Foundation Endowments: Focus on risk

Andrew Milner

Andrew Milner

In view of my abysmal ignorance of the higher finance and its terms, I am probably not the best person to report on this session. Although I understood most of the words used, when they were put together in the way they were, I suddenly felt like the stupidest person in the world. Or possibly the second stupidest – Jon Edwards was keen to dispute this questionable distinction with me after the session. This is a pity, since I’m convinced from the reaction of many other participants, that had I known my VARs from my asset classes, I would have found it rewarding.

Let me set down what did emerge for me from the mist. The organizations represented by the two presenters, Wellcome Trust by Sarah Fromson and Compagnia di San Paulo by Piero Gastaldo, had very different stances on risk chiefly because of some fundamental distinctions in the way the two organisations were set up. While Wellcome was able to diversify more or less as it chose to offset some elements of risk, the Compagnia – and others, pointed out Piero Gastaldo – could not because they had a very large single stock position. This made their attitude to risk slightly more cautious. They were aided in this by the fact that, unlike US foundations, they had no 5 per cent payout requirement, and they adopted a more modest policy of spending 2.5 per cent of the market value of their endowment. This allowed them to build up reserves of equivalent to at least two years of spending, so that, even with no income, they would be able to maintain levels of payout for two years.

Another somewhat less significant difference between the two was that while Wellcome had its own investment team responsible for analysing risk, San Paulo had – to use an odious but intelligible term – outsourced it, though not to a completely independent firm. In conjunction with four other Italian foundations, it had set up an organisation called Fondaco who provided the expertise in this area. However, in both cases, it was the board who had ultimate responsibility to determine the shape and content of the portfolio and as Sarah Fromson suggested it was the responsibility of Wellcome’s investment committee and investment executive to make the foundation’s board understand the risks to which investment exposed the organization.

Given that staff on the investment side were paid differently from programme staff – that is, there was an incentive scheme in the latter case – was there no tension between the two? Sarah Fromson acknowledged that it could a problem. However, on the one side, while Wellcome offered what she called a competitive package related to performance, it was clear that working at there would never pay as much as working in say an asset management firm, so there was no jaw-dropping disparity. On the other, she thought, you had to work hard to make programme staff that the money they paid out depended on what the investment side could earn. For Piero Gastaldo, the matter didn’t arise to the same extent, he suggested, however, that there was an ethical, as well as material element to the decision to work in investment for a foundation, rather than commercial firm.

As regards mission related investing, Piero Gastaldo said that 4 per cent of San Paulo’s assets were currently invested in this area and they were considering the idea of not investing in certain areas. Wellcome had one such class – tobacco. Apart from this, Sarah Fromson was clear that her investment department’s job was to maximize returns from a given level of risk. When sustainable investments demonstrably brought in the same level of return, she said, ‘we’ll do it’. That wasn’t to say that Wellcome wasn’t actively looking for investments in areas that might produce social and environmental benefits – it was. There portfolio had a number of themes and one of these was scarcity. Wellcome looked across all asset classes for such investments and stressed, ‘we do take this seriously.’

I was able to glean this much from the session because apart from excursions into water much too deep for me, both presenters did an excellent job of explaining their respective foundation’s positions and answering questions as briefly as possible and to the point. On a slightly facetious closing note, I might add that I now know that VAR stands for value at risk. I’m still slightly hazy about what this means, but I think it means using past performance to predict what a given groups of assets are likely to do in the future in order to assess risk – anyone able to shine further light into my darkness?

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3 responses to “Foundation Endowments: Focus on risk

  1. Um. Thanks Andrew. I think.

    Do you think that if we were to measure social change more clearly, we would then be able to argue that performance incentives should be shared across the organisation rather than just those that make the money? It is the degree of social change surely through which reputation is enhanced.

    Then again, we’d have to accept that some on the spending side are irreplaceable too – so I’ve clearly misunderstood something.

  2. Andrew Milner

    Dear Jon, not sure if this is addressed to me or if it’s an open question. I suppose setting a comparative value on social change is one of the perenially vexed questions of the foundation world. As a mere hack writing about foundations, I don’t worry too much about this, though as someone who has also dipped a toe in the murky waters of evaluation, I should have a view. I think you’re absolutely right (and I’m sure you’ll sleep sounder knowing this!) that the work of a foundation – as distinct from its existence – stands or falls by its programmes. Is the root of your question a sort of basic proposition that for foundations to do good work they have to keep going, but they need to keep in mind that they exist in order to work, not for existence’s sake? I suppose the general presumption is that programme staff get their ‘bonus’ morally and emotionally through the success of a programme, rather than through any sort of material reward, whereas investment/finance staff operate in a different world and according to different standards. I’m not of course suggesting that this is right or that this implicit dichotomy is inevitable.

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