Videos

Delyse Lawless:

Good afternoon everyone. My name is Delyse Lawless and I would like to start us off today first by thanking you all for taking the time to participate in the community foundation survey this year. We truly appreciate your time. Your efforts help provide insights that allow all of us to make the most impact in our local communities across the country. Today we are excited to kick off FEGs seventh community foundation survey results webinar. But before we dig into the data, we would like to provide a little history into how the survey began. The community foundation survey was born as a creative solution for one of our community foundation clients. It started with a few questions focused on clients, but quickly evolved to integrate spending policy and asset allocation. Our initial goal was to look at questions that you were asking, honing in on enterprise considerations and trends and focusing on this goal has since enabled us to continue to expand the depth of survey to integrate topics like responsive investing, diverse managers, governance, and more.

Many of you have seen us and worked with us at various conferences throughout the country and have had the opportunity to learn about the changes in our community each year. As demonstrated through this survey this year, we are excited to present the data in more detail at several upcoming conferences, including our very own investment forum, which will be taking place in Cincinnati, Ohio from September 18th through 20th, and we really hope that we'll see you all there.

Now, before I go any further, let me introduce our presenters for today, Quincy Brown, Jeff Davis, and Jeff Weisker, all of whom are advisors at FEG and have been working with community foundations for more than 20 years. They have lots of experience and have significantly contributed to the development of this survey. Today, they are going to share with you key themes we have seen in this year's data, including details on portfolio management, enterprise considerations, and more. At the end of the presentation, we do have time dedicated to hearing and answering questions from all of you. However, if you think of questions throughout the webinar, please feel free to use the Q&A tab located at the bottom of your screen. With that, I will hand it over to Jeff to get things started.

Jeff Weisker:

All right, well first and foremost, want to thank everyone for participating in the survey. We had about 100 participants this year, which is a little higher than last year. Excuse me. All right, let's get into the survey theme. So we have five themes listed here, and looking at the average and median spending rates, the average and median spending rates has declined somewhat...

Jeff Davis:

... over the last year. And while traditional consulting has been the primary model that most community foundations have used, we have seen a significant movement towards OCIO. We've also seen more of an adoption of diverse asset managers, not only in language within the IPS, but also with board and staff alignment on the topic, and Quincy Brown will be talking about that in greater detail. Allocation to responsive investing continues to be supported by more than 50% of the respondents, although investment continues to be limited. And then again, there's differences between small and large. Small community foundations favor more of a home country biased domestic equity oriented portfolio, while we see that to a lesser extent in large community foundations with more of an alternative asset allocation.

Jeff Weisker:

All right, let's go back into looking at the next page here, the current model. So this year we saw a noticeable jump in the amount of you that have the OCIO or discretionary model. About half of you have traditional consulting non discretion, but look at the jump here. And those of you that have OCIO, that jumped from 25% to 35% this year. So a noticeable jump, and those of you that have an outsourced chief investment officer model, and I know you all know this on staff, but small staff continues to be the norm. Just nearly 75% of the respondents continue to have one or less full-time equivalence to administer the portfolio. And then when you go back to the theme of additional assets in private investments, this is something to consider that that takes more time from your back office. And as you continue to increase private investments, just having one person looking over the entire portfolio and administer it could be a potential issue. Now Jeff Davis is going to walk us through portfolio management and asset allocation.

Jeff Davis:

Thanks a lot, Jeff. Just a reminder, as far as data collection, this was collected as of 9/30/2022. So let's think about environment for a moment in the midst of a bear market in inequities possibly the worst one year ever in the domestic bond market. Traditional asset classes, if we think about those two in tandem, struggling to a great extent. So this creates some noise in the data that we see this year, but many themes are consistent with previous surveys. The 70-30 asset allocation strategic framework remains the norm, but we did see a modest increase in defensive asset classes and portfolio diversifiers. Continued investor appetite and increasing asset allocation to private capital investments, we're seeing that across the spectrum, both small and large community foundations are adopting programs or expanding their existing programs. And we also saw increased allocations to hedge funds, which is a bit of a departure from previous years.

