The Southeastern Council of Foundations (“SECF”) virtually hosted its 51^st annual meeting from November 11-13, 2020. This year’s programming offered one investment-focused session titled, “An Asset Allocator’s Discussion: Strategic Opportunities Amidst a Rapidly Evolving Political and Public Health Landscape.”

This session featured two investment professionals from Truist Foundations and Endowments and David Richter from GCM Grosvenor, a global alternative asset manager. GCM Grosvenor was established in 1971 and Richter has been with the firm for 26 years, managing money through seven different crises. During this session, Richter discussed the challenges and opportunities arising in 4Q20 as well as his views looking into 2021.

As a family foundation is mandated to distribute at least 5% per annum, what does a long-term investor do to generate a portfolio return in excess of inflation + 5%? Acknowledging his bias given his focus on alternative investments, Richter responded to this question by recommending investors look outside traditional stocks and bonds and incorporate non-traditional investments into their portfolios in order to achieve desired target returns. He validated his recommendation by clarifying that fixed income offers no yield, and in fact has a negative yield after accounting for inflation. Furthermore, the historical non-correlated relationship between stocks and bonds is also stressed and so bonds do not provide the diversification benefits they once did. Correlation is Richter’s biggest fear. In order to assuage this fear, an investor should construct a portfolio comprised of investments with different correlations, so all holdings are not out of favor at any one single point in time.

Additionally, Richter warns investors to be careful because he believes now is the time for active equity investing as opposed to passive given high valuations, which provide more room for prices to fall as opposed to increase. In the S&P 500 Index, one in three stocks is down year-to-date, and one in five stocks is down -50% from their peak, supporting Richter’s preference for active over passive. Richter believes we are currently at an inflection point, and active management tends to outperform at inflection points because there is greater performance dispersion providing opportunity for a talented manager to pick winners. Conversely, when dispersion is low, then it’s easy for everyone to identify and own the few best performers. For example, a hedge fund with shorting capabilities went short companies hurt by Covid, like AMC theater (Ticker: AMC), and went long companies that benefitted from Covid, like Zoom (Ticker: ZM), resulting in relative outperformance.

Richter specifically manages an absolute return strategy targeting the treasury rate + 5% while incurring less market sensitivity, like 20%. So, if the market dropped -10%, then an absolute return investment would in theory decline only -2%.  There is huge dispersion within the hedge fund industry, and so not all investors have the same experience. For instance, in Richter’s opinion, there are 8,000 global hedge funds and only 100 are worth investing in.

Last week, I cast my vote, and one of the local items I voted on was the 2020 GO Bond, which is the final installment of a four-bond package for the Charlotte community. NC Voters approved the three previous bond installments in 2014, 2016, and 2018. The 2020 bonds are targeting a total issuance of $197,232,000 as detailed below:

• $50 million of Affordable Housing Bonds seek to increase the supply of reasonably priced housing for low- and moderate-income residents in Charlotte.
• $44.5 million of Neighborhood Improvement Bonds target Charlotte’s infrastructure needs, such as streets and sidewalks, in order to enhance connectivity throughout the city.
• $102.732 million of Transportation Bonds pursue improvements in the city’s transport, such as transit access, bridges, trails, sidewalks, and streets.

On August 7, 2019, the foundation purchased a Charlotte housing bond, which was part of the 2018 approved issuance mentioned above. As of October 31, 2020, this bond (+5.79%) was outperforming both the Bloomberg Barclays US Aggregate Bond Index (+5.41%) and Bloomberg Barclays Municipal 1 – 10 Year Blend Index (+2.78%) since inception. We classify the foundation’s Charlotte housing bond as a Mission-Related Investment provided it aligns specifically with one of the foundation’s three focus areas, Vibrant Communities. This bond has generated a positive financial return for the foundation, while also relatively outperforming, and thus has grown the corpus of the foundation, further enhancing grantmaking abilities. Additionally, buy owning this bond, the foundation is realizing the positive non-financial return of contributing to Charlotte’s affordable housing efforts.

The logistics of purchasing this bond were straightforward as we utilized an existing Fixed Income manager for the foundation to buy the bond at a compelling price. The bond is custodied at one of the foundation’s main custodians, Fidelity, allowing for seamless performance reporting. Pending the approval of the 2020 bonds, the foundation will likely purchase additional housing bonds from this new issuance next year.

