The Metropolitan Museum of Art in Manhattan is resorting to major cutbacks after its endowment dropped precipitously last winter.
The economic downturn has been rough on countless industries, and arts organizations in New York City that rely on endowment money to survive have been hit hard—not just, as City Journal’s James Panero points out, by the immediate effects of the meltdown felt round the world, but also by the “indirect effects” of how some of their funds have been managed.
“All of the charities, all of the institutions lost money, but they didn’t have to lose 25 to 40 percent,” says Frank Martucci, a financier who has sat on several arts boards and opposed their aggressive strategy. “Why weren’t there some down only 10 percent? If you are all sharing the same strategy, it’s not really a diversified approach. Advisors are all pretty much the same. They tell you 10 to 30 percent in bonds and the rest in private equity, stocks, foreign securities, distressed securities. There are times you take your chances, but with charities I don’t think you ever do, and putting 85 percent of your money in equity and illiquid instruments is gambling. I hope this has taught people to be more conservative in their approach towards charity.”
Martucci advocates an eventual shift in endowment allocation to 40 percent to 50 percent in conservative fixed-income investments and the rest in equities—and only 5 percent to 15 percent of that in alternative investments. He also suggests that arts endowments move away from relying on active management and use volunteer board members with financial expertise to oversee investments, which can largely be maintained through bond index funds. “Managers of managers are like funds of funds,” says Martucci. “You can end up paying fees three times over.”