.
As of the end of November, Helmsley's cash/ reserves (non-return-generating assets) stood at 23%. In this bucket marked "safe" assets are securities — such as Treasuries — that can be converted to cash immediately. However, the fact that nearly one-quarter of the fund's allocation is pegged to what are essentially risk-free securities should not be interpreted as a market call, said Chief Investment Officer Rosalind "Roz" Hewsenian.
Because if there is one phrase to avoid when discussing the fund's asset mix with her, it is "market timing."
"If we were only worried about the asset side, and not worried about spending, then I would have to agree with naysayers who say that you can't time the market," Ms. Hewsenian said. "But we have a foundation to run, grants to make, IRS-mandated spending requirements, staff to maintain, so I do need to worry about spending."
And so while Helmsley's safe cushion is neither the result of a deliberate reallocation, nor some sudden monetization, it is a reflection of an organizational mindset that puts grant-making front and center. Their models do not make forecasts about the future, but what the models indicate about the current period has them being pragmatically cautious even as they insist they are not market timing.
"When we do reach a recession, we want to be able to withstand it without any impact to the operation," Ms. Hewsenian said.
As portfolio managers, the Helmsley team appears more idiosyncratic than emblematic relative to other foundations.
As of the end of 2018, the 161 private foundations surveyed annually by the Council on Foundations and Commonfund had an average short-term/cash allocation of 4%; average fixed-income allocations were 9%. These averages were basically unchanged from 2017.
"It's definitely atypical," NEPC's Samuel J. Pollack said when learning of a foundation having 23% essentially in cash.
A partner who helps to head up NEPC's foundations and endowments practice, Mr. Pollack was quick to note that each institution has its own cash-flow considerations; and that there isn't any one-size-fits-all approach.
"Some organizations might take a barbell approach, balancing illiquid investments with highly liquid/defensive investments," he said.
Most foundations and endowments do have a more balanced and diversified approach, he added.
NEPC has no preset model for target allocations to cash. The firm does have a stated view that "we are late in the cycle," Mr. Pollack said. Returns should be "consistent with long-term averages across asset classes" in the next 18 to 24 months, Mr. Pollack said. But harsh lessons from the past might be fading too far from memory.
In a 2018 research paper marking the 10-year anniversary of the global financial crisis, Mr. Pollack cautioned "it may be hard for endowments and foundations, basking in the warmth of an extended economic expansion, to remember the havoc wreaked by the global financial crisis 10 years ago … or the liquidity rout that forced many to sell performing assets at depressed valuations so they could meet their spending needs."
Indeed, some of NEPC's clients had dry powder to deploy at the precise moment when such flexibility was most valuable. But the crisis brought on a "deeper level of introspection for many institutional investors," Mr. Pollack wrote in his paper.
General discussions about how much, if any, dry powder to cordon off during the late stage of a market cycle are bound to become more frequent as a new decade begins. One veteran investment consultant strenuously warned against it.
"There are those who have tried to time the market and have been spectacularly wrong, for forever, and I don't think that's likely to reverse," said Michael Rosen, chief investment officer of Angeles Investment Advisors LLC.
The team agrees
The Helmsley team of 12 people, including a dedicated risk manager and four investment officers, would tend to agree. The team prides itself on not making forecasts. Rather, it endeavors to evaluate, quarterly, where the economic/market cycle appears to be at all times.
"We leave forecasting to others," Ms. Hewsenian said. "Our main concern is, at all times, knowing where we are."
This measurement is done on two concurrent time horizons — long and medium term — using the most common factors/economic data such as price/earnings ratios and consumer confidence; the data are all common, publicly available inputs but filtered through a proprietary process to gauge where the market/economy stands at any given moment in time.
Sentiment gets expressed via an assigned probability. Translated into probabilities, the models are currently indicating 63% late cycle and 37% midcycle. In other words, Helmsley's investment team thinks, based on its models, that "we're two-thirds of the way through the late cycle and only one-third through the midcycle," Ms. Hewsenian said.
Incremental cash has accrued over the past year — returned, for example, from private asset funds winding down, or from managers jettisoned for performance reasons. The current assessment shows there is some room for the market to run, but probably not that much.
But then even risk averse is a term that Ms. Hewsenian denies as being applicable to the fund's allocation. "We're not risk averse," she said. "We want to take only the risks we choose to, and avoid the risks we think we can avoid."
Put another way, the stability of spending supersedes any inclination to shoot for the highest possible returns.
Peer benchmarks do matter, but are not closely obsessed over, she said. It's a competitive arena, and investment committee members do want to know where the organization stands. The foundation staff would not provide information on its investment performance. Foundations such as Helmsley are routinely lumped together with university endowments and placed into a charitable catchall.
But, as Ms. Hewsenian is keen to point out, there are some major distinctions separating foundations from endowments.
The IRS has stricter spending requirements. There is, for foundations, no getting around the 5% spending minimum and that equation is tethered to trailing asset values, exacerbating the pinch of a downturn in double-whammy fashion.
Endowments typically tend to aim to spend 5% but by law they don't have to.
Fundraising is constant. Most private foundations already have all the money they are ever going to get. Foundations, unlike endowments, don't fundraise or get new infusions of funding other than from their investment returns.
Yale endowment CIO David Swensen, in his book on the asset allocation model he helped make famous, concedes the reason that the $30.3 billion Yale endowment now dwarfs the Carnegie Institution's endowment is not performance but gifts, said Christopher Rapcewicz, Helmsley's director of risk and operations.
"Managing risk at a foundation means being sensitive to the kinds of risks that are uniquely detrimental to grant-making," he said. "And that means limiting large drawdowns."
Helmsley is going against the grain in terms of risk-free exposure and also in some other regards.
It has, for example, no dedicated allocation to hedge funds. What hedge funds they do have are a function of investment themes and expected to be return-generating rather than controlling risk. Officials would not disclose how much they have invested in hedge funds.
Ms. Hewsenian declined to reveal the total private asset allocation (which includes private equity, venture capital, real estate and private credit) other than to say that its private investment portfolio it is on par with the typical foundation. The Council on Foundations/Commonfund study on foundation allocations shows the 2018 average allocation to "alternatives" was 46%.
Tiers of liquidity
Helmsley has an asset allocation approach that groups its investments based on tiers of liquidity. After the safe assets (immediately liquid) come liquid assets (accessible in up to 60 days); and semiliquid (up to two years) and, finally, illiquid (two years-plus). Much of the liquid assets are long-only public equities. Helmsley officials would not discuss their specific allocations to these individual tiers.
Viewed this way, the foundation is barbelled between safe and illiquid with stock and hedge funds in between.
In this context, with the emphasis on spending stability, the pile of dry powder looks more practical compared with an institution such as an underfunded pension fund that simply can't afford to have such a hearty slice of non-returning assets.
Historical context also needs to be considered. When the Helmsley foundation was created in 2007, the assets comprised commercial real estate that was liquidated. Thus it came to be, in the tumultuous summer of 2008, Helmsley was mostly in cash or Treasuries.
Major lessons were gleaned from comparing notes with peers and including that the endowment model had a flaw: It did not sufficiently account for liquidity evaporation.
"Common sense tells us right now that committing dollars to riskier assets is probably not the right thing to do right now, considering where we are in the cycle," Ms. Hewsenian said.