Charities are chasing more aggressive investment returns too

In a low-growth environment, philanthropic foundations are increasingly seeking out higher-risk investments

 
Malcolm Burrows

Malcolm Burrows, head of philanthropic advisory services at Scotia Wealth Management. (Portrait by Roberto Caruso)

For 25 years, Malcolm Burrows has been helping charities and foundations with investing, governance issues and everything in between. While it may seem as though giving hasn’t changed much over that time, the way charities grow their assets looks nothing like it used to.

Burrows got his start in the communications department at the University of Toronto; he’d wanted to be a journalist but found a job in public relations for the university’s foundation, then just getting off the ground. That put him on the front lines of fundraising. Endowments, he soon recognized, were a growth industry. With a family history of charitable work—his mother ran two United Way agencies—he realized philanthropy was his calling.

It was a simpler time. Two decades ago, 100% of a foundation’s assets would be invested in fixed income, says Burrows. As bond yields began to fall, stocks were added. There was a point when a 60% to 40% bond-to-stock balance was common, but since the last recession the asset mix has flipped. Now it’s common to see 65% of a foundation’s funds in equities, and that could continue creeping up, says Burrows, who served as the director of gift planning at both the Princess Margaret Hospital and SickKids foundations.

While equities can provide greater rewards, they add more risk to a portfolio. During the 2008 market crash, many charities lost money. Because of a rule that stated a charity cannot distribute any of its principal for 10 years, many couldn’t dole out money in those down years. That law changed in 2010; now foundations with $100,000 in assets can pay out up to 3.5% of their funds per year, regardless of performance—but most don’t want to eat into their capital.

Combating market volatility of the kind we saw early this year has been a challenge, says Burrows. Many foundations, like the rest of us, get queasy when markets fall. Some panic. He’s seen charities sell off their stocks and go all to cash. Selling low with no chance of making the money back is stupid enough for an individual investor; it can cripple a foundation’s capacity to do good in its community.

He tells donors and charities that volatility should be expected. “Any model that’s created needs to assume there will be some volatility, but the volatility will smooth out,” he says. More sophisticated non-profits now calculate rolling averages so they can see where they sit on a three to five-year horizon. “Then they don’t really care about the annual return,” Burrows says.

A smart foundation will use an investment adviser—there should be some distance between the board and the money—and have a robust investment policy statement (IPS), in large part to combat itchy trigger fingers and ensure continuity of the investing strategy. A proper IPS, he says, will have a description of the fund and its goals, risk-tolerance levels and performance benchmarks. An IPS also needs to define each asset class, including what types of investments should and shouldn’t be included in a category. As well, charities need to set out minimum and maximum weightings for each class, he says. If a board fails to do this and invests with no real rhyme or reason, it could get sued.

Following the pension-plan model, more foundations are opting for longterm assets that provide steady yields and returns. Burrows sees more of them buying alternative assets, either directly or through funds. Charities are also increasingly purchasing corporate bonds—something their directors fretted about just a few years ago. “They’ve developed a level of comfort with them they didn’t have before,” he says. “I see far more dynamism since the financial crisis,” Burrows adds. “More boards are challenging their investment managers to say, ‘Are we doing the right thing now? Is this the right way to look at risk?’”


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