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

Although PRIs are relatively new to The Gambrell Foundation, The Ford foundation originated the concept in 1968. A PRI is money that leaves the foundation’s corpus, counting towards a private foundation’s 5% annual payout requirement in the year made, and goes into the hands of a non-profit or for-profit entity. The primary distinction between a PRI and a grant is that a PRI comes back to the foundation after a predetermined term, increasing a private foundation’s annual payout requirement in the year reimbursed. In other words, a PRI is a recyclable, interest-bearing grant.

The IRS requires that an investment pass the following three basic tests in order to be classified as a PRI:

1. The primary purpose of the investment is to further the foundation’s charitable mission.
2. Income generation and capital appreciation are not a meaningful intention of the investment.
   • In other words, would an investor solely engaged in investing for profit make the investment on the same terms? When the answer is no, it means the foundation is accepting higher risk and lower return, thus satisfying this requirement.
3. The investment can in no way participate in political activities, such as lobbying, campaigning, etc.

Creating, executing and monitoring a PRI requires a team approach comprised of a diverse set of skills, including programmatic, financial and legal. PRIs are customizable and can take various forms, including but not limited to:

• Interest free or below market rate loan to a non-profit
• Purchase of promissory note of a non-profit
• Low interest rate deposit with a bank or other financial institution “linked” to lending for a charitable purpose (often housing or economic development)
• Loan guarantee or letter of credit to enhance a charitable organization’s creditworthiness in a third-party loan transaction
• Equity investment in a for-profit entity

As depicted in the below illustration, the foundation’s portfolio is comprised of two overarching buckets: Classic Investments and VAIs. 

Classic Investments consist of traditional holdings, such as shares of Google or a U.S. corporate bond, which we only track the financial return. 

The second bucket, VAIs, comprises traditional holdings analyzed via an unconventional lens tracking both the financial return and non-financial return (e.g. impact return, social return, environmental return, etc.) Within VAIs, there are three groupings: zero-rate investments (i.e. grants) produce no return, below-market investments (e.g. Program-Related Investments or PRIs) yield subpar returns and market-rate investments generate competitive returns. 

Grants are self-explanatory and other sections of the website elaborate on the foundation’s grant making. 

Within market-rate investments, we classify investments into the following three subcategories:

1. Socially Responsible Investments (“SRI”), or Environmental, Social and Governance Investments (“ESG”), is the broadest grouping comprised of companies that adhere to sound business practices while providing services and products that do not solely target social or environmental issues. For example, Cisco Systems is an American technology company that emphasizes environmental sustainability as evidenced by renewable energy accounting for 80% of the company’s worldwide electricity use.
2. Impact Investments have a narrower focus than SRI/ESG investments, including companies whose core products and services exclusively address the world’s largest social and environmental problems. For instance, CT Environmental Group is a Chinese wastewater company uniquely positioned to impact the health and well-being of China’s population and its natural environment, targeting an urgent social and environmental concern provided widespread pollution has strained China’s water resources.
3. III.Mission-Related Investments (“MRIs”) is the most concentrated subcategory provided it targets investments in companies whose activities are explicitly aligned with the foundation’s unique mission. Provided education is one of three pillars of The Gambrell Foundation’s mission, an investment in SEEK, an Australian company that matches underserved working-class job searchers with employers and offers online training and education in an effort to address the education and training gap, is an example of a MRI for this specific foundation.

Provided the uniqueness of PRIs, I will elaborate on them in a separate article given they warrant a more in-depth analysis. 

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Brittany Priester

Portfolio Manager

Before delving into our unique values-aligned investment (“VAI”) framework and implementation, I would like to summarize and reference additional academic studies, which further dispel the myth that one sacrifices financial return when participating in VAIs. 

CFA Institute Research Foundation in collaboration with Swiss Sustainable Finance published the Handbook on Sustainable Investments in 2017, which summarizes that “there is ample academic evidence that ESG parameters have a positive influence on the returns from financial assets.” For instance, a 2015 MSCI research report titled “Can ESG Add Alpha?” found that over an eight-year period, the ESG portfolio relatively outperformed the global benchmark by +1.1% per year. 

In 2016, Barclays Research published a report titled “Sustainable investing and bond returns,” which concluded that ESG factors “can be applied to credit markets without being detrimental to bondholders’ returns.” Furthermore, bonds with a positive ESG tilt delivered “a small but steady performance benefit.” In 2018, Barclays Research expanded upon their study with an updated report titled “The case for sustainable bond investing strengthens.” The recently updated report confirmed that credit portfolios favoring bonds with high ESG ratings, while keeping all other risk factors unchanged, led to higher returns. Specifically, from July 2009 – March 2018, U.S. and European investment grade bonds with high ESG ratings consistently outperformed those with low ESG ratings. For example, in March 2018, U.S. investment grade bonds with high ESG ratings relatively outperformed by +2.4%.

Similarly, the Journal of Banking and Finance published an article in 2016 titled “The effect of social screening on bond mutual fund performance,” which compared the risk-adjusted performance of more than 100 ESG-focused fixed income funds in the U.S. and eurozone against a sample of conventional fixed income funds. The analysis concluded that over a 13-year period, the ESG funds relatively outperformed by +0.5% annually, which is a noteworthy margin for fixed income investing. 

Provided the foundation does not have to sacrifice financial performance in order to participate in VAIs, we incorporated a VAI sleeve into the foundation’s portfolio in 2018. We believe that the foundation’s corpus can be invested in such a way to generate both a competitive financial return while simultaneously achieving a positive impact, or non-financial return. 

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Brittany Priester

Portfolio Manager