Transparency Talk

Category: "Investment Strategy" (2 posts)

Robert K. Ross, MD, President and CEO, The California Endowment: Parkland Students Inspire Foundation to Screen Out Investments in Firearms Manufacturing
March 14, 2018

Dr. Robert Ross photoOne month after the school shooting in Parkland, Florida that killed 17 people, students across the country are continuing to press for stricter gun control legislation with protests and school walk-outs. According to the Gun Violence Archive, more than 2,837 gun related deaths have occurred so far this year, and both the American Medical Association and the American Public Health Association have recommended addressing gun violence as a public health issue.

The week following the shooting, The California Endowment (TCE), California’s largest healthcare foundation, announced it would begin screening out firearms manufacturing from its investment holdings. TCE’s mission is to expand access to affordable, quality health care for underserved individuals and communities and to promote fundamental improvements in the health status of all Californians. TCE’s mission statement also outlines that the foundation doesn’t focus on prescriptions, but rather “we focus on fixing broken systems and outdated policies, ensuring the balance of power is with the people. We don’t focus on the individual, we focus on the larger community as an ecosystem of health. We work with citizens and elected leaders to find lasting solutions to impact the most people we possibly can.”

Recently, Glasspockets spoke with TCE president and chief executive officer Dr. Robert Ross, about the foundation’s decision to ban firearms investments, and how this aligns with both TCE’s stated health mission, and its core values around diversity, equity, and inclusion.

Glasspockets: The California Endowment recently announced that it will be scrubbing its investments of any holdings in firearms manufacturing, and this is actually not a new practice, but the third “negative screen” you are adding, since you already had screening in place for tobacco and for-profit prisons. Data shows that this practice is actually fairly uncommon in foundation philanthropy, so it’s clear it’s a challenge for the field. When did you begin the practice, and what led to you going down this path initially when you first implemented negative screening?

Dr. Ross: Since we are a health foundation, the founding board actually started with the tobacco screen in the late 90’s.  We added for-profit prisons more recently, after hearing from community leaders that they considered hyper-incarceration as an unhealthy practice affecting communities of color. This is consistent with our core values statement, which also helps guide our board. The very first item in our values states: “We believe that diversity, equity and inclusion are essential to our effectiveness and the long-term health of all Californians and commit to the integration of diversity, equity and inclusion in all our policies, practices, processes, relationships, internal working culture and systems.” By filtering out tobacco, for-profit prisons, and now gun manufacturing we are being consistent with these values.

“We really have to ask ourselves the question of whether the management of our investments portfolio reflects the values we hold dear.”

Glasspockets: There have sadly been many shootings prior to Parkland. What was it about this one that motivated your foundation to act?  

Dr. Ross: We were motivated by the youth and high school student activism – I think we were “shamed” to act by their leadership. The California Endowment “values the energy, agility and fearlessness of youth leadership and youth organizing in its many forms including local, statewide and online community-building.”

Glasspockets: And are you aware of other foundations being similarly motivated to act, either now or that already had such prohibitions in place? 

Dr. Ross: We have followed the leadership efforts of The California Wellness Foundation, Bloomberg Philanthropies and Joyce Foundation, all of which, to the best of my knowledge, already have a screen on firearms in place. I’m not certain how many other funders currently have a firearms manufacturing screen.

Glasspockets: The California Endowment was an early adopter of our Glasspockets approach to a more transparent philanthropy. So clearly transparency, openness, and accountability are priorities. Is your commitment to these values part of what motivated the decision and the public stand you are now taking? 

Dr. Ross: Yes, and it was the reason I published the OpEd in the Chronicle of Philanthropy.  Even though these boardroom conversations can get a little “messy,” it strengthens philanthropic practice if we can demonstrate vulnerability and transparency on tough issues. Without actions, our values just become words on a page.

Glasspockets: Glasspockets is currently advising foundations to become more familiar with what holdings they do have, since these are publicly listed on the 990-PF that foundations annually file with the IRS. And that data is now being released as machine-readable, open data—making it more open and accessible than ever before. Is this something TCE is tracking or do you have any internal practices about monitoring what’s in your 990-PF that may be helpful for others? 

“Without actions, our values just become words on a page.”

