Maximizing Earnings While Minimizing Risk
By MARTIN DAKS
There was a time when all a nonprofit needed were savings, checking and money market accounts against which checks could be written. “You could basically leave money uninvested and get a return of up to four percent,” said Richard Saperstein, the New York City-based managing director and chief investment officer of Hightower Treasury Partners. “But since 2009, that strategy doesn’t work.”
Nonprofit managers with cash they don’t need immediately are turning to sustainable investing.
Hightower was asked to design an investment strategy for The HudsonAlpha Institute for Biotechnology, a Huntsville, Ala., nonprofit dedicated to researching the human genome and genomes of economically and environmentally important other organisms such as plant crops. The organization’s spending cycle had to be considered during the process. HudsonAlpha has an annual operating budget of about $34 million, with $55 million available for capital investment.
Besides recurring operating expenses such as salaries, the nonprofit periodically purchases lab equipment, for example, 10 genetic testing machines that cost about $1 million apiece and have a useful life of about three years. These types of spending patterns have to be considered in an investment allocation formula, said Saperstein.
“You try to design a mix of short-term and longer-term investments that will yield a satisfactory return with a risk that matches your client’s tolerance, while ensuring that enough cash can be freed when the organization needs it,” he explained.
HudsonAlpha’s investment capital base is large enough to enable it to access a wide range of investments. “Once you drop below $30 million, you’re going to experience some inefficiencies but can still diversify adequately,” said Saperstein.
The U.S.-domiciled assets under management using Sustainable, Responsible and Impact Investing strategies expanded from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014, an increase of 76 percent, according to a report from US SIF: The Forum for Sustainable and Responsible Investment. The practice of mission investing has deepened at foundations, using a variety of strategies to “create positive social impact aligned with their mission,” according to the report.
There’s a significant benchmark when it comes to investing. To maintain their nonprofit status, private foundations generally have to distribute at least five percent of their net investment assets each year for charitable and administrative purposes. To earn more than that, HudsonAlpha was step up with an allocation mix of about 30 percent bonds, about 50 percent equities, and a small amount of alternative assets such as hedge funds and some private equity investments, according to Saperstein.
“We’ve been able to generate income and appreciation by investing in about 20 to 24 different diversified investment strategies,” he said. “We limit risk to a relatively low level that matches HudsonAlpha’s tolerance.”
To ensure everyone’s on the same track, HudsonAlpha’s chief financial officer and other key executives speak with a Hightower partner regularly, according to Richard M. Myers a geneticist and president and founding science director of HudsonAlpha. “This way they know what our cash flow and other needs are, and we’re able to set up a realistic budget.”
A foundation or other nonprofit that evaluates an investment through a lens of corporate, social and environmental factors in addition to traditional investment criteria can generate a good return, according to Peter Martin executive director of the San Francisco-based Sierra Club Foundation.
“It’s the foundation’s view, and that of our investment managers, that if a company incorporates sustainability into its business model and practices, it will be more resilient and, therefore, more profitable in the face of climate challenges,” he said.
The concept of “sustainable” investing can still be a slippery one. Although a company’s environmental and its social impact are considerations in the investment decision, sustainability measurements are evolving, they are not always consistent. And, not all companies are reporting.
“We do not have a defined measurement for a sustainable return, but rather we expect a ‘sustainable’ company to have competitive, if not superior returns over time,” he said. “Our managers incorporate sustainability into their stock selection but they are also investing for long-term growth and tend to hold investments for longer periods of time.”
The Sierra Club Foundation has an outside investment consultant who works with Martin, along with the organization’s chief financial officer and its investment committee to select investment managers.
As of March 31, the nonprofit had $100.7 million in cash and investments. The investments are spilt into different portfolios, or long-term and short-term “buckets.” About 70 percent of the longer-term portfolios are invested in stocks, with the remainder mainly in bonds. In contrast, the short-term fund mix is about 40 percent equities and 60 percent fixed income and cash and money market funds, giving the foundation easy access for its day-to-day operations.
“Today it’s not always easy to distinguish impact investing funds from traditional investment funds,” said Jacqueline Novogratz, founder and CEO of Acumen, a nonprofit that addresses poverty by raising charitable donations to invest in companies, leaders, and ideas. Sometimes an investment might have a negligible financial return, but a big impact on improving lives.
When Hightower’s fund managers invest HudsonAlpha’s money, for example, they “consider environmental, social and governance screens,” but the principles “are not central to the investment process,” according to Saperstein.
Novogratz said Acumen looks “at many of the same metrics that traditional investors do, including operational metrics such as units sold, number of customers, the customer acquisition rate, projected revenue numbers as well as valuation.”
She added that Acumen approaches each investment with the ultimate intention of seeking either an equity exit, or in the case of debt, a return on its loan. Social concerns also play a big role in the investment decision.
“For Acumen, the principal target of our impact is the change in the lives of poor customers and the households from which they come,” Novogratz said. “When we first consider an investment, we look at its focus on the poor, its breadth of impact and depth of impact. First and foremost, the companies we invest in must be committed to serving the poor, those customers living on less than $4 a day. The breadth is the number of lives the company is impacting: how many customers have purchased a company’s goods and services and, as a result, experienced positive change in their lives. The depth is the extent of impact created by the good or service. For example, a solar lantern has improved the lives of its consumers by reducing the amount of kerosene they inhale and providing them with more light to read or work at night. It is a combination of these three metrics that actually transform the life of the consumer and provide a holistic understanding of social impact.”
But she also says people “shouldn’t get bogged down on the idea of impact investing as a means in and of itself. “Impact investing does not relieve any other entity — corporations, governments, NGOs — from their responsibilities,” she explained. “Instead, it helps fulfill them and vice versa.”
Martin Daks is a freelance business writer based in Bethlehem Twp., Pa., and a regular contributor to The NonProfit Times and Exempt.