The investment challenges faced by small and medium-sized foundations
Small and medium-sized foundations (with assets, say, below 600 million euros) face a particular set of issues in maximising their investment returns while minimising their investment risks. Three obvious difficulties come to mind:
- Affording to employ an in-house investment specialist
- Attracting trustees/investment committee members with the necessary investment expertise
- Establishing a well diversified/risk adjusted investment portfolio
The fundamental issue is one of scale which impacts on costs. The bigger the foundation’s asset base, the easier it is to justify employing specialist investment staff, attract experienced/engaged members to join the investment committee, and establish a broadly diversified portfolio of assets. But not all is lost since there are actions that the smaller/medium-sized funds can take to ameliorate their disadvantages:
- A group of funds in a particular city/country could club together to fund the salary of an investment specialist to share. For such a proposal to work, the interest of the parties must be closely aligned and they should share some common values around governance etc. And one of the foundations would need to take responsibility to act as the actual employer.
- A fund could cosy up to a very large fund which already employs an investment team and ask for their monies to be actively monitored in exchange for a donation towards the overall costs. Finding the right partner (and for that foundation to in turn agree to the proposal) is key for such an arrangement to work to practice. There is also some risk around the loss of autonomy.
- A fund could look to identify a recently retired investment professional with an interest in their cause to donate their time either as a quasi-staff member or as a member of the investment committee/board. Selecting the right individual is vital and yet the pool of candidates may be quite limited depending on the geographical location. It is especially important to avoid appointing someone who may have the right technical skills but has too much time on their hands and becomes too involved with tinkering around with the assets.
- Many of the large investment houses operate broadly invested pooled funds specially designed for charities to participate. The size of some of these pooled funds serve to allow the manager to access a very broad range of asset classes on behalf of the underlying clients and so reduce the overall risk and allow relatively smaller foundations to invest in a range of instruments that they simply would not be able to do on their own. The range of fund choices is vast and it is therefore vital to secure expert guidance and advice in making the fund selection. Furthermore, there might be issues around the costs and the opaque nature of some of these types of funds.
The above four points are by no means intended to provide complete answers to such a tricky issue, but individual foundations may be able to take some of these ideas and customise them for their own circumstances. It has to be recognised that every foundation is unique and the solutions to their investment challenges must be tailored to individual circumstances. However, I believe it would be true to say that all these approaches require a robust governance structure at the level of the individual foundation, supported by the involvement of actively interested trustees.
Former CIO, Health Foundation and current advisor to the EFC