I think it was just maybe two, three years back, zero community foundations indicated that they were thinking about adding to hedge funds. There is some market movement at play here, but at the same time, there is some interest given the difficulties we saw in traditional asset classes. Thematically, we continue to see differences between small and large community foundations, and I hit on that from the top, and that's consistent with previous surveys. Home country bias is evident in smaller community foundations with nearly half of the portfolio exposure being dedicated to publicly traded US companies. Equity risk at the same time for those portfolios and smaller community foundations is typically mitigated with public fixed income, which is around 24%. So thinking about 2022 and the market environment, this was a particularly difficult year for many smaller community foundations since about 70% of the portfolio assets were dedicated to two asset classes that were in bear market territory.

The historical role also of fixed income, if we think about it, of providing a ballast for the portfolio in a bear market environment broke down and that's due to the most aggressive tightening policies from the Fed in the last 40 years. So we saw US equities and fixed income fall in tandem, which was very challenging for most community foundations that were smaller. On the flip side of that, if we think about larger community foundations, we only have about 42% of the asset allocation dedicated to those traditional asset classes, which helped many larger community foundations from a relative performance standpoint significantly last year. Hedge fund strategies had a wide range of returns last year, but we did see hedge fund indices returns outperformed not only equity but also fixed income. So providing that role of portfolio diversification and downside protection, real asset exposure is also more significant for larger community foundations.

And given the backdrop, the inflationary backdrop that hit us also hard last year, we did see real asset portfolios, particularly those that were more commodity based, provide some diversification within the portfolio and actually commodity related strategies where one of the only areas if we're thinking about strategic asset allocation where there were positive absolute returns to be had, so a nice diversifier for many larger community foundations. So although sentiment remains neutral to alternative investments, we do continue to see overall allocations tick up. And this is partially due to the terrible year we had in traditional asset classes last year. I'm not going to deny that there's some market movement at play here, but also it is partially due to investor demand.

We continue to see community foundations discussing either implementing some sort of private capital program or expanding their existing program. And this year we didn't have any community foundations that responded to the survey that indicated they were going to decrease their private capital exposure, which is a departure from the last couple of years. Fixed income has been a topic over the last few years that we've seen differing results. Over the last two years it's been an area where few, I would say if any community foundations had plans to add to, but that changed this year. And particularly if we look at the results, and these are different asset classes where when you're sitting around with your investment committee and discussing where you're going to reallocate dollars, fixed income actually was the second highest, and that has everything to do with the Fed policy that we experienced last year, and it makes sense if we're looking forward.

So the higher yields today indicate a higher return down the road, but also another silver lining here is that we can assume that fixed income would reassume that role of a diversifier or that ballast in the portfolio when there is a flight to quality scenario, which we did not have last year. So a more traditional role as it has had over time, given the higher yield and the competition for capital for considering that in comparison to equity. So I think that brings us to a good spot here to open up the poll for some questions, and thinking about the backdrop or the environment last year and asset allocation as we look forward, "Has a higher interest rate environment caused you to change your strategic asset allocation?"

We're letting the results come in.

Jeff Weisker:

All right, well, technology works here. Looking at the results, I would say, as expected, about 70% of you said no to the poll question. So now I am going to hit enterprise considerations and looking at spending rates that you all have. Bear with us here as I have lost my voice and we are dealing with some technology issues.

Quincy Brown:

So what we've seen here is somewhat of a shift over the last few years. Ultimately, policies have started to come down in terms of spending levels, which is what we anticipated, but a little bit more of a dramatic shift in the numbers here from the last three years, dropping from 13% in 2022 to 21% in 2023. Again, we expected this shift, but the more dramatic shift that was outside of what we expected, but again, as Jeff Davis alluded to, the markets may have been an influence on that reaction. So here in the next explicitly looking at the rates of change over the course of time in different percentages, by far and away 4% is the largest allocation or spending level for most institutions, and we've seen the migration over time and it's been drawing further and further from near 5% earlier on in 2016, moving closer in line to that market center, if you will, for participants at 4% more recently. And again, we expect that level of probably continue to come down as people reset from a bear market in 2022.

