J McLeod

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J McLeod

  1. 1. Why greenhouse matters, even at the coalface and other lessons in managing money Goldman Sachs JBWere Philanthropic Services Goldman Sachs JBWere Pty Ltd ABN 21 006 797 897 AFSL 243346 13 th October 2006 John McLeod
  2. 2. Philanthropic Services <ul><li>Has been established to: </li></ul><ul><li>Promote Philanthropy across our client base </li></ul><ul><li>Provide advice and assistance to Endowments and Foundations, not-for-profit and charitable groups </li></ul><ul><li>Assist corporate clients to establish and manage an appropriate Philanthropic Strategy </li></ul>
  3. 3. Traditional Foundation Structure Fund manager Grantmaker Philanthropic ATM
  4. 4. Let’s go back to the start <ul><li>What is the real purpose of your Trust’s existence? </li></ul><ul><li>To reduce tax </li></ul><ul><li>To earn money to make donations </li></ul><ul><li>To provide for philanthropy in perpetuity </li></ul><ul><li>The real reason is to generate a social return. </li></ul>Investments are just a tool. You judge your success on the impacts you have, not on the dollars given. Earning money from sweat shops and giving that to fight poverty might not produce a net positive social return.
  5. 5. What is the role of private Philanthropy? <ul><li>Government money has certain boundaries and corporate money should be somehow aligned to the business. </li></ul><ul><li>Without these constraints what options are available for private philanthropy? </li></ul><ul><li>Complementary – fill the gaps </li></ul><ul><li>Substitution – take on areas that Government is retreating from </li></ul><ul><li>Redistribution – higher to lower incomes </li></ul><ul><li>Innovation – exploring and promoting new ways of solving long term problems </li></ul><ul><li>The opportunity is to do what others can’t </li></ul><ul><li>This has implications for their investments </li></ul>
  6. 6. But how do we do it? <ul><li>It can be as simple or as complex as you choose </li></ul><ul><li>Negative “ethical” screening </li></ul><ul><li>Positive “ethical” screening </li></ul><ul><li>Sub market rate investments/loans to NFPs </li></ul><ul><li>Alternative asset classes </li></ul>Private equity Small enterprises Venture philanthropy Microcredit Increasing complexity requiring greater measurement of social returns and effects on financial returns (+ve/-ve)
  7. 7. What is ethical? <ul><li>Can a company be a bit non ethical, say 5%? </li></ul>
  8. 8. Companies aren’t what they used to be <ul><li>They have ever increasing global reach and economic force </li></ul><ul><li>They’ve taken over from the Church in terms of assets controlled </li></ul><ul><li>They are a large part of the social environment of many people </li></ul><ul><li>Public and press quick to condemn perceived bad behaviour </li></ul><ul><li>Global information sharing is instantaneous </li></ul><ul><li>Increasing power and effectiveness of NGOs and social movements </li></ul>This position of power has a requirement to gain and maintain a “licence to operate” which goes beyond just legal requirements. Remember, the law just evolves from public views, albeit very slowly.
  9. 9. What is Corporate Social Responsibility anyway? It is simply about the way a company operates and how it relates to all of it’s stakeholders. Companies do not operate in isolation from the broader community or society in general. However, this simple statement has very broad ramifications when you start to consider the real range of stakeholders a company has.
  10. 10. Who are a company’s stakeholders? <ul><li>Depending on the company and the industry, the range and importance of each stakeholder will vary. </li></ul>Shareholders Employees Government Customers Competition Suppliers Community Company
  11. 11. Economic and social returns are related <ul><li>To be competitive you need employees who are safe, educated, motivated etc. </li></ul><ul><li>To generate products you need infrastructure, security, sustainable environment. </li></ul><ul><li>You’ll have a bigger market to sell into if you solve poverty. </li></ul>
  12. 12. Don’t ignore the social returns
  13. 13. The perfect corporate world <ul><li>Is when a company gets the right. </li></ul><ul><li>This should result in social change achieved that is so positive for the company that it would strive to achieve it anonymously. </li></ul>where to give what to give how to give
  14. 14. Does the investment world think this way? <ul><li>Q What should the role of Wall Street Banks be in shaping corporate policy. Should they become involved? </li></ul><ul><li>Ans Absolutely not. The cornerstone of free markets is efficient capital markets. It would be inefficient and inappropriate …………………… </li></ul><ul><li>Ans As a fiduciary, I have a moral obligation to my investors to maximise return. I would reduce the opportunity set if……………………….. </li></ul>
