I went to a presentation the other night where the speaker outlined four scenarios for the U.S. economy over the next few years based on past experience and computer modeling. The scenarios ranged from an average growth of up to 10 percent to an average decline of 40 percent.
After the presentation I raised my hand and asked why none of the scenarios predicted a return to 2007 levels. The presenter groaned and said, "You need to get over it and just forget about it."
In other words, the asset amounts reached in 2007 may not return for years.
Last month, Jason Zweig wrote about the same subject in the Wall Street Journal and asked, "What are we smoking, and when will we stop?"
Zweig gives as an example a survey taken by David Salem to suggest that even the biggest investors in the world of philanthropy are often too optimistic:
David Salem is president of the Investment Fund for Foundations, which manages $8 billion for more than 700 nonprofits. Mr. Salem periodically asks trustees and investment officers of these charities to imagine they can swap all their assets in exchange for a contract that guarantees them a risk-free return for the next 50 years, while also satisfying their current spending needs. Then he asks them what minimal rate of return, after inflation and all fees, they would accept in such a swap.
In Mr. Salem’s latest survey, the average response was 7.4%. One-sixth of his participants refused to swap for any return lower than 10%.
According to Zweig, Salem says he would swap at 5%.
Zweig "asked several investing experts what guaranteed net-net-net return they would accept to swap out their own assets. William Bernstein of Efficient Frontier Advisors would take 4%. Laurence Siegel, a consultant and former head of investment research at the Ford Foundation: 3%. John C. Bogle, founder of the Vanguard Group of mutual funds: 2.5%."
I have written before about the "new normal" for the nonprofit sector. Although our sector is by no means without resources, I think we need to acknowledge that the rapid growth we experienced in the ’90s and up until 2007 are over. We are entering a period where assets will be lower than before and growth will be smaller than we have previously experienced. It will be a long time until we see universities and foundations endowments earning 20 percent–plus on an annual basis. It will take time for foundation assets to recover as well. Nonprofits will need to rebuild their endowments. Fewer wealthy individuals will start new foundations and individual giving will be down or flat. Nonprofits searching for contributions will find it more difficult as donors have less money or reduced ability to increase their donations.
The new normal is here and likely to stay for a while.
There is one area of growth that I would argue will continue: the expansion of the global third sector. While the US endowments and annual fundraising may experience only incremental growth, the third sector around the world is booming as governments continue to pull back regulations on voluntary organizations, fundraising expands and becomes more professional and personal wealth grows at a faster rate in Asia than in North America. Of course, that also means that American NPOs will have even more competition for charitable donations!