How We Manage Endowment Funds
April 01, 2013
The expectation of an arts organization holding an endowment is to receive a stable long term income to support their mission/programming and assist in covering operating costs. Endowment income is also a source for funding to implement change, education and programs to build audiences.
Long Term Perpetual Funds
The majority of endowments with the OAF are long term perpetual funds. The capital is held in ‘perpetuity’, which for investment purposes means a horizon longer than 10 years. Income is paid out annually based on a return established by the Board each year, based on actual investment results. Our portfolio objectives are to achieve at least a 5% investment term return over 5 years. That return is intended to cover operating costs, create a reserve for inflation and allow for annual income payouts in a range of 3 to 5%.
Investment Policy Statement
Investment strategy/allocation of assets (equities, fixed income) is documented in an Investment Policy Statement, which is reviewed annually. The board considers what level of risk it is willing to accept to achieve target returns and links that risk assessment with selection of assets to invest the portfolio. The actual decisions for security selection and security trading, is delegated to several professional investment managers. The asset mix strategy is based on a combination of risk tolerance, return requirements and our outlook for long term investment returns. The Board holds responsibility for setting strategy, hiring managers and monitoring their results. The managers are expected to deliver value added returns that meet or exceed our target return expectations.
Coming out of the economic downturn and extreme market volatility of 2008/9, the Board conducted a strategic review of investment strategy. When we looked at our objectives, we identified there was a gap between the current portfolio asset mix and the desired long term return. We could ‘close’ the gap by investing in higher growth assets, which implies taking on higher risk. As our objective is stability of returns, we looked for alternate solutions. The Board evaluated way in which the OAF could lower overall risk in the portfolio, introduce potential for increasing returns in a prudent way and maintain oversight through ongoing review of asset mix/investment policy. We identified asset classes that could help the foundation achieve its objectives - small cap equities and absolute return strategies (hedge funds).
We engaged a consultant, conducted manager search and interviewed candidate firms. Our conclusion was that different types of asset management can diversify risk, increase returns and lower the volatility of the foundation portfolio. Investing in the new asset class of Alternatives – Absolute Returns created the opportunity to close the gap between our required returns (5%) and expected return from the asset mix of the investment portfolio. The new strategy was implemented at the beginning of 2012.
So how did we do?
2012 was a strong year in investment markets. The results achieved by the three investment managers employed by the Foundation, was a positive 12.6% for one year. Three and five year returns were 6.93% and 3.93% respectively. Over the short and medium term, we closed the gap between our required return (meet expenses, allow for inflation and pay 3 – 5%) and actual results. Markets continue to be volatile, but we believe that our strategy will deliver positive results and allow the foundation to deliver stable, long term income to the arts organizations and private awards/scholarships we support.
Based on the actual returns in 2012, the Board approved a payout of 4%, or $2.2 million to over 270 arts organizations across the country. This continues a strong history of financial support – since 1991, the Ontario Arts Foundation distributed over $21 million in endowment income payments.
The Foundation continues to grow assets ($1.5 million in 2012), reflecting contributions by arts organizations to increase their endowments, gifts from private donors, and receipt of matching funds through the federal Endowment Incentives program of the Dept. of Cdn. Heritage. Total assets under administration now exceed $60 million. Careful and continuing stewardship of our investment responsibilities, and a diversified strategy is expected to continue to achieve positive results and ability to support arts organizations in Ontario.