According to the U.S. Department of the Treasury CDFI Fund, CDFIs “share a common goal of expanding economic opportunity in low-income communities by providing access to financial products and services for local residents and businesses.”

CDFIs began in the 1880s when the first minority-owned banks focused on low-income areas. Since then, CDFIs have evolved to include credit unions in the 1930s and loan funds in the 1980s. Today, there are four types of CDFIs, including banks, credit unions, loan funds and venture capital funds. Approximately 1,000 CDFIs operate nationwide.

The foundation currently invests in one CDFI, Self Help Credit Union. Provided the foundation’s positive experience with this CDFI, I’d like to elaborate further on the characteristics of a CDFI credit union.  Similar to how a traditional bank delivers services to its customers, a CDFI credit union provides financial services to its members. From an oversight perspective, CDFI credit unions are regulated by the National Credit Union Administration (“NCUA”), an independent deferral agency, just like banks are regulated by the Federal Reserve System. So, if a CDFI credit union member deposits $250,000 with her credit union, then that deposit is fully backed by the NCUA. Comparatively, if a bank customer deposits up to $250,000 with her bank, then those dollars are insured by the Federal Deposit Insurance Corporation (“FDIC”). As you can see, from a safety/regulatory standpoint, CDFI credit unions and traditional banks are comparable.

Financially, CDFI credit unions are competitive. When I specifically compare Self-Help Credit Union’s rates to Bank of America’s rates, the credit union consistently offers more compelling rates. See below for a handful of examples as of June 2020 supporting the argument that CDFIs can make a positive financial and non-financial impact.

Vehicle	Self-Help Credit Union (APY)	Bank of America (APY)	Differential
Checking Account	0.10%	0.02%	+0.08%
Savings Account	0.25%	0.06%	+0.19%
36/37-Month CD/IRA	1.01%	0.10%	+0.91%
60-Month Term CD	1.06%	0.08%	+0.98%

One of the foundation’s impact investments is the Wellington Global Impact Fund, which strives to outperform the broad stock market by investing globally in the equities of companies trying to solve the world’s greatest social and environmental issues. The philosophy behind this fund’s investment strategy is, “the world’s greatest problems present some of the world’s greatest investment opportunities.”

Annually, the fund’s managers compile an impact report, and I would like to share one section from their 2020 report with you today.

An area of focus for the fund that aligns with the foundation is that of education and job training. According to the United Nations Educational, Scientific and Cultural Organization (“UNESCO”), secondary education may reduce income inequality by 7% over two decades and each grade a child completes may raise her earning potential as an adult by 10%. Additionally, The UN connects educational success to poverty reduction. So, by investing in education-focused companies, the foundation is directly targeting one of its pillars, while also indirectly impacting its overall goal of “working to end inequities.”

Laureate Education is one of the fund’s education-focused holdings. This company comprises 25 higher education institutions serving 850,000 students, primarily residing in Latin America (e.g. 637,500 students are from emerging markets). Laureate offers vocational training and job placements primarily for low-income students. Amazingly, the graduates of Laureate’s schools earn a 31% average starting salary premium, validating that the company’s practices are resulting in improved quality of life as a result of education.

Source: Wellington Management

As of June 30, 2020, the foundation’s primary values-aligned investments (“VAIs”) have generated the following year-to-date returns:

• Wellington Global Impact Fund (-5.70%) relatively outperformed the MSCI All Country World Index (-7.06%).
• Charlotte Affordable Housing 5-Year Bond (+5.72%) beat the Bloomberg Barclays 5-Year Municipal Bond Index (+2.18%).  
• Self-Help Women & Children CDs yield approximately 2%. The 12-Month CD is up +1.05% and the 24-Month CD is up +1.10%, both relatively outperforming the Bank of America 3-Month Treasury Bill at +0.60%. 

In summary, the foundation’s main VAIs have financially outperformed each of their respective benchmarks year-to-date. So, while these investments continue to generate a positive non-financial return, they are simultaneously outperforming in financial terms. 

