If a friend told you to put 85 percent of your retirement savings in the stock of one corporation, you would probably think he or she was crazy. It wouldn’t matter to you how well that stock had performed in the past or how fervently your friend believed in the future of the company. As good investment managers usually advise, smart diversification is the prudent strategy given the stock market’s volatility to ensure a safe and comfortable retirement.
Unfortunately, the charitable organizations of Georgia are going to lose out on millions of dollars in donations this year—and possibly every year for the foreseeable future—because the trustees of the region’s largest private foundation have chosen a foolhardy investment strategy. They have more than 85 percent of the foundation’s assets invested in Coca-Cola stock, according to the tax documents they file with the IRS every year.
The Robert W. Woodruff Foundation has a broad mission to improve the quality of life in Georgia. Tax records show that the foundation gave out $143 million in grants in 2015 to a range of deserving public charities. In many ways, the foundation is run in an exemplary fashion. But the trustees have a blind spot about their investments. They are irrationally committed to Coca-Cola, and that’s dangerous for the charities of Georgia and the people they serve.
Last week, Coca-Cola (NYSE: KO) announced that profits and sales declined again for a seventh straight quarter. According to Morningstar, investments in KO underperformed by 6.20 percent compared to the S&P 500 index over the past three years. During that time, Coca-Cola’s stock dividend paid to investors quarterly has produced an annualized return between 3 and 3.6 percent. Yes, the foundation’s assets continue to grow. But they are not growing as fast as they could be.
Woodruff Foundation had $2.6 billion invested in Coca-Cola stock three years ago. If, instead, the foundation had invested in a simple S&P index fund, the foundation’s stockholdings could have grown by as much as $161 million more than the return that was actually realized.
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Private foundations are required by law to distribute five percent of assets, including administrative expenses, every year. The higher return from a more diversified portfolio would have meant $8 million more in grants to Georgia’s charities this year alone. Imagine what that extra $8 million could do for the many important causes and underserved communities that benefit from the work of local nonprofits.
The story doesn’t end with 2017. Those foregone contribution amounts will grow over time if Coca Cola stock never catches up to the S&P. It could mean as much as $200 million less in grants from Woodruff over the next 20 years if the trustees stick with their current investment approach. A worst-case scenario for Georgia charities is if Coke tanks at some point. This kind of disaster has happened to other private foundations whose trustees refused to diversify.
The National Committee for Responsive Philanthropy (NCRP), which I lead, alerted Woodruff Foundation of the tremendous risk posed by its investment strategy during a Philamplify assessment nearly three years ago. The foundation’s leaders disagreed with our recommendation to diversify. Hopefully, they are rethinking their investment strategy given the recent poor performance of Coca-Cola stock.
It’s understandable why Woodruff’s trustees have felt an attachment to the Coca-Cola corporation. Investments in the company have performed extremely well over time, and the donor to the foundation, Robert W. Woodruff, was the company’s first CEO. But no corporation performs well forever.
Under federal law, the assets of the foundation are to be used exclusively for the public good. The trustees should adopt a more prudent approach to investing those assets to ensure there will be a reliable revenue stream to benefit Georgia’s charities for decades to come.