Finding the right governance framework for investment portfolios in foundations

Charitable foundations have a wide range of financial arrangements. Some aim to spend their funds within a set period. Others rely wholly or partially on fundraising so do not have the luxury of an investment portfolio that can finance their missions. Others, like Wellcome, are financed through an investment portfolio but aim to exist in perpetuity, balancing spending today against profitable investments to fund future spending. This group has a theoretical advantage compared to most other investment institutions because we can think and act for the long-term – provided we have the right governance in place. Poor governance can be seriously damaging to the financial health of foundations.

Foundations do not have a pre-defined set of legal liabilities like pension funds or insurance companies, so we can invest to maximise long-term returns. This should allow us to maximise long-term spending on the mission, which is after all why we exist. The ability to think and act for the long-term should enable us to embrace illiquidity and use volatility to our advantage in search of higher returns. However, there is a catch. Doing the right thing from an investment perspective may mean taking decisions that feel counter-intuitive or even scary, so appropriate governance needs to be in place to ensure that emotion does not get in the way of sound investing.

A well-constructed long-term investment portfolio is usually best left alone to allow compounding to work its magic, but there is always pressure on investment managers (internal or outsourced) to be seen to be ‘doing something’. Often advisers have vested economic interests to encourage managers make frequent changes to a portfolio. Members of investment committees may even push their own agendas to favour managers from their networks. There are always costs to trading, however it is highly uncertain that the changes will result in better outcomes. Doing nothing is often the right answer in the absence of compelling evidence to the contrary.

From an investment perspective, the right time to be making significant portfolio changes (in other words doing something) is usually at the scariest points in markets, which often means doing the opposite to the crowd. Unfortunately, the temptation at these times may be to avoid doing anything too dramatic because it is psychologically difficult to act differently, whereas these are exactly the times that meaningful changes can make an important long-term contribution to capacity to spend on the mission.

Governance is key to navigating markets successfully – clear governance is especially important during periods of market turmoil, when mistakes can be very costly and stakeholders need careful management. At its simplest, there should be absolute clarity about who is empowered to make decisions and therefore who is accountable for the results of those decisions. Some foundations, like Wellcome, have internal investment teams, while others outsource portfolio management. Either way, there should be clear levels of delegated authority within which the manager can act in real time, rather than waiting for ratification at a quarterly board or investment committee meeting. If your manager is not allowed to make decisions, you cannot rationally hold them responsible for success or failure.

Just as importantly, there should be a clear investment policy that sets out objectives, risk limits, allowable investments and governance arrangements. Taking the time to get the investment policy right will maximise the probability of meeting the financial objectives of the foundation. This policy statement should take account of the foundation’s current and future spending needs, because cash management in an investment portfolio should always start from the mission’s spending requirements. At Wellcome, our main risk metrics focus squarely on providing enough liquidity to ensure that we never have to sell good assets at bad prices to fund the mission. A link to Wellcome’s investment approach, including the investment policy, is at the bottom of this article.

Clear governance arrangements that are set out in an investment policy will ensure that the investment portfolio operates within the risk appetite of the organisation. At Wellcome, we have long taken the view that owning real assets (public and private equity as well as physical property) is the best way of preserving and preferably growing long-term value and spending power. This has worked well for us as spending grew 4x in the 20 years to September 2024 to just under £1.6 billion.

However, equities are volatile and there were plenty of times over this period when we faced large mark-downs in the paper value of the portfolio. The Global Financial Crisis, the Eurozone Crisis, Covid-19, and the inflation spike in 2021-22 all caused major downdrafts in financial assets. There are plenty of examples of organisations that were forced to sell assets in these periods of market weakness, either because of liquidity constraints or because stakeholders were unprepared for the inevitable volatility in their portfolios.

Selling good assets at bad prices is a sure way to damage the long-term spending power of a foundation, so preparing in advance for these difficult periods is vital for any foundation that relies on an investment portfolio to fund its mission. One of the strengths of the EFFIO network (European Foundation Financial & Investment Officers) under Philea is that it enables foundations to compare notes on portfolio arrangements, including governance. One size does not fit all as we operate with different objectives and constraints. Getting the appropriate governance framework for your organisation will not guarantee investment success, but inappropriate governance is very likely to lead to trouble.

https://wellcome.org/about-us/investments#our-investments-approach-3cfa