The single most important current investment issue for Canadian foundations is the need to increase investment returns. This need for enhanced investment performance reflects a change in our Canadian charitable environment and investment environments.
As governments struggle to control their budgetary deficits and levels of debt, foundations are facing continual reductions in levels of public funding. Many, as a result, are examining their current investment policies to determine whether a change could improve their investment income. At the same time, they continue to try to control the level of investment risk to which they are exposed.
Results from 85 foundations
In late 1998 Mercer Investment Consulting conducted a survey of foundations and endowments to identify the investment practices and procedures employed by these organizations, as well as the key investment concerns and issues facing this market segment. This broad-based Canadian survey drew responses from 85 organizations.
A primary objective of the survey was to determine the current most important investment issues for the foundations. The table Most Important Investment Issue summarizes the responses to the question asking respondents to identify the most important investment issue that they must deal with.
Most Important Investment Issue
- Increase returns 47%
- Assess Performance of current fund managers 12%
- Assess appropriateness of current asset mix 12%
- Establish Policy guidelines 10%
- Immunization 4%
- Establish monitoring process 3%
- Other 13%
The investment return issue is particularly acute for the smaller organizations, which experienced significantly lower investment returns than the larger foundations ($15 million being the dividing line between the two groups). For the five years between 1993 and 1997 the larger funds achieved an average return of 13.34%, compared to 9.08% for the smaller organizations. The difference of over four per cent represents nearly a 50% increase in returns for the larger foundations.
Small foundations more cautious
The primary reason for the lower returns earned by the smaller foundations appears to be the more conservative asset mix they employed. The average asset mix of smaller foundations contained higher cash and short-term holdings and lower foreign equity holdings than that employed by the larger foundations.
The survey results indicate that many organizations are evaluating their investment structure and establishing a formal investment policy that will help them monitor the performance of both the fund and individual managers within the fund. This seems to reflect not only a desire to enhance investment returns but also a general increase in concerns about investment prudence and fiduciary responsibilities. In this area we also see a marked divergence between the larger and smaller sized foundations, with approximately 85% of the larger foundations having implemented a formal process to monitor investment performance, compared to only 58% of the smaller foundations.
‘Prudent investor’ bar being raised
Canadian foundations are becoming increasingly concerned to ensure they are doing all in their power not only to invest funds prudently but also to maximize the assets they are charged to maintain. In Ontario, this trend may be partially in response to the changes made in the Trustee Act, which now holds trustees to a prudent investor standard similar to that of pension trustees. Meeting this prudent investor standard would involve, among other things, setting a formal investment policy which is rationally linked to the risk tolerance and spending policies of the organization. It would also involve establishing formal selection and monitoring processes for investment managers who invest the foundation assets.
Foundations outside of Ontario are expressing similar concerns. Clearly, there is a growing general acceptance in Canada of the importance of establishing a prudent investment framework for Canadian foundations, even in absence of formal legislative requirements.
Brian Moore and Colin Ripsman are senior consultants with Mercer Investment Consulting, which provides comprehensive investment consulting services to foundations, endowments and other non-taxable and taxable trusts. For further information about the survey or to obtain a copy of the survey in its entirety, contact Colin Ripsman at (416) 868-2685.