Regarding change going forward, not a lot of activity is taking place in this front as it relates to changing policy. Where we are seeing much of the changes in the rolling average. So, response is that we've seen an increase in that smoothing phenomenon in their calculation. The highest level of change we saw in this most recent survey result was in the rolling 20 quarter average, which is not depicted here, but a background data point that we recognize when viewing the responses in the most recent survey.

Jeff Weisker:

All right, I'm going to try to give it a go again here. So looking at the overall average admin fees, so these are the fees that you all are charging to run your business, but looking at the overall average, the total fees a little north of 1%. Larger community foundations have a lower admin fee at 81 basis points, and then when you go in and look by type scholarship funds, those labor-intensive funds have a larger fee at 1.58%. Supporting orgs, agency funds, call it those less sticky assets of yours are about 81 and 88 basis point respectively. Now on the investment expenses, so this includes the advisor, the managers and the custodian. We have the median fees here and we did have a decline year over year in fees. The overall median at 62.5 basis points, not a large difference between OCIO and traditional consulting. But looking how we get there, it's different.

So OCIO higher advisor fee as compared to traditional consulting. In the OCIO platform, perhaps you have more indexing, but lower manager fees as compared to traditional consulting. And then finally by size, the total fees, the larger the community foundation, the higher the fee. So you think about it, why is that? Well, a good portion of that is going back to some of the information on private investments. Larger community foundations have a larger amount in private investments, which of course carry the higher fee. Now Quincy Brown is going to walk us through diverse asset managers.

Quincy Brown:

Thank you, Jeff. This is the fourth year of inquiries on diverse managers and we've seen sustained activity in some areas while other considerations have waned more recently. Ultimately, policy adoption has been the further incorporated by many respondents in 2023. As foundations seek to determine how they want to define the area, there's not a consensus around further or around whether DEI is separate from ESG or not. And that's what the graphic depicts here, very little distinction. We think this may be an influence on other responses that we'll discuss here shortly. At FEG, we see diverse managers or DEI as a distinction from ESG, but associated under an umbrella term called responsive investing or RI.

Over the past few years, responses on hiring diverse managers have grown and sustained while considerations on exploring diverse managers have fallen more recently. Again, we think this decline could be a result of the stigma associated with ESG. So each year since we started asking questions in 2020, we've seen increases in hiring in those that have been considering hiring diverse managers until this most recent year where the hiring practices were sustained and we saw a decline to some degree in those that are considering diverse managers. Yet diverse managers is among the top trends of talking points among investment committees within community foundations. Community foundation boards and staffs appear largely unified on DEI initiatives. This aligns with our experience engaging with these groups as boards and staffs have gone through some education and are ready to take action within their investment programs.

There has not been a set target adopted for diverse managers amongst community foundations. However, we've seen a sizeable increase in investment policy and language adoption amongst survey respondents. This is where we see the most implementation of diverse managers when the intentions are documented in the investment policy statements. Resources and defining the space remain some of the challenges to investing in diverse managers. I think we're going to pause here and do another poll of the participants around if you're seeking a diverse manager solution, is your preference for a discretionary or non-discretionary model? So we'll give it a moment to collect your responses.

So, the tally will appear here momentarily and it's a draw here with a little bit indifference between the discretionary model and the non-discretionary model. So to some degree, that matches the history of where we've seen community foundations who have largely been drawn to a more traditional consulting model, but also propensity here more recently to seek out a discretionary OCIO solution to investment strategies. Those that have defined the space have focused around the 50% threshold for representation, and this is a trend that's been synonymous over the last three years. And what we'll note here is that the composition is focused on ownership, leadership, and portfolio management in this space. So again, the 50% representation is by far and away the clear distinction for most community foundations. They look to define diverse managers.

I lead our DE&I and diverse manager efforts here at FEG, and within that structure we have a diverse manager committee, and the responsibilities of that committee are looking to assist in defining diverse managers within the industry, as well as understanding the universe, expanding our own lineup of recommended diverse managers and assisting clients in implementing diverse managers within their investment program. So we begin with the starting conversation at a 40 plus percent threshold at firm ownership, firm leadership or strategy management. This is looking through the lens of a diversity dimensions that you see in the bottom right-hand portion of your screen of underrepresented groups.