Dr. Ross: We have begun utilizing ESG (Environmental, Social and Governance) practice approaches, as have many others, as a “values and principles” overlay to our investments portfolio. [ESG screening is an array of ethical exclusion metrics designed to govern certain investment decisions. Excluded companies can include those in the tobacco, firearms, and for-profit prison industries. The alerts look for mentions of portfolio companies (those not currently excluded) and rate them as positive, negative or neutral in terms of these screens.]

Glasspockets: The things you are screening out make a lot of sense for a healthcare foundation. Why do you think so few do it? And what advice would you have for them as far as overcoming those challenges?

Dr. Ross: The answer to this is values-values-values.  Most foundations have both a statement of mission and a statement of values, and we really have to ask ourselves the question of whether the management of our investments portfolio reflects the values we hold dear.  You can’t make a blanket values exception for the investments portfolio.  

Glasspockets: In terms of the screening that had already been in place, what has been the impact on endowment growth?

Dr. Ross: I’m not sure, but I do know that a concern some raise when discussing this is the belief that growth may be negatively impacted by the lack of tobacco and private prisons holdings.  But if you’re acting on your values, then I’m not sure the question is material.  Slavery is profitable, but we’d never invest in that….

Glasspockets: And how about the qualitative impact—things that bottom lines don’t measure? 

Dr. Ross: It’s good for boardroom cohesion, and messaging to staff and community that we intend to live up to our values, even if it is discomforting.  It’s hard to put a price tag on reputation and accountability.

--Janet Camarena

Foundations and Endowments: Smart People, Dumb Choices
August 3, 2017

(Marc Gunther writes about nonprofits, foundations, business and sustainability. He also writes for NonprofitChronicles.com. A version of this post also appears in Nonprofit Chronicles.)

This post is part of a Transparency Talk series, presented in partnership with the Conrad N. Hilton Foundation, examining the importance of the 990-PF, the informational tax form that foundations must annually file. The series will explore the implications of the open 990; how journalists and researchers use the 990-PF to understand philanthropy; and its role, limitations, and potential as a communications tool.

Marc Gunther photoAmerica’s foundations spend many millions of dollars every year on investment advice. In return, they get sub-par performance.

You read that right: Money that could be spent on charitable programs — to alleviate global poverty, help cure disease, improve education, support research or promote the arts — instead flows into the pockets of well-to-do investment advisors and asset managers who, as a group, generate returns on their endowment investments that are below average.

This is redistribution in the wrong direction, on a grand scale: Foundation endowments hold about $800 billion in investments. It hasn’t attracted a lot of attention, but that could change as foundations make their IRS tax filings open, digital and searchable. That should create competitive pressures on foundation investment officers to do better, and for foundation executives and trustees to rethink business as usual investing.

The latest evidence that they aren’t doing very well arrived recently with the news that two energy funds managed by a Houston-based private equity firm called EnerVest are on the verge of going bust. Once worth $2 billion, the funds will leave investors “with, at most, pennies for every dollar they invested,” the Wall Street Journal reports. To add insult to injury, the funds in question were invested in oil and natural gas during 2012 and 2013, just as Bill McKibben, 350.org and a handful of their allies were urging institutional investors to divest from fossil fuels.

Foundations that invested in the failing Enervest funds include the J. Paul Getty Trust, the John D. and Catherine T. MacArthur Foundation and the California-based Fletcher Jones Foundation, according to their most recent IRS filings. Stranded assets, anyone?

“Endowed private foundations are unaccountable to anyone other than their own trustees.”

Of course, no investment strategy can prevent losses. But the collapse of the Enervest funds points to a broader and deeper problem–the fact that most foundations trust their endowment to investment offices and/or outside portfolio managers who pursue active and expensive investment strategies that, as a group, have underperformed the broader markets.

How costly has this underperformance been? That’s impossible to know because most foundations do not disclose their investment returns. This, by itself, is a troubling; it’s a reminder that endowed private foundations are unaccountable to anyone other than their own trustees.

On disclosure, there are signs of progress. The Ford Foundation says it intends to release its investment returns for the first time. A startup company called Foundation Financial Research is compiling data on endowments as well, which it intends to make available to foundation trustees and sell to asset managers.

What’s more, as the IRS Form 990s filed by foundations become machine readable, it will become easier for analysts, activists, journalists and other foundations to see exactly how billions of dollars of foundations assets are deployed, and how they are performing. Advocates for mission-based investment, or for hiring more women and people of color to manage foundation assets are likely to shine a light on foundations whose endowments that are underperforming.

