Cash has once again become the favorite four-letter word of many investment managers in the charitable sector. After what started off as a pretty good year, 2018 turned out to be gut-retching for those responsible for charitable assets.
That same uncertainty hit public companies that do substantial work in the charitable sector. The stock prices of some companies dropped 50 percent from their 52-week highs and closed the year with declines exceeding 30 percent.
Equities were not a safe haven. Ditto that with bonds and certificates of deposits, even though the Federal Reserve Bank did tick up interest rates to a range of 2.25 to 2.5 percent. The Fed raised rates four times during 2018.
The year also saw some in the securities community talking about impact investing as if it’s more a roll of the dice since other investments seemed to be plunging at the end of 2018. There has also been a resurgence of activist investors, in some cases close to stalking chief executives at investment banks demanding portfolio changes for social change.
No, 2018 was not a quiet year.
Starting with stocks, there was really no neutral ground if the investments were in public companies doing a good percentage of their business in the charitable sector. Tech firms were particularly hit or miss. Salesforce (CRM) was up 33.98 percent to $136.97 a share while Blackbaud (BLKB) was down 33.42 percent to $62.90. Microsoft (MSFT) was up 18.74 percent to $101.57.
Payment and donation processing was profitable for some investors, with PayPal (PYPL) up 14.22 percent to $84.09 and Square (SQ) rising 61.78 percent to $56.09.
Investments that didn’t go very well include Facebook (FB) down 25.71 percent to $131.09 and eBay (EBAY) down 25.62 percent to $28.07 per share.
B-Corporations, companies that meet verified standards of social and environmental performance, public transparency and legal accountability, didn’t do particularly well. Laureate Education (LAUR) was up 12.39 percent to $15.24 per share. Unilever (UN), parent of Ben & Jerry’s and Sundial Brands, was down 4.47 percent to $53.80 per share. Proctor & Gamble (PG), parent firm of New Chapter, declined 0.04 percent to $91.92 per share. (See the accompanying chart for more individual stock winners and losers.)
It’s all about political uncertainty, according to Jessica Strausbaugh, chief financial officer of The Chicago Community Trust. “The year was fairly good until October and then things went off the rails. It was constant guessing of what’s coming down the pipeline,” she said.
The trust has a diversified portfolio but is moving more toward cash in the near term, the next 60 days or so, she said. The trust is not alone on the liquidity front. Holders of donor-advised funds are doing the same thing, according to René Paradis, chief operating officer of the National Philanthropic Trust.
“We are not seeing huge shifts,” said Paradis. There is movement in the donor-advised funds toward exchange-traded funds (ETFs). “It’s a move to liquidity, keeping money invested in something you can change out very quickly,” said Paradis.
An ETF is a marketable security that tracks a stock index, a commodity, bonds, or a basket of assets. ETFs are different from mutual funds because shares trade like common stock on an exchange, with the price changing throughout the day.
The Chicago Community Trust’s investment committee has a long-term view and the investment mix will be roughly 10 percent fixed income, 35 percent hedge and 55 percent equities.
There’s a challenge on the hedge fund element. A large number of hedge funds are either liquidating or are closed to new investors. According to Pension & Investments magazine, 16 well-established firms managing multiple billions in hedge funds and hedge funds of funds have either closed or set up family offices and returned money to external investors since the beginning of 2017.
According to hedgefundresearch.com, 125 hedge funds liquidated during the three months through June 2018. It was the lowest number of hedge fund closures since the third quarter of 2007, according to the reporting, but nonprofit investment managers are having a hard time finding solid hedge funds.
Paradis said that some holders of donor-advised funds are moving to impact, which often is a longer-term view. Antony Bugg-Levine, CEO of the Nonprofit Finance Fund (NFF), said he’s hearing both sides of the impact investing argument from foundation leaders. “Some believe if this continues, it’s harder to make the case for impact investing, when a portfolio is under threat. People tend to get spooked and the attitude is that now is not the time to try something new,” he said. The other side of the discussion is if mainstream investments are not providing stability and reliable returns, why wouldn’t you take the chance on impact investing, he said.
According to the Global Impact Investing Network (GIIN), 225 respondents to a survey invested $35.5 billion in 11,136 deals during 2017, a growth of 8 percent. According to GIIN, a majority of respondents indicated that their investments have met their expectations for both impact (82 percent) and financial (76 percent) performance since inception. Another 15 percent reported outperformance across each of these dimensions.
Foundation investors are examining capital placements and ensuring they are not antithetical to mission. In some cases, such as in healthcare, the investments are going into areas on the investment side that ultimately impacts social determinates of health, such as affordable housing. Opportunity zones alone with Community Development Financial Institutions Fund (CDFI Fund) are places investment committees are looking, according to Bugg-Levine.
Investments by Acumen, a nonprofit social impact investing fund, is doubling down areas of impact, said Alex Healey, senior associate of the impact investment program for Acumen.
Important to that process is participatory capitalist models, he explained. The idea is to “bring in community, employees and other parties in the investment,” he said. For example, when sourcing Latin American coffee, it’s also investing in the processing facilities. “Cash flows over time for communities to become owners,” Healey explained.
There really can’t be impact without energy so that’s one of Acumen’s 2019 focuses. In Sierra Leone, for example, roughly 90 percent of the nation is without electricity. Acumen is pioneering an energy investment initiative and bringing in partners in some element of the electric industry.
A third area Acumen is targeting for investment is workforce development, “how to create employment opportunities,” said Healey. Acumen did have a “strategic reset” in India and healthcare there. “It was less of a market question” but moving assets to “where we want to double down,” said Healey.
Some advocates are going to make their points day after day, targeting the heads of funders both nonprofit and for-profit. For example, Make The Road New York has been following around JP Morgan Chase CEO Jaime Diamond pushing for the firm to divest its investments in private prisons and detention centers. Funders need to “recognize links between investment assets and your social mission,” said Bugg-Levine. JP Morgan Chase and its foundation gave nearly $250 million to nonprofit organizations across the U.S. and in 40 countries during 2017. The firm has committed to invest $1.75 billion by 2023, according to the firm.
Impact investing for 2019 will be more diverse with increased introspection, said Acumen’s Healey, with money being self-directed by donors and investors who will define how they will participate.