For more than 50 years, Commonfund has been working with boards and investment committees to design and implement investment structures that support and maintain intergenerational equity - the purchasing power of their long-term pools. With that in mind, the Commonfund OCIO team and Commonfund Institute, in partnership with the MacArthur Foundation, recently convened a panel of CIO and CFO philanthropic leaders in Chicago, at MacArthur’s offices. Our goal was to delve into the important issues that are top of mind for long-term investors, facilitate a community of learning and practice, and engage in meaningful discussion among participants. The event was well attended by senior investment staff and board members from foundations, endowments, pensions, and other institutions with long-term pools.
The panel was moderated by George Suttles, Executive Director, Commonfund Institute. Panelist included: Mark Anson, Chief Executive Officer and Chief Investment Officer, Commonfund, Nickol Hackett, Chief Investment Officer and Treasurer, Joyce Foundation, Sue Manske, Vice President and Chief Investment Officer, MacArthur Foundation, and Jessica Strausbaugh, Chief Financial Officer, The Chicago Community Trust.
Here are key themes and takeaways from our robust and lively panel discussion.
Looking Back, Moving Forward
In our recently released Council on Foundations–Commonfund Study of Investment of Endowments for Private and Community Foundations (the Study), which covers calendar year 2022, respondents reported the greatest downward year-over-year change in endowment returns in the 11-year history of the study. Private foundations saw a -12.0 percent return, and community foundations were down -13.3 percent. Looking forward over the next 12-18 months and beyond, the conversation mainly revolved around resilient portfolios. Panelists focused on the need to play defense while continuing to explore new opportunities across asset classes, while ensuring there is enough liquidity to honor grantmaking and other commitments. The panel also reflected on 2022 being an anomaly, with both the stock and bond markets being down, coupled with extraordinary inflationary pressure. Ultimately, the panel discussed the importance of being disciplined and staying the course, as 2023 markets seem to be experiencing some positive momentum and inflation seems to be easing.
Spending to Meet the Moment
For the 2022 Study, in response to markets being down and inflation up, we asked a new question about how foundations responded in terms of their spending. A majority reported that they stayed the course and didn’t make any changes. For those that did report making a change, more indicated they increased spending in response to an increased need, than those that said they decreased spending. Panelists focused on the importance of having a reliable spending policy to serve as a smoothing mechanism, especially during times that markets impact the portfolio so sharply. Much of this part of the conversation centered on spend rates, and the acknowledgement that spending discipline also has to be matched with flexibility. Panelists discussed how they wanted to spend the same or more in order to support grantees, especially since many are still recovering from the pandemic.
Portfolio Construction and Asset Allocation: The meat and potatoes
Asset allocation was another key topic and panelists discussed the benefit of doing deeper dives into their investment programs, with a focus on strategies, opportunities, and challenges across asset classes. There was a lot of discussion about the importance of seeking liquidity, whether through equities or in fixed income strategies. Panelists also noted the tension between a long-term investment horizon and annual investment committee reviews, realizing that the ultimate goal is to provide consistent returns over time. Again, the conversation came back to staying the course and letting fund managers make tactical corrections, while actively monitoring other risk factors. With the potential for a recession in mind, the panel discussed “recession resistant” opportunities that they are exploring, such as data centers for real assets, private credit, and venture capital, acknowledging that innovation comes in both good times and bad. Investing in the secondaries market was discussed as a strategy to diversify vintages and buy in at a discount. Lastly, the prospect of a looming recession, while interest rates remain high, led to a discussion of cash management strategies and investing in cash as an asset class.
Artificial Intelligence: Smart Intelligence and Dumb Intelligence
Opportunities to engage with artificial intelligence (AI) through venture capital and through learning about new technologies and their market potential were a hot topic for all in the room. Data scraping allows organizations to become more efficient in data gathering, and AI can support innovation across many industries and sectors. But disruption as a result of these new technologies brings questions, such as what about job depletion, the future of work, and its impact on communities? Panelists asserted that AI doesn’t always mean smart intelligence - there will always be a need for human intelligence, oversight, and intentionality behind technology. For asset owners and managers, a key starting point for understanding the impact of AI on portfolios - and the world more broadly - is asking their venture managers how they are incorporating AI into their funds and looking to individual portfolio companies for insights.
Values-aligned investing: Focus on risk, returns, and impact
In addition to asset allocation, spending, and risk, there are additional factors in the balancing act, such as Diversity, Equity and Inclusion (DEI), impact investing, and other opportunities to align foundation values with investment strategy. The MacArthur Foundation focuses on returns first, then impact, through an impact portfolio managed in close collaboration with an impact investing team. They have also divested from fossil fuels and their benchmarks, and other potential risk factors related to China, the Russia-Ukraine war, and Israel-Palestine were discussed. For Chicago Community Trust (CCT), an impact investment, or any investment for that matter, must have certain parameters. They focus on centering the question, ‘how can capital solve a social problem?’ There is a growing trend toward impact investing, but money moves slower than the concept, so it’s a process of evolution.
Impact strategies for donor advised funds (DAFs) were discussed, including challenges related to the exploration of private equity impact strategies and managing donor relationships. Specifically, impact strategies that are illiquid may be appealing to donors who want impact and outsized return potential, but the panel highlighted the importance of agreeing upon a reporting schedule and impact metrics. CCT strives to connect their philanthropic services, grantmaking, and investing teams, and sometimes brings in community development financial institutions (CDFIs) that target local impact areas to ensure donors can allocate capital to local impact strategies in a way that makes sense for them.
For Joyce Foundation, mission related investments are evolving, with their foundational approach of exploring the potential benefits derived by investments and programs, beyond financial return. A diverse manager strategy was highlighted as a means to align investments with their institution’s racial equity focus, in addition to making investments in climate and water-related opportunities.
This productive and interactive discussion reinforced the importance of engaging senior investment professionals and investment committees on these and other topics as they strive to increase and preserve the real purchasing power of their long-term portfolio, express the values of their organizations within their investment strategies, and stay the course for the long term. Commonfund, as an OCIO, supports institutions in a myriad of ways to express their values within their investment program, from investing in diverse managers, ESG integration, and opportunities in real assets and sustainability as well in the other areas discussed above: asset allocation, risk management, spending, and more.
Reflecting on the leaders and attendees at this roundtable, Chicago is still the “City of Big Shoulders.”1
Commonfund OCIO and Commonfund Institute are on the road meeting with institutions to discuss the topics above and more. Interested in being a part of the conversation? If you would like to attend one of our interactive and informative events in your area, please complete the form with your details. A member of our team will reach out to you with dates and locations of where we will be next.
- Source: “Chicago” by Carl Sandburg (Poetry Foundation, 1914).