For a broader look at Environmental, Social and Governance (“ESG”) performance, I’d like to reference Deutsche Bank’s (“DB”) research findings as of June 30, 2020. DB created their own index of the 10 largest ESG funds broken down by region (e.g. U.S., Europe, Japan and Global). Combined, these ESG funds comprise 56% of the entire ESG fund universe and so it’s a sizeable sampling. Then, DB benchmarked each of its custom ESG regional indices against the corresponding market index over the past year drawing the following conclusions:

• U.S. ESG funds tracked the S&P 500 Index, resulting in comparable performance.
• European ESG funds beat the Stoxx 600.
• Japanese ESG funds outperformed the Topix.
• Global ESG funds performed in-line with the MSCI World Index. 

In conclusion, all regional ESG funds have thus far either outperformed or performed in-line with their respective benchmarks over the previous year, which includes the virus crash of 2020. 

Deutsche Bank Research (“DB”) published a report on July 1, 2020 that analyzed Environmental, Social and Governance (“ESG”) investing throughout the global pandemic thus far. I’ve highlighted below some of their findings, which I believe are interesting and, in some instances, surprising.

The most popular ESG topic at the beginning of 2020 was climate change. Since the global pandemic hit, the focus of ESG shifted to employee wellness (+48% increase in interest) and accounting practices (+38% increase in interest). The rise in interest in accounting practices is somewhat expected based on past tail risk events, which have historically uncovered corporate accounting issues. The ESG topics that have declined in interest as a result of Covid-19 are diversity and inclusion and board structure. DB drew these conclusions by using AlphaSense to analyze company documents (i.e. SEC and global filings, press releases, event transcripts, company presentations and ESG reports) to see which topics were discussed most/least and at an increasing/decreasing frequency.

According to the Global Impact Investing Network (“GIIN”) 2020 investor survey, 15% of investors intend to add to their impact investment allocations, 20% plan to do the opposite and decrease their allocation to impact investments, and 65% remain undecided. For those that plan to increase their allocation to impact investments, they plan to only increase their allocation by 2%, which is far less than the average 13% increase witnessed in 2019.

Bloomberg analyzed 300 ESG funds from June 2015 – June 2020, and the data revealed that investors contributed less and less dollars to ESG exchange-traded funds (“ETFs”) in 2020. Specifically, ESG fund inflows peaked in January 2020 at approximately $6.5 billion and have since declined to approximately $1.8 billion in June 2020. One plausible reason for the decline of dollars flowing into ESG ETFs is that investors are concerned how new themes brought about by Covid-19 will factor into ESG investing. For example, there is a new focus on supply chain concentration, which will impact ESG analysis and could result in companies being either upgraded or downgraded.

Provided the massive impact Covid-19 has had on the world in 2020, I thought it would be informative to share a few specific effects felt within the ESG/impact investing space.

An ongoing debate regarding values-aligned investing (“VAI”) is whether or not one must sacrifice financial return in order to generate a positive non-financial return. Our position on this matter is best explained through tangible data points. Please see below for a recap of how the foundation’s unique VAIs performed in 2019.

• The Wellington Global Impact Fund invests in the equities of U.S. and non-U.S. companies whose primary purpose is to address the world’s major social and environmental challenges. As the name implies, we classify this investment as an impact investment within VAIs. In 2019, Wellington Global Impact (net +29.8%) relatively outperformed its benchmark, the MSCI ACWI Index (+27.3%) by +2.5%. 
• The foundation also purchased a 5-year taxable Charlotte Housing Bond on August 7, 2019. This investment is classified as a mission-related investment (“MRI”) within VAIs since it specifically aligns with the foundation’s mission, namely it’s focus on vibrant communities. Even though it has only been a few months, the Charlotte Housing Bond (net -1.0%) relatively underperformed both the Bloomberg Barclays Municipal Bond 5-Year Index (+0.3%) and Bloomberg Barclays U.S. Aggregate Index (-0.1%). 
• As highlighted in a previous article, the foundation also owns two Self-Help Women & Children CDs, which are categorized as MRIs provided alignment with education and vibrant communities, two of the foundation’s three areas of focus. Given the short duration of CDs it is more appropriate to compare yields as opposed to returns. The 12-Month Self-Help Women & Children CD annually yields +1.8%, outperforming Bank of America’s 13-Month Featured CD at 1.4%. Similarly, the 24-Month Self-Help Women & Children CD annually yields +1.9%, beating Bank of America’s 25-Month Featured CD at 1.0%. 

At the time of writing this article, Barron’s published its list of the 100 most sustainable companies in the U.S. In 2019, if you held a portfolio comprised of stock in each of these 100 companies, then you would have generated an average return of +34.3%, relatively outperforming the S&P 500 Index at 31.5%. In fact, 55 out of these 100 most sustainable companies beat the index on an individual basis. 

