To diversify or not to diversify — is that still in question?
The W.K. Kellogg Foundation isn’t the only charitable organization with an addiction to an oversize stake in one stock. The $5.9 billion Pennsylvania-based Hershey Trust Co. and the $2 billion Atlanta-based Robert W. Woodruff Foundation are holding on to their vast holdings in, respectively, Hershey Co. and Coca-Cola Co. shares. Thirty-eight percent of the assets of the Hershey Trust, which supports the Pennsylvania-based Milton Hershey School for underprivileged children, are in the chocolate company’s shares — the rest are in a diversified portfolio that includes a 2 percent allocation to hedge funds. The Woodruff Foundation, which grants money within its home state of Georgia to educational, health, arts and human services programs, has 83 percent of its assets in Coca-Cola; the remaining 17 percent is in fixed income.
Trustees of both foundations, like those at Kellogg, are unconstrained by the wishes of their respective founders — chocolate magnate Milton Hershey and Robert Woodruff, the former chairman of Coke — and can invest as they see fit. Maintaining their company holdings seems governed more by emotion than reason, though defenders note in each case it has been a safe long-term bet.
Kellogg, Hershey and Woodruff are part of a dwindling minority. The stock market downturn of 2000–’02 hurt a number of foundations that retained majority positions in one stock, such as the David and Lucile Packard Foundation and the Annie E. Casey Foundation. In 2002, 53 U.S. foundations had donor stock and the average holding was 40 percent; by 2007 only 28 U.S. foundations held donor stock, with an average holding of 17 percent, according to a 2008 Commonfund study of 226 private foundations. “Overly large concentrations in donor stock can constitute the single largest risk factor,” the study concluded.
“When you hold donor stock, you’d better get used to volatility,” says P. Russell Hardin, president of the Woodruff Foundation. Coca-Cola stock soared 30 percent in 2007, only to fall 22 percent in 2008 (better than the overall market, but down nonetheless). Because the foundation’s grants are one-time gifts not used for ongoing programs, the volatility is less troublesome than it might otherwise be.
The story at Hershey is a bit stickier. The trust owns 78 percent of Hershey Co. voting shares, which gives it control of the candy company — an advantage some trustees and many Hershey, Pennsylvania, residents don’t want it to relinquish. The trust runs, in addition to the school, several other local enterprises vital to the town’s economy: Hersheypark, the Hershey Museum, Hershey Gardens. In a shot at diversification, trustees in 2000 allowed an initial allocation to hedge funds — a tough sell, recalls Robert Vowler, president and CEO at the time. “Some people hear ‘hedge fund’ and think it’s a four-letter word,” he explains.
