Every month, Foundation Advocate chooses one aspect of foundation investment performance to highlight.
This month we examine some concepts surrounding setting benchmarks.
Setting A Course
The title off this article, Who Controls The Money?, is intentionally provocative. On the one hand, the answer might be, of course, the trustees control the foundation’s assets, but if one steps back a bit and considers a typical investment process, particularly for larger, more institutionalized investors, the picture may be a little different, and one might say that the people setting investment policy benchmarks might be the ones with the biggest influence.
As we at FA have discussed before, foundations investment strategies can run the gamut, but for this discussion we are going to ask you to imagine the process at a larger/more institutionalized foundation that has a formal approach to investing. A simplified structure might include the components in the “Institutional Blueprint” below and follow an “Institutional Process”.
- Investment Committee
- Investment Policy Statement (IPS)
- Asset Classes
- Asset Ranges
- Consultant / CIO / OCIO
- Asset Allocation
- Manager/Security Selection
- The foundation’s trustees might create a subset to serve on the investment committee.
- The investment committee, perhaps in conjunction with a consultant, or Chief Investment Officer (CIO) or Outsourced CIO (OCIO) might write an investment policy statement (IPS) laying out the goals and often asset class thresholds.
- The foundation may use in-house resources (their own investment staff, which is only the case at the very largest) or hire a firm to implement their policies.
- In-house or external money managers invest the foundation’s assets according to the IPS.
Often Smart, Rarely Brave
Tall for a Jockey, Short for a NBA Player
One thing that has puzzled us is that every foundation that reports their investment performance (sadly there are only a handful that do) seems to beat their ‘target’ or ‘policy’ benchmark, much like the children from Lake Woebegone who are all above average.
For example the James B Duke Endowment (not to be confused with Duke University) noted in 2017 that it’s endowment out-performed its policy benchmark by 2.0% per year for the 10 year period. The Carnegie Corporation of New York also outperformed its target policy by a more modest 1.3% per year over the 10 year period. One might draw the conclusions that Duke’s 2.0% out-performance surpassed Carnegie’s. We don’t think that is necessarily the right conclusion.
There aren’t many foundations that publish their investment performance, and even fewer mention their targets. Two exceptions that serve as beacons of transparency are the Carnegie Corporation of New York and the James B Duke Endowment. One thing that we found interesting was the different approaches that they have taken in choosing benchmarks.
The Willie Nelson Approach
When asked about owning his own golf course, country music legend Willie Nelson said, “the best part is getting to set your own par. See that hole? It’s a par 8. Yesterday I birdied that sucker!”