Unhappily, all indications are that most foundations are underperforming because they pursue costly, active investment strategies. This month, what is believed to be the most comprehensive annual survey of foundation endowment performance once again delivered discouraging news for the sector.

The 2016 Council on Foundations–Commonfund Study of Investment of Endowments for Private and Community Foundations® reported on one-year, five-year and 10-year returns for private foundations, and they again trail passive benchmarks.

The 10-year annual average return for private foundations was 4.7 percent, the study found. The five-year return was 7.6 percent. Those returns are net of fees — meaning that outside investment fees are taken into account — but they do not take into account the considerable salaries of investment officers at staffed foundations.

By comparison, Vanguard, the pioneering giant of passive investing, says a simple mix of index funds with 70 percent in stocks and 30 percent in fixed-income assets delivered an annualized return of 5.4 percent over the past 10 years. The five-year return was 9.1 percent.

These differences add up in a hurry.

Warnings, Ignored

The underperformance of foundation endowments is not a surprise. In a Financial Times essay called The end of active investing? that should be read by every foundation trustee, Charles D. Ellis, who formerly chaired the investment committee at Yale, wrote:

“Over 10 years, 83 per cent of active funds in the US fail to match their chosen benchmarks; 40 per cent stumble so badly that they are terminated before the 10-year period is completed and 64 per cent of funds drift away from their originally declared style of investing. These seriously disappointing records would not be at all acceptable if produced by any other industry.”

The performance of hedge funds, private-equity funds and venture capital has trended downwards as institutional investors flocked into those markets, chasing returns. Notable investors including Warren Buffett, Jack Bogle (who as Vanguard’s founder has a vested interest in passive investing), David Swensen, Yale’s longtime chief investment officer, and Charles Ellis have all argued for years that most investors–even institutional investors–should simply diversity their portfolios, pursue passive strategies and keep their investing costs low.

In his most recent letter to investors in Berkshire Hathaway, Buffett wrote:

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

For more from Buffett about why passive investing makes sense, see my March blogpost, Warren Buffett has some excellent advice for foundations that they probably won’t take. Recently, Freakonomics did an excellent podcast on the topic, titled The Stupidest Thing You Can Do With Your Money.

2016700activepassivesign-640x410-jpgThat said, the debate between active and passive asset managers remains unsettled. While index funds have outperformed actively-managed portfolios over the last decade, Cambridge Associates, a big investment firm that builds customized portfolios for institutional investors and private clients, published a study last spring saying that this past decade is an anomaly. Cambridge Associates found that since 1990, fully diversified (i.e., actively managed) portfolios have underperformed a simple 70/30 stock/bond portfolio in only two periods: 1995–99 and 2009–2016. To no one’s surprise, Cambridge says: “We continue to find investments in private equity and hedge funds that we believe have an ability to add value to portfolios over the long term.” Portfolio managers are also sure to argue that their expertise and connections enable them to beat market indices.

But where is the evidence? To the best of my knowledge, seven of the U.S.’s 10 biggest foundations decline to disclose their investment returns. I emailed or called the Getty, MacArthur and Fletcher Jones foundations to ask about their investments in Enervest and was told that they do not discuss individual investments. They declined comment.

To its credit, MacArthur does disclose its investment performance of its $6.3 billion endowment. On the other hand, MacArthur has an extensive grantmaking program supporting “conservation and sustainable development.” Why is it financing oil and gas assets?

Ultimately, foundation boards are responsible for overseeing the investment of their endowments. Why don’t they do a better job of it? Maybe it’s because many foundation trustees — particularly those who oversee the investment committees — come out of Wall Street, private equity funds, hedge funds and venture capital. They are the so-called experts, and they have built successful careers by managing other people’s people. It’s not easy for the other board members, who may be academics, activists, lawyers or politicians, to question their expertise. But that’s what they need to do.

And, at the very least, foundations ought to be open about how their endowments are performing so those who manage their billions of dollars can be held accountable.

--Marc Gunther

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About Transparency Talk

  • Transparency Talk, the Glasspockets blog, is a platform for candid and constructive conversation about foundation transparency and accountability. In this space, Foundation Center highlights strategies, findings, and best practices on the web and in foundations–illuminating the importance of having "glass pockets."

    The views expressed in this blog do not necessarily reflect the views of the Foundation Center.

    Questions and comments may be
    directed to:

    Janet Camarena
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    Foundation Center

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