The Math is Simple
Private foundations have $1 trillion in assets. An incremental 1% return on investment would yield an additional $10 billion….per year…every year.
To put that in perspective, the additional $10 billion would equal the annual charitable support provided by 12 Ford Foundations, 36 Rockefellers, or 45 Carnegies – you get the picture. Better returns of just 1% would be the biggest thing to hit philanthropy since Bill Gates (or actually bigger since Gates disburses $5.6 billion a year).
Private foundations provide nearly $75 billion a year or 18% of all funding to charity. Unlike public or operating charities which actively seek donations to support their work, private foundations rely on investment returns to support their philanthropic missions. For most foundations, investment returns provide the sole source of income.
Mind the Gap: Is 1% Better an Acheivable Target?
Over the 5 year period to December 31, 2018, the average foundation returned just 4.2% while a portfolio comprised of 60% U.S. Stocks (S&P 500) and 40% U.S. bonds (Bloomberg Barclays U.S. Aggregate) returned 6.2% – a difference of 2.0% per year. Just cutting that gap in half would deliver the 1% performance improvement goal.
How Do You Get Better at Anything?
Of course everyone wants better investment performance, sadly there is no silver bullet for improving returns, but there are some simple lessons that are universally applicable to improving your chances of success in virtually any endeavor, be it losing weight, getting better at a sport, or learning a language.
The single most important thing is to engage yourself in the process.
- Set a Goal. Don’t be vague. Rather than saying you want to lose some weight, be specific, maybe it’s 10 pounds in 2 months. Make sure it is achievable. On the investment front for example, you might want your foundation to have have a consistent economic philanthropic impact, so your goal might be to target real returns of 5% over a long time period, say 10 years, so combining that with an inflation target of 2%, you might aim for 7% nominal returns over a decade.
- Make a Plan. It is important to make a plan to achieve your goal. The plan doesn’t have to be overly complex, it just has to be consistent with your goal. If you are trying to learn a language, the plan might be to take classes twice a week. From an investment point of view, the plan could be to write an investment policy statement. Again, it doesn’t have to be complex, but it should take into consideration you goals and realistic return expectations. If you want a particular return level, recognize that you will have to accept risk. Just as if you were trying to lose 10 pounds in 2 months, your plan probably wouldn’t have a lot of fast food. If you want 7% or higher returns, you have to plan for gyrations.
- Learn From Others.
- See who is doing well and see what you can learn from them
- Create a system for evaluating performance
- Put your thoughts and expectations in writing, review these periodically to see what worked and what didn’t
Case Study: Be Like Yale
What we mean by “be like Yale” is to read their annual endowment report, not for its information, but for its structure. FoundationMark doesn’t offer investment advice and certainly very few investors have the means to invest like Yale’s legendary investment team led by David Swenson, but the report provides an excellent blueprint for fostering a habit of evaluation and improvement.
Let’s look at a few components of the report that we think are important.
- Have a Target.
- On page 10 of the Yale Endowment Update, they say that they aim for a 6.9% real return with risk (standard deviation of returns) of 13.9%.
- Foundations should think about their long term expectations and associated risk/volatility. Of course forecasting expected return and volatility is difficult at best, but the process of thinking about it and viewing the foundation’s return expectations as a function of risk is the important part.
- Establish which Asset Classes are Available.
- On page 9 of the report, Yale discloses its asset allocation target. Yale uses 9 asset classifications – from cash to venture capital – to build its target portfolio.
- Only the very largest foundations are likely to invest in some asset classes like buyout funds and real estate, but the point is to establish what the foundation can invest in and then build up an allocation target from the selection of all available asset classes. For most foundations these might be things like cash, government bonds, US stocks, international and emerging market stocks, or high yield bonds to name a few.
- Evaluate your Results and See What Worked and What Didn’t
- Pages 15-18 of the Yale report go through each asst class one by one and assess their returns their expectations. Page 24 is the report card – detailing performance by asset class versus passive benchmarks.
- Again, most foundations are unlikely to have such sophisticated attribution tools, but the concept is the same. Compare where you are versus where you thought you would be in terms of returns, risk and your own expectations.
Better Returns Mean More Money to Charity
At Foundation Advocate, we always return to the core message, that better investment performance translates directly to greater charitable impact. We believe that there are lessons to be learned from many sources in the investment world and bringing these lessons to the foundation community will help drive better performance.