  15. 15. Corporate governance – addressing the two key questions Is there an investment signal? How do I manage my portfolio obligations? GSJBW quantitative testing using CGI Corporate Governance rating database GSJBW “Conehead” risk analysis tool accessing CGI Corporate Governance rating data Indications of a quantitative link to aspects of company performance As ESG obligations increase, Conehead provides an easy way to manage portfolio corporate governance exposures
  16. 16. Investment link – Share price performance <ul><li>The analysis below shows the performance of simulated portfolios investing in various “governance investment strategies” using the CGI ratings as a basis. These strategies are </li></ul><ul><ul><li>Overall, </li></ul></ul><ul><ul><li>Board Overall (Skills & Structure) </li></ul></ul><ul><ul><li>Board Skills </li></ul></ul><ul><ul><li>Accounting </li></ul></ul><ul><ul><li>Audit </li></ul></ul><ul><ul><li>Remuneration </li></ul></ul><ul><li>CGI ascribes a rating of 0 -5 for each stock for each factor (0 poorer, 5 better) </li></ul><ul><li>Portfolios are rebalanced each time CGI reissue their ratings for the entire year (approximately annually) </li></ul><ul><li>Equally weighted portfolios have been constructed consisting of stocks ranked 3-5 in the long portfolio and 0-2 in the short portfolio </li></ul>
  17. 17. Other measures of company performance – ROE <ul><li>A relationship between ROE levels and corporate governance is evident across most rating categories </li></ul><ul><li>Chart below plots median ROE over the last 4 years for each rating level within each governance category </li></ul>
  18. 18. How do we manage a corpus? <ul><li>Some of the issues to consider </li></ul><ul><ul><li>Understand the relationship between risk and reward </li></ul></ul><ul><ul><li>Understand the financial requirements of achieving your mission </li></ul></ul><ul><ul><li>Formulate investment objectives and policy to reach these goals </li></ul></ul><ul><ul><li>Determine asset allocation and, if any, ethical investment choices </li></ul></ul><ul><ul><li>Include roles and responsibilities of internal and external managers </li></ul></ul>
  19. 19. What is an Investment Policy? - Spending Policy - Risk - Return - Asset Allocation - Investment Management Structure Plan Choose Investment Managers Review Investment Performance Investment Policy Board of the Organisation Investment Committee
  20. 20. Elements of an Investment Policy <ul><li>Preamble on the organisation and its reliance and expectations from its Investments. Any reliance on its Trust Deed or regulatory requirements for Investments beyond the “Prudent Person Principle”. </li></ul><ul><li>Fundflow Guidelines on spending out of (liquidity implications) and inflows to the Investment funds (including from variable investment returns and new gifts or bequests etc.) It should also include a statement on the ability of the Fund to borrow or lend. </li></ul><ul><li>Risk Statement to be set by the Board, defining the acceptable level of risk able to be taken in Investments. This should not only incorporate liquidity requirements and acceptable frequency of negative returns, but also consider reputational consequences of risk to the organisation. It should also recognise the benefits of diversification in reducing risk. </li></ul>
  21. 21. Elements of an Investment Policy <ul><li>Socially responsible or ethical investment considerations . What (if any) exclusions, limits or voting guidelines are to be placed on investments to ensure the overall maximisation of the organisation’s social mission? </li></ul><ul><li>Return objectives should define expected long term (5 years +) income and capital returns with reference to outperformance of inflation and net of costs. E.g. Total returns after costs of 4% above CPI and likelihood of a negative return less frequent than 1 in 5 years. </li></ul><ul><li>Allowed Asset classes and definitions, characteristics, acceptable quality descriptions within each asset class. Which benchmarks to be used for each asset class. </li></ul><ul><li>Asset Allocation decision including control bands. These should be set as a consequence of the previous risk statement and return objectives. </li></ul>
  22. 22. Elements of an Investment Policy <ul><li>Investment Management Structure </li></ul><ul><ul><li>Will the funds be invested directly and in the name of the organisation, through various managed funds or a combination of both? </li></ul></ul><ul><ul><li>Subject to the boundaries set by the risk statement, return objectives, asset allocation and ethical considerations, who (external, internal or Board) is to make investment decisions on a day to day basis? </li></ul></ul><ul><ul><li>What guidelines will be set around conflict of interest between Board/Investment Committee and the choice Funds Management organisations? </li></ul></ul><ul><li>Performance Reporting . What is the desired frequency and format of reporting and the method of consolidation of difference asset class performances? </li></ul><ul><li>Investment Review . What mechanism is to be used for Investment review, rebalancing and manager changes? Also to highlight the requirement for updates and reviews of this Investment Policy. </li></ul>
  23. 23. What is your time frame?