Last year we developed an OCIO or discretionary diverse manager strategy that is more commensurate with the community foundation threshold at 50% or more in these parameters. As foundations seek to further explore the area, education and inventory are the main areas sought, followed by policy, and this is a consistent trend over the last three years. FEG assists in various resources including articles, white papers, sample policies, videos, and podcasts. In addition to that, we've conducted events like our diverse manager series conducted this past spring as well as a session that will be incorporated in our forthcoming investment forum here in Cincinnati on September 20th. With that, I'll turn it back over to Jeff Weisker.

Jeff Weisker:

Well, thank you. We added questions last year on cryptocurrency. I'm going to be very brief on this subject whether or not you accept crypto as a gift. 32% of you said yes, another 17% said it's currently under discussion and the reasons why you don't accept crypto as a gift, the largest reason was there's no donor interest. Then after that, just being uncomfortable with crypto, the fact that crypto is unregulated and that the process is just too difficult to receive the gift and then to subsequently sell the gift.

Jeff Davis:

Now, getting to responsive investing, as Quincy alluded to, this is an umbrella term we utilize here at FEG. Responsive investment is any investment made by an organization that seeks both a financial and social benefit or achieves a double bottom line. And for you all that takes the form of mission related investment programs, program related investment programs along with ESG investments, which have garnered a lot of discussion here more recently. But those are strategies that actively incorporate positive environmental social, incorporate governance behavior into their investment processes. Consistent with the last several surveys, allocations continue to increase. We see 54% of the community foundations having some sort of RI allocation, which is nearly three and a half times the level we saw back in 2017. About 60% of the community foundations have RI language in their investment policy statements. So as we look forward, will this adoption continue both from the governance standpoint and within asset allocation?

And we do have some conflicting data this year. ESG has become a lightning rod topic in that it's heavily politicized. In addition, the market environment did it no favors. 2022 provided challenges to the ESG investing format that are hard to ignore, particularly on the environmental side. But despite these headwinds, over half of community foundations have RI allocations and of those who do not, nearly 23% are interested in it or say it's something that we should do so early on in the discovery process. So potential for future growth for RI investment programs. But the headwinds exist. I mentioned how it's become politicized. There's been anti ESG legislation. About 26 states have proposed new ESG investing related bills since January of this year, but we have seen some pushback at the same time. More extreme legislation is being scaled back or failing to progress, and there's two states actually looking to repeal anti ESG bills. So potentially some of this political wrangling is leading to some waning donor interest. It's at its lowest level since 2018 at 36%.

Factors driving RI investments are consistent with previous surveys. Aligning your portfolio with your mission to support your community continues to be the primary driver for RI allocations. However, additional headwinds have appeared and it's evident in the data from this year's survey. So that takes the form if we're looking at the factors preventing investment in RI lower prioritization as well as performance concerns, which increased significantly relative to years past. And 2022, 16% cited that performance concerns were a factor preventing investment in RI. Fast-forward to 2023, that jumped to 45% and this makes sense. Energy markets were up about 65% last year on a calendar basis, while all other areas of the market were negative outside of utilities. So most sectors of the market actually experienced double-digit losses and this led to significant tracking error for portfolios that were light on energy. Similar to years past, we continue to see growth and the number of community foundations with RI investments. However, over  all portfolio allocation size remains modest. If you're looking at an MRI or PRI program, typically that's around 2 to 3%.

There is a higher average allocation for SRI or ESG types of strategies, but many community foundations or a few responded with a hundred percent dedicated to SRI/ESG. So that does skew the overall average, but if you look at the median right around 3%. Similar to portfolio management, there are differences between small and large community foundations and RI program implementation. And consistent with surveys we have seen in the past it's more common to see smaller community foundations implement RI via turnkey solutions like a commingled fund, mutual fund, fund of funds offering that incorporates ESG into the investment process. When we look at larger community foundations, it's more likely to have an MRI or PRI program in place already, or they're a little bit further in the implementation of incorporating one than a smaller community foundation.

