Tales From the Vault: AMG Solves Charitable Conundrum

• 2 min read

A novel solution suggested by AMG advisors helped a charitable foundation keep on giving without having to sell off portfolio assets during a down stock market.

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The stock market was down in 2008, and a foundation managed by AMG was required to make distributions to charitable and educational causes. Because the foundation’s portfolio had declined in value, making the distributions would have required selling some of the investments in a down market, resulting in less funds available to distribute. It was a conundrum.

The foundation’s AMG advisors crafted a novel solution: Create a line of credit using the foundation’s portfolio as collateral. This allowed the charitable distributions to continue as scheduled while waiting for the markets to recover and restore greater value to the foundation’s portfolio.

The foundation was initially created with about $12 million and had about $5.2 million remaining to be distributed over the following three years. The foundation pledged about $3 million from its portfolio to secure a $1 million line of credit that would mature in one year.

If the line were fully drawn, the total cost (including interest and fees) would have amounted to $44,250. The market had declined about 38.5% in late 2008 over the preceding year, but was poised to improve and did, in fact, increase 23% in the subsequent year. Internal calculations showed that the market would have only had to grow 6.8% over the next 12 months to provide the gain from using the line of credit instead of liquidating any of the portfolio.

The foundation used $500,000 drawn from the line of credit to augment its charitable and educational giving, saved over $10,000 in the process and closed the line after about six months when the value of the portfolio had recovered.

This information is for general information use only. It is not tailored to any specific situation, is not intended to be investment, tax, financial, legal, or other advice and should not be relied on as such. AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product.

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