  24. 24. Investment environment
  25. 25. <ul><li>Long term forecasts show the diversity in size and type of returns </li></ul>Investment environment – the future
  26. 26. Why diversify? (continued) <ul><li>Now let’s have 50% in each asset over the 10 years </li></ul>
  27. 27. Why diversify - the answer <ul><li>While returns were averaged combining the two assets, risks can be lowered </li></ul>
  28. 28. Number of stocks needed for diversification
  29. 29. Asset allocation considerations for Foundations <ul><li>Source: Goldman Sachs JBWere Research </li></ul>
  30. 30. For a donor - Two ways of giving <ul><li>First option </li></ul><ul><li>Make a $2,000 grant from income </li></ul><ul><li>Second Option </li></ul><ul><li>Lend the same organisation $100,000 at a low interest rate </li></ul><ul><li>(say at 3% compared to a market rate of 5%) </li></ul><ul><li>Result </li></ul><ul><li>Both options see $2,000 of income used/foregone </li></ul><ul><li>But the second option also sees $100,000 used in the community </li></ul><ul><li>If just 2% of assets were invested this way, it would effectively be adding 40% to philanthropic support </li></ul>
  31. 31. What and how to give? <ul><li>What: </li></ul><ul><li>Broad analysis of assets and skills of an organisation </li></ul><ul><li>Use all of Grant, Intellectual, Human, Political and Financial Assets </li></ul><ul><li>How: </li></ul><ul><li>Select the best not-for-profit partners </li></ul><ul><li>Signal, advertise the cause or solution to get others involved </li></ul><ul><li>Improve the activities of your selected partner </li></ul><ul><li>Advance the knowledge in the area </li></ul><ul><li>Source: Jed Emerson, Porter/Kramer </li></ul>
  32. 32. Summary <ul><li>Being a not for profit offers unique opportunities and challenges. </li></ul><ul><li>Where you invest: </li></ul><ul><ul><li>huge advantages in investing for perpetuity </li></ul></ul><ul><ul><li>no tax environment offers different end returns and opportunities </li></ul></ul><ul><ul><li>asset allocation is the key </li></ul></ul><ul><ul><li>inflation not volatility is the enemy </li></ul></ul><ul><ul><li>consider alternative asset classes </li></ul></ul><ul><li>How you invest: </li></ul><ul><ul><li>consider your overall mission </li></ul></ul><ul><ul><li>think about the social impact of your assets </li></ul></ul><ul><ul><li>think laterally about your assets </li></ul></ul>
  33. 33. <ul><li>Important Notice: </li></ul><ul><li>Goldman Sachs is a registered trademark of Goldman, Sachs & Co. </li></ul><ul><li>Goldman Sachs JBWere Pty Ltd (&quot;Goldman Sachs JBWere&quot;) does not give, or purport to give, taxation advice. This document does not contain, and should not be construed to contain, any securities recommendations. You should consult with your professional taxation adviser before using the information or data contained in this document or contact your Goldman Sachs JBWere adviser if you require further assistance. This document was compiled from information provided by persons other than Goldman Sachs JBWere and accordingly no representation, warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information contained in this document. Goldman Sachs JBWere and its related entities distributing this document and each of their respective directors, officers and agents disclaim, to the maximum extent permitted by law, all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from this document. </li></ul><ul><li>This document contains general financial products advice only. In preparing this document, Goldman Sachs JBWere did not take into account the investment objectives, financial situation and particular needs ('financial circumstances') of any particular person. Accordingly, before acting on any advice contained in this document, you should assess whether the advice is appropriate in light of your own financial circumstances or contact your Goldman Sachs JBWere adviser. If you were referred to Goldman Sachs JBWere by an investment adviser, that adviser may receive a financial benefit from Goldman Sachs JBWere for dealing in financial products on your behalf. Your Goldman Sachs JBWere adviser will give you precise details of any benefit payable to the investment adviser who referred you to Goldman Sachs JBWere. </li></ul><ul><li>Goldman Sachs JBWere Pty Ltd and its related entities distributing this document and each of their respective directors, officers and agents (&quot;Goldman Sachs JBWere Group&quot;) believe that the information contained in this document is correct and that any estimates, opinions, conclusions or recommendations contained in this document are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, recommendations (which may change without notice) or other information contained in this document and, to the maximum extent permitted by law, Goldman Sachs JBWere Group disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from this document. This document is for the intended recipient only and is provided on the condition that you keep it confidential and do not copy or circulate it in whole or in part. No part of this document may be reproduced without the permission of Goldman Sachs JBWere Group. Copyright in this document is owned by Goldman Sachs JBWere Pty Ltd. The Goldman Sachs JBWere Group does not represent or warrant that any attached files are free from computer viruses or other defects. Any files provided may only be used on the basis that the user assumes all responsibility for any loss, damage or consequence resulting directly or indirectly from their use. The liability of the Goldman Sachs JBWere Group is limited in any event to either the resupply of the attached files or the cost of having the attached files resupplied. All reasonable efforts are made to prevent dissemination of viruses through the electronic portal. c 2006 Goldman Sachs JBWere Pty Ltd ABN 21 006 797 897, AFSL 243346 All rights reserved. </li></ul>
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