And that's because there are economies of scale for larger community foundations which have more resources to administer MRI/PRI programs or some sort of local impact investment program. But I can't say through my work in the field and conversations with you all at several conferences that you attend, I'm seeing increased interest from smaller community foundations in place-based investing. So as we look forward, perhaps that's an area we will see some growth. Depending on how the RI program is implemented, there's also a divergence in return expectations. 70% of community foundations with MRI allocations have a concessionary return expectation, meaning that it's going to be below the target return of the portfolio. On the other hand, right around 81% of the community foundation surveyed believe that their SRI or ESG mandates will be in line with portfolios target return. Why is this? More than likely it's the areas of focus and implementation of the RI program.

MRI investments are local in footprint and often taken in the form of a low interest loan that many consider to be part of the fixed income portfolio and below a market rate of return. SRI or ESG investments are typically equity strategies that incorporate ESG factors into the investment process. So these managers will proactively seek companies for their portfolios that promote racial diversity or good environmental stewards. So this causes ESG and SRI portfolios to look a bit different than the broad stock market, and 2022 was a good reminder of that. However, long-term expectations for most, at least those that were surveyed, I believe that performance should be in line for an ESG or SRI type program. But there are going to be some periods of tracking error, particularly if you're thinking about an ESG portfolio that is 100% diversified from fossil fuels.

So there have been two schools of thought here incorporating environmental companies into underlying portfolios that have an environmental focus. How should you go about doing that? One could be engaging corporations on the shareholder level by bringing corporate resolutions or voting proxies in a certain manner to enact corporate change or divest completely from energy stocks. So this is the third year in a row that we've actually seen community foundations have indicated that their managers have divested and that the overall level of divestment as we look at it today from when we began the survey is at its highest level at 58%. Last year, as we were discussing this and we saw this trend increase, we pointed out this was an area where we would keep our eye on investor resolve given the significant outperformance of the energy market. And so far, even though it's the early innings, it does appear that community foundations are comfortable with the tracking area even after a year, like last year, fossil fuel free portfolio and are willing to accept periods of volatility like we just experienced.

Jeff Weisker:

All right, the last topic here is on the investment committee structure and looking at your investment committees. The majority of you have between six and 10 committee members with staggered terms. Now a very timely topic is on your meeting format. So just looking at last year, and the last couple of years I should say on how you're meeting, 65% have some type of hybrid structure in place for your meetings, 23% are in person.

Quincy Brown:

As previously mentioned, boards and staffs of community foundations appear aligned on DEI initiatives. As you can see here, security factor may be a result of being intentional on demographics, whether that's tracking, recruitment or representation as over a 40% of community foundation surveyed have some threshold of 25% or more in terms of diversity percentage thresholds.

Jeff Weisker:

Now half of you have term limits of 49%. So you have term limits. The typical number of terms that you allow a committee member to have is between two and three, and looking at the length of the service term, it's either a one year or a three-year service. So again, two to three terms with an average of one to three years. Other topics that you are speaking about with your investment committee, not a surprise here given the data of the surveys, in private capital investing, what are others doing? What are you going to do in regards to that asset strategy, impact investing, how to increase your assets and get the assets best as you can to a MRI/PRI type of approach. And then finally, investing in diverse asset managers. So with that, we will open it up to questions.

Delyse Lawless:

Yes. Thank you Jeff. We do have a number of questions that have come in before we start reading. I do welcome everyone to go ahead and submit any questions that you have and we will do our best to answer as many as we can in the time that we have. So the first question that we have is for Jeff Davis. "How did the market volatility in 2022 impact community foundation's methodology in raising cash to support operations and grant making?"

Jeff Davis:

Great, that is a topic that came up in several meetings as we entered into periods of volatility beginning early part of 2022. And the community foundations that I have worked with, I would say have taken a variety of approaches here. One being very thoughtful about cash needs and thinking about annual draws that might need to be taken, if it's possible to take that in a dollar cost average approach. Meaning maybe in four quarterly chunks or every other month, raise the cash given the volatility of plus one or plus 2% to negative one to negative 2% days that we were seeing in the market last year. So either taking that method or even thinking about the income dividends and interests that were associated with the underlying investments in the portfolio, perhaps not reinvesting those and sending those to cash to provide some sort of liquidity rather than having to sell assets at a distressed level, which everyone was trying to avoid and it was hard to do given that equity and fixed income both suffered such significant losses.

