Investment Strategy

Our Investment Strategy

The Luzerne Foundation is committed to prudent investment management strategies and fiscal policies. We believe it will lead to the long-term growth of endowment fund principal, and yet will also provide a consistent level of annual grants to charity.

Our Finance Committee, which is appointed by the Foundation’s Board of Directors, is charged with designing and administering these strategies and policies, and monitoring the results they produce. At regular intervals, the Foundation’s investment managers report performance results to the Finance Committee, which compares these results among our managers and against nationally recognized investment performance standards.

Our investment goal is to maximize total return in any combination of its cash income or capital appreciation components. We believe this approach provides the fewest constraints on our investment managers and, therefore, puts us in a better position to demand superior investment performance results.

Investment Tactics

While individual fund identity is at all times maintained, donor funds are generally combined for investment purposes into a single account at each investment manager. This results in better investment performance, particularly for small funds, and also lowers investment management fees. The Foundation’s current investment managers are M&T Bank, Smith Barney Group, PNC Advisors, Charles Schwab & Co., Berkshire Asset Management, Pennsylvania Trust Company and National Penn Investors Trust Company.

As a share participant in one of our combined investment accounts, each fund receives the investment results from a professionally managed balanced-fund portfolio of investments. This large portfolio is highly diversified in order to reduce overall risk.

The portfolio assets are invested in a combination of equities, bonds and other fixed income instruments or cash. Depending on market conditions, each fund may be invested in a portfolio mix of between 50% and 75% equity investments with the remainder in fixed income instruments. Our present allocation is roughly 70% equities. The asset allocation guidelines are given to the investment managers to allow them sufficient flexibility to meet our total return objectives.

The investment performance results achieved by each manager are carefully reviewed and compared quarterly. Also quarterly, the Finance Committee reviews the total portfolio asset allocation and may make adjustments based on anticipated market conditions and manager performance.

Spending/Distribution Policy

If we are to satisfy our organizational mission, this total return investment strategy must be complemented by what is commonly known as a spending or distribution policy. A spending policy is a cash usage, or “spending” determination, made each year by the Board of Directors aimed at satisfying two complementary goals:

1) To ensure, over time, that the growth of each fund’s principal assets meets or exceeds the annual advance in the Consumer Price Index. As a result, grant distributions from each fund to charity ten years from now will have the same purchasing power as today’s grants.

2) To maximize grant dollars to address community needs.

The Luzerne Foundation’s spending policy is reassessed annually by the Board of Directors. The practical application of the spending policy results in a recommended grant distribution amount or “Grant Making Budget” (“GMB”) for each fund. Through membership in our professional association, the Council on Foundations, we maintain contact with philanthropic organizations of all sizes located throughout the nation in order to be attentive to the latest findings about successful endowment fund management.

How it is Applied

The annual recommended cash payout of all funds, except those funds containing illiquid assets (such as certain real estate or other property) will be 4.25% of the average market value, using a 16-quarter trailing average of the principal market value of each fund. For funds less than four years old, the market value will be the average of all quarterly market values to date. This payout will be used to meet both grantmaking and administrative needs. The payout rate will be established by the Board at its January or February Meeting, and may be adjusted to reflect special funding needs and/or financial market conditions.

Accordingly, donors can grant out this amount in the following year, plus any unspent dollars from the current year. However, donors are not required to distribute any or the entire available grant making amount.

To meet the payout level determined each year, the Foundation may utilize both traditional interest and dividends generated by its various funds as well as capital appreciation. Where prudent and not inconsistent with the Foundation’s bylaws, trust documents, and fund agreements, the Foundation may use a portion of the principal of certain funds (such as new funds with little or no capital appreciation) to meet the established payout or to fund special projects as determined by the Board or as designated by the donor of such funds. This spending strategy reflects the total return approach to investing and disbursing funds described above.

Fees

There is no charge for establishing a fund at The Luzerne Foundation. Generally, funds managed by the Foundation experience two types of fees, which are taken from a fund’s principal account.

The Foundation’s general endowment portfolio is a broadly diversified pool of investments combining equities and fixed income. As a participant in our general endowment portfolio, a fund qualifies for the lowest available investment management fees paid directly to the professional money managers retained by The Luzerne Foundation. This fee applies to funds currently placed with the Fund Managers listed above.

In addition, The Luzerne Foundation automatically accepts a community participation contribution in lieu of an administrative fee. This required contribution may vary depending on the size and type of fund established. Please note: this contribution allows the Foundation to assist you and provide comprehensive administration of all aspects of your fund, which include but are not limited to; audit, fund statements and reports, processing and confirmation and documentation of all contributions and distributions, etc. This contribution also assists The Luzerne Foundation in fulfilling its broader mission as a community resource and facilitator to help improve this community for all.

Therefore, the total fees from both sources for an endowment fund at The Luzerne Foundation ranges from 1.25% to 2.00% annualized based on the type of fund and the level of administrative duties required. All fees are annualized and accepted quarterly (January 1, April 1, July 1 and October 1) based on the prior three month average fund balance.

Fund Type Fee

Designated Funds 1.50%
Donor Advised Funds 1.50%
Organizational Endowment 1.25%
Scholarships Funds 1.50% (Normal Admin Involvement)
Scholarships Funds 2.00% (Full Admin Involvement including detailed review and committee coordination)
Unrestricted Funds 1.50%
Unsupervised Funds 0.75% (Admin only, separate outside investment management fees paid by fund)

Fund Accounts

Funds at the Foundation comprise of two separate accounts, The Endowment Account and the Pass-Through or Grant Making Account. The Endowment Account contains the principal of the fund intended to last into perpetuity. Gifts received into the Endowment Account participate in The Luzerne Foundation’s combined fund investment portfolio beginning the next available market valuation date, which occurs at the first business day each month. The second account type is referred to as the Pass-Through or Grant Making Account. Annually, cash is transferred to this account based on the donor’s advice or recommendations in conjunction with the annual spending policy calculation.

There are no fees to hold and maintain a Pass-Through or Grant Making account. However, interest earned on Pass-Through or Grant Making Account balances is used to defray the Foundation’s administrative expenses. Although it is our goal to promptly disburse grant making funds as the donor advises, they may be accumulated over a reasonable time period in order to satisfy a specific future grant purpose.

Some donors may want to distribute a grant in the first year, before a spending policy is calculated. Donors establishing a new fund may deposit part of their initial gift in the fund’s Pass-Through or Grant Making Account. Donors still must build their Endowment Account to at least $10,000 prior to making any distribution requests. Note: Scholarship funds may require a higher minimum principal value prior to any scholarship distributions. The deposit to the Grant Making Account may be awarded as a grant immediately after the creation of a fund.

If an existing fund receives a contribution or bequest that increases the fund balance by more than 25%, the spending policy and distribution calculation will be adjusted as if it were a new fund with an initial fiscal 4 quarter average to grow to a rolling 16 quarter average over time.

Charles M. Barber, President & CEO
The Luzerne Foundation
140 Main Street, 2nd Floor
Luzerne, PA 18709

Ph: (570) 714-1570; Toll Free: (877) 589-3386
Fax: (570) 300-1712
E-mail: charles@luzfdn.org

Web Site: www.luzfdn.org