In summary, sometimes a VAI will financially underperform (e.g. the Charlotte Housing Bond), while still generating a positive non-financial return. However, our experience demonstrates that VAIs outperform both financially and non-financially the majority of the time. 

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Brittany Priester

Portfolio Manager

In mid-November, the entire foundation team attended the 50^th annual meeting for the Southeastern Council of Foundations (“SECF”). The foundation has been a member of this organization since 2016, and we find the annual meeting especially thought provoking. Below are highlights from the two conference sessions I enjoyed most:

Failing Forward: Learning from Failure as a Regular Discipline

In this breakout session, three foundations shared unsuccessful philanthropic initiatives resulting in lessons learned, which educated the over capacity audience. A common overarching theme across the three foundations’ failed experiences was the underinvestment in research at the onset. For instance, one foundation created a program to solve a problem that did not actually exist. If the foundation had communicated with individuals at the front end, rather than being disengaged and working top down, it would have avoided the pitfall of attempting to solve a nonexistent problem. 

One of the speakers, Rev. Cory Anderson with the Winthrop Rockefeller Foundation, shared the following quote, which I believe nicely encapsulated this session on learning forward:

“You do not know the words to your favorite song the first time you hear it.” 

Change the Story, Change the World 

Andy Goodman with The Goodman Center led a keynote session on storytelling as the most powerful form of communication provided stories help us remember. For instance, NUMBers make us numb, whereas STORies help us store information. Goodman advises that any good story must answer the following six questions:

1. Who is it about? People identify with people.
2. What does she want? In other words, what is the main character’s goal?
3. What stands in her way? (e.g. an obstacle or barrier)
4. How does she respond? With regards to a foundation telling a story, this step would inform the listener about the organization.
5. What happens? (i.e. success or failure)
6. What does it mean? (i.e. What is the larger lesson?)

Goodman closed his presentation with the following quote, which captures the significance of storytelling.

“If I look at the mass, I will never act. If I look at the one, I will.” – Mother Theresa  

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Brittany Priester

Portfolio Manager

Recently, within a single week, I received two separate calls, one from a community foundation and another from a family foundation, both based in North Carolina, inquiring how to get started with values-aligned investing (“VAI”). As the volume and frequency of VAI-related conversations increases, it is evident the strategy continues to gain support in the marketplace. Provided my real-time interaction with these local organizations, I would like to share the advice I gave to them with all of you as well. 

Aligning with our experience, the first step I recommend an organization take in order to get its toes wet with VAI is to purchase a certificate of deposit (“CD”) through Self-Help Credit Union. Specifically, Self-Help offers the following three CDs, which generate either an environmental or social impact in addition to providing a competitive financial return:

• Green Term Certificate
• Women & Children Term Certificate
• Go Local Term Certificate

Additional information available at: https://self-help.org/personal/accounts/certificates 

Self-Help is backed by the National Credit Union Administration (“NCUA”), which insures deposits up to $250,000 per entity, similar to how the Federal Deposit Insurance Corporation (“FDIC”) insures bank deposits up to $250,000 per entity. In other words, a CD issued by a credit union bears comparable risk to a CD issued by a bank. 

As of November 2019, a 12-Month Self-Help Women & Children CD yields 2.12%; whereas a Bank of America 13-Month CD yields 1.50%. Similarly, a 24-Month Self-Help Women & Children CD yields 2.22%; whereas, a 25-Month Bank of America CD yields 1.30%. 

In summary, a Self-Help CD will relatively outperform a bank CD both financially and non-financially (i.e. social/environmental impact) while taking the same amount of risk.

When it comes to execution, The Gambrell Foundation prefers to accept the market-rate offered. In this scenario, the foundation would purchase a 12-Month Self-Help Women & Children CD yielding 2.12% and classify it as a Mission-Related Investment (“MRI”) provided it generates a market-rate return and aligns with the foundation’s unique mission. Another approach is to accept a below-market return on this CD and classify it as a Program-Related Investment (“PRI”). For instance, a foundation’s policy could be to accept half the market rate, in which case it would invest in the 12-Month Self-Help Women & Children CD earning a rate of 1.06% (=2.12%/2). 

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Brittany Priester

Portfolio Manager