Delyse Lawless:

That's great. Thank you, Jeff. And the next question is, "Do you expect spending policy changes if we enter a recession?"

Jeff Weisker:

That's a challenging question. Looking at the question, last year in the spending rate, I was not anticipating much of a change going into this year. Now the average is the medians decline 10, 20 basis points, so it's not a very large change. But when we asked a question last year, "Are you anticipating changing your spending?" Most of you said "No." So, I was actually expecting that number to stay the same. Why did it change? Well, it could be just the decline that we had last year in the equity markets. So, if we continue to have a decline in the markets or a recession perhaps, then the spending rate might drop another couple 10, 20 basis points. I don't anticipate it, but clearly last year we did see a decline in those average in median, and I would attribute some of that to the equity markets.

Delyse Lawless:

Thank you, Jeff. The next question is for you Quincy, "What are foundations doing to increase DEI? Are they able to aggregate data for reporting?"

Quincy Brown:

Well, yes. That's a question that really is the starting point of having the conversation. Understanding where you are will guide you on where you want to get to. And so one of those things is understanding the exposure you have to diverse managers, and recognizing there's no perfect number. It's how you want to align your mission with the portfolio. So, we assist those institutions with evaluating their current investment managers to see who qualifies as diverse based on those institutions, and then building upon that the institutions can decide how and when they want to progress in terms of gaining more exposure to diverse managers.

Delyse Lawless:

Thank you, Quincy. And we have another question, "Do you have any specific figures on the move to using a 20 quarter rolling average for the annual spending rate?"

Jeff Weisker:

We do have the figures and we will distribute all of the information with all the other questions that we did not cover in the upcoming weeks with the detailed report for those of you who participated in the survey.

Delyse Lawless:

Great. And it looks like we have one last question. "Please expand on the slide. Regarding spending policy, did you find that community foundations changed their policies in response to the market or that they retained a consistent policy, but that the market conditions reduced the spending?"

Jeff Weisker:

Yep. And looking at that question, the way we asked the question was on your actual policy. So it wasn't on the effective rate. So yes, you're correct, in the down market, your effective rate is going to be lower than your policy just giving the impact that the market had on your market values. So the question was in regard to policies, not to the effective rate so we would expect that some foundations perhaps reduce their spending policy during the challenging market.

Delyse Lawless:

Great. Thank you. I think that's all the questions we have for now. If any more do come in, please feel free to contact us and we'll go ahead and wrap it up with a summary.

Jeff Weisker:

So hopefully I get through the summary here with my voice. So looking at the past survey, a change does appear to be occurring and that a noticeable amount of community foundations changed to the OCIO model. We'll see what it is in next year's survey, but that 10 percentage point increase was sizable. We hit spending pretty well during the Q&A, but rates have steadily, I would say, modestly decline since we started the survey back in 2016 and we saw that slight decrease last year. Nearly 50% of community foundations have hired or are considering to hire diverse asset managers. We expect that trend to continue. And then finally, allocation to responsive investing continues to be supported by 50% of the respondents. Again, last year was more of a challenge, so we see donor interest decrease to its lowest level in the last six years. Now, of course so far, 2023 has been a good year for ESG investing.

Delyse Lawless:

Well, that's great. Thank you all, Jeff, Quincy and Jeff for sharing all of this great insight. And for those of you listening, thank you again for your time and participation. As we conclude the webinar, we do want to remind you all the FEGs Investment Forum will take place this year, September 18th through 20th in Cincinnati, and we will have a breakout session focused on unpacking more of the data from the community foundation survey. So you don't want to miss that.

And we will also be presenting at several conferences this year, including KCF, FOG and others, and we look forward to seeing you all at these events as well as our forum in the fall. In the next week or so, you will receive a link to the replay of this webinar along with the slides available to download. For those of you who did participate in the survey, a full report will be sent to you as well. Thank you again for joining us, and I hope you all have a great rest of your day.