Foundations – a stitch in time saves nine or saving for a rainy day?

 

Abigail Rotheroe

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Abigail Rotheroe

Abigail Rotheroe

Foundations exist to provide funds and support to other organisations for a range of charitable purposes—that much is clear. On the face if it sounds like an easy job—giving away money—but behind the scenes foundations have to wrestle with intricate decisions around whether to give all their money away now or invest it (socially or otherwise) for future generations. If my granny ran a foundation she would undoubtedly give all the money away now under the firm belief that a stitch in time saves nine. But if my grandpa held the purse strings he would save it for a rainy day.

Permanently endowed foundations have a specific remit: to preserve the real or inflation adjusted value of their money so they can exist in perpetuity. This isn’t easy. If the income produced by investments falls, maintaining the same level of grant-making results in a shrinking endowment. The foundation is therefore forced to choose between accepting a—hopefully short term—reduction in the real value of its endowment, or reducing its grant-making programme.

For foundations that are not permanently endowed, a more nuanced calculation is required. It begins with the question: should we spend the money now or save it for later? No one can eradicate stubborn social problems such as homelessness or youth unemployment in one fell swoop, but under what circumstances is there value in spending down to improve the life chances of beneficiaries today rather than tomorrow? For example, early intervention parenting programmes are aimed at addressing current behavioural issues of parents and children to improve long-term outcomes for the children. So spending money now makes sense. There is an opportunity cost in waiting for problems to materialise some way down the line, which will be more expensive to address. On the other hand, there will always be a need to spend money later—no amount of early intervention will remove the need for palliative care.

So, how does a trustee factor this into their decision making? Trustees clearly recognise the need to maintain the financial spending power of their endowment by getting a return on their investments that exceeds inflation. But how do they maintain their social spending power? It will be different for all grant makers and is affected by  issues of mission, evidence base and a host of other factors—but it is a debate worth having at the next trustee meeting.

Social investment presents further difficult decisions for trustees. Up front it seems to offer a win-win situation, enabling foundations to use more of their assets for social good. However, social investment also tends to sell itself as trading financial for social return. We don’t know how great that trade off is, but it does imply that returns on social investment will be lower than financial investment, which can make it even harder to preserve the value of your endowment.

For example, a recently launched social investment fund is targeting an annual return over its10 year life of 3- 5%. So the return may exceed inflation—but does the extra return over inflation compensate for the risk you are being asked to take over that 10 year period? Is it prudent to do this as a trustee? Who knows—maybe yes, maybe no. But is it a risk worth taking? Possibly, if the social investment produces an impact consistent with your mission and therefore increases the difference you make.

It will be interesting to see how foundations approach these debates going forward—whether the rainy day wins over early intervention. In the meantime, I don’t envy them.

Abigail Rotheroe is a consultant at NPC.

Tagged in: Foundations NPC


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