The Robert Wood Johnson Foundation’s Liquidation of Johnson & Johnson Stock

In 1982, the former CEO and heir to Johnson & Johnson gifted a massive block of Johnson & Johnson to fund the Robert Wood Johnson Foundation. The Foundation is a charity dedicated to providing grants that serve the purpose of “encouraging healthy living.” The charity was initially endowed with $560 million in nothing but Johnson & Johnson stock. 

When Wall Street saw this singular investment, the pitch was easy to make. It is really easy to approach the trustees and say, “Gee, that’s awfully risky having all that money in just one stock. Sure would be a shame if something happened to it. Why don’t you let us give you a hand and manage some of that endowment, for a friendly fee of course.” 

The trustees of the Robert Wood Johnson Foundation agreed, and over the past forty years, the net assets of the foundation have reduced the holdings in Johnson & Johnson stock from 100% of the charity’s portfolio to 13.6% of the overall portfolio. 

If you audit the Foundation’s spending and investment decisions, you will see that the company has replaced its pure vanilla common stock position in one of the ten greatest businesses in the entire world with a collection of Wall Street, fee-heavy junk. If you look at their “Return of Private Foundation” Form 990-PF (as part of their full tax return) that was recently filed, you can see what they replaced their Johnson & Johnson holdings with beginning on page 27. 

It’s just…Wall-Street fee junk. A dozen Accel funds, random European funds, about 10 Ban Capital Venture funds, five “Berkshire”-named funds that have nothing to do with Warren Buffett’s investment vehicle, literally a Blackstone Mazzanine Feeder and Real Estate Fund that has 5% fees, something called Fortress Investments that just owns many of the same stocks you’d find in the S&P 500 in similar allocations while charging a 100x fee. 

On page 19 of the separate financial statement, you will see that the foundation tried its hands at derivatives, including future contracts, forward exchange contracts, and certain option-related contracts. In each instance, the foundation lost money. 

Still, on the whole, things remain strong. The foundation is sitting on $11 billion in assets, with $1.5 billion invested in Johnson & Johnson stock. If you compare the annual returns for the past five years or so, you will see that the Johnson & Johnson stock keeps appreciating and then getting sold off to buy some random hedge fund. 

The Robert Wood Johnson Foundation does not provide a forty-eight year audited track record on its website, but even looking at the past five years, the diversification away from Johnson & Johnson has brought with it the “diworsification” effect of at least $2 billion in foregone wealth. Without knowing the particular grants bestowed by the funds in the 1970s, 1980s, 1990s, and even 1990s, it would be hard to guess the cumulative effect of foregone wealth from the ongoing sales of Johnson & Johnson stock, but it could theoretically be as much as $7 billion. 

For you, the lesson to take home is that there can be something of a false security that can be found when searching for sophisticated strategies or brand-name hedge funds. Once you hand your hard-earned money to a hedge fund manager or some other investment selector, there is still a requirement to pick an ultimate investment. More times than not, this means common stock, preferred stock, or bonds. And if you are paying a substantial fee for these investments, there can be even greater pressure to avoid investing in the so-called obvious blue-chip stocks because there can be a human tendency to assume that “complexifying” affairs must carry some wealth-creating benefit for being clever. 

Nope! Someone who is quietly investing $300 per month in Johnson & Johnson stock every month like clockwork year after year has, and will continue, to achieve higher compounding rates than the Robert Wood Johnson investment fund. 

You do things like read Peter Lynch’s book “One Up On Wall Street” and encounter the passage that makes fun of investors that cannot help themselves from selling appreciating assets because they get scared of the over-concentration. They “cut the flowers to water the weeds.” Peter Lynch wrote his book to warn mom and pop investors of doing the same, but if you look at the Robert Wood Johnson Foundation’s investment decisions, you will quickly note that folly does not have an inverse relationship with wealth.

If I were the trustee, you know what I would have done? It appears the foundation spends about 1.5% of its assets on grants to comply with the minimum requirements of the Internal Revenue Code pertaining to foundations. Throughout most of the history, Johnson & Johnston yielded 1.5%. There was absolutely nothing to stop them distributing half the dividends to grant money, and using the rest to put together a portfolio of plain vanilla stocks. Within a few years, even if Johnson & Johnson were to go kablooey, there’d still be a trust with hundreds of millions of dollars in it. 

When a foundation is endowed with a business interest rather than cash, there is already a proof of concept at work because the business interest being given has proven so lucrative over time that it has enabled to donor to take care of his needs and have significant amounts leftover for the purpose of giving away. 

I suspect that the management team at the Wood Foundation is probably patting themselves on the back for diversifying and preserving the $11+ billion corpus of the trust. In fact, they’d probably give themselves an A+ because they have been providing grants while the balance for the fund has been increasing each year. I doubt they have the introspection to realize that the continued outperformance of the ever-shrinking Johnson & Johnson stake is playing a meaningful role in that growth, and additionally, billions of dollars in wealth have been bestowed upon the individuals and entities that bought the Johnson & Johnston from the foundation. But since there is no line-item identifying “mistakes of omission” on the foundation’s balance sheet, ignorance persists. Or worse, can be rationalized under the theory that diversification is such a great benefit that it supersedes whatever amount of wealth is foregone. 

These types of conclusions are not emphasized in business schools, but they can be life-changing for you if you spot them.  The world is filled with 15,000+ publicly traded companies. Perhaps most of them are junk. But several hundred of them have enduring characteristics, often in the form of economies of scale (i.e. manufacturing or distribution) or in the form of the intellectual and social properties associated with the good or service that make it especially entrenched. Finding a few of them, and holding onto them for the rest of your life, can bring financial rewards that will build upon themselves and bestow more and more rewards upon you year after year.

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