Profes­sio­na­lism and expe­ri­ence are decisive for risk tolerance

Foundations are in a good starting position for a successful investment strategy, even when crises hit. However, 2022 has been impacted by unprecedented circumstances.

Global crises, whether the pande­mic, the war in Ukraine, droughts and uncer­tain­ties about energy supply, are curr­ently posing chal­len­ges for inve­stors, too. Foun­da­ti­ons are not immune to this deve­lo­p­ment: as at the end of Octo­ber, the Swiss Phil­an­thropy Perfor­mance Index is showing a cumu­la­tive loss of XXX per cent for 2022. The index reflects the average deve­lo­p­ment of a broad cross-section of foun­da­tion assets mana­ged by Zürcher Kantonalbank.

Obli­ga­ti­ons

Swiss­Foun­da­ti­ons’ Bench­mark Report also provi­des infor­ma­tion about foun­da­ti­ons’ assets, rese­ar­ching the invest­ment beha­viour of grant giving foun­da­ti­ons on an annual basis. The current report for 2021 lists returns of 11.5 per cent, putting foun­da­ti­ons ahead of pension funds (8 per cent). Simi­larly, foun­da­ti­ons perform better in a five-year compa­ri­son, too. Maxi­mi­lian Martin, a member of Swiss­Foun­da­ti­ons’ board, assi­sted with the Bench­mark Report. He high­lights that this compa­ri­son isn’t comple­tely fair. ‘Pension funds and foun­da­ti­ons don’t share the same goal,’ he says. ‘Pension funds have a target group with a codi­fied enti­t­le­ment.’ Luzius Neubert, a part­ner at PPCme­tric, the firm that produ­ces the report, is also aware of these diver­gent obli­ga­ti­ons. ‘If a pension fund suffers losses and ends up with a short­fall, it needs to be rest­ruc­tu­red,’ he says. ‘Foun­da­ti­ons gene­rally do not have any speci­fic obli­ga­ti­ons and can be flexi­ble with their expen­dit­ure.’ Accord­ing to the report, three-quar­ters of foun­da­ti­ons have not set a target amount of capi­tal that they want to, or have to, main­tain. Nevertheless, foun­da­ti­ons some­ti­mes sell their assets at a loss in a falling market. ‘Foun­da­ti­ons often want to spend more in a crisis because this is precisely when they want to support their bene­fi­cia­ries,’ explains Luzius Neubert. ‘Howe­ver, this restricts their risk capacity.’

Risk capa­city

A board of trus­tees’ risk tole­rance can also impinge on invest­ment deci­si­ons. ‘Many foun­da­ti­ons would have capa­city for more risk,’ says Luzius Neubert – but if their trus­tees get cold feet in a crisis and want to back out, that makes things tricky. This is why he recom­mends enga­ging trus­tees who have been through a crisis or two, setting a long-term invest­ment stra­tegy and defi­ning rules for preser­ving or consu­ming capi­tal. Maxi­mi­lian Martin also belie­ves that it is important to have profes­sio­nal mana­gers who take respon­si­bi­lity for the long-term direc­tion of the foundation’s capi­tal. He thinks foun­da­ti­ons are obli­ged to take a parti­cu­larly respon­si­ble approach to hand­ling money. ‘Despite phil­an­thro­pists’ gene­ro­sity, phil­an­thro­pic capi­tal is always in short supply compa­red to the extent of society’s needs. So we need to manage it well.’

Diver­si­fi­ca­tion

Invest­ment stra­te­gies took centre stage during 2022, in parti­cu­lar – a year of great chal­len­ges. Nevertheless, Hans­jörg Schmidt, Foun­da­ti­ons Mana­ger, Key Clients, Zürcher Kanto­nal­bank, states: ‘Gene­rally, there’s no need to adapt the stra­tegy because there haven’t been any funda­men­tal chan­ges in terms of long-term inter­ac­tions and the long-term outlook for the finan­cial markets.’ Even if there are far fewer bene­fits of diver­si­fi­ca­tion in the present climate, he belie­ves that diver­si­fi­ca­tion across multi­ple asset clas­ses and indi­vi­dual stocks is the first, and least contro­ver­sial, way to put toge­ther a port­fo­lio. This year, though, diver­si­fi­ca­tion had little impact, due to the speci­fic circum­stan­ces at play. Two major geopo­li­ti­cal uphea­vals shaped 2022: the war in Ukraine and unex­pec­tedly high levels of infla­tion. ‘Both have a nega­tive impact on every asset class, which is why there is no invest­ment stra­tegy that protec­ted against nega­tive perfor­mance,’ says Hans­jörg Schmidt. Espe­cially posi­tive perfor­mance was only seen by the commo­di­ties segment and stocks in the energy sector. ‘Howe­ver, many foun­da­ti­ons have little to no invest­ments in these markets,’ says Hans­jörg Schmidt, ‘because most sustainable invest­ment stra­te­gies exclude these segments from the off.’

‘Foun­da­ti­ons usually have no liabi­li­ties. They are basi­cally flexi­ble in terms of expenditure.’

Lucius Neubert,
Part­ner at PPCmetrics

Sustaina­bi­lity

Eighty-four per cent of foun­da­ti­ons take sustaina­bi­lity into consi­de­ra­tion in their invest­ments, accord­ing to the Bench­mark Report. ‘This is a clear incre­ase,’ says Luzius Neubert: this figure was a mere two-thirds in 2016. Maxi­mi­lian Martin has noti­ced a huge uptick in inte­rest among Swiss­Foun­da­ti­ons members. ‘Today, this topic is at the fore­front of people’s minds. If they’re not yet enga­ging with it, they want to be.’ In this respect, foun­da­ti­ons inter­pret sustaina­bi­lity in diffe­rent ways. ‘Certain foun­da­ti­ons have a laser focus on their purpose, with some enga­ging with impact inve­sting,’ says Luzius Neubert. ‘Others just want to invest in a way that bene­fits the envi­ron­ment and society. They’re less tied to the impact in question or their speci­fic purpose.’ All told, the topic is uncon­tro­ver­sial: various studies have proven that sustainable stra­te­gies do not reduce the poten­tial for returns in the long term. Conver­sely, experts are less certain as to whether taking sustaina­bi­lity crite­ria into account makes invest­ments safer. Nevertheless, Maxi­mi­lian Martin says: ‘Gene­rally spea­king, igno­ring infor­ma­tion about risks is an expen­sive game to play, in the long-term.’ Luzius Neubert menti­ons the risk that a sustainable invest­ment stra­tegy can pose for foun­da­ti­ons, in parti­cu­lar. ‘If a foun­da­tion opts for an exclu­sion-based process and every trus­tee speci­fies the sectors or compa­nies they don’t want in the port­fo­lio, this could result in a port­fo­lio with very little diver­si­fi­ca­tion, in the worst-case scen­a­rio.’ This risk can be elimi­na­ted by seeking advice from invest­ment experts, who can high­light the impact of mini­mal diversification

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