Foundations and Proper Asset Management: The problems and the solution

By Mark Barnicutt on June 30, 2021

The Challenges for Foundation Boards

The globalization of capital markets has caused a significant increase in both the variety and complexity of available investment opportunities. Examples of investment options now available include:

  • Bonds
  • Stocks
  • Pool funds
  • Mutual funds
  • Structured products
  • Private equity
  • Hedge products
  • Real estate
  • Income trusts
  • Commodities
  • Master limited partnerships

The result? A surge of investment-related products, which has in turn caused more complexity for foundations and endowments.

Furthermore, the proliferation of investment products and increased marketing has diverted Board focus from the tangible need to meet current and future disbursements – consumption goals – in favour of chasing relative performance based on peer or market indices. This has led to trading investment managers like commodities while Boards and advisors try to hit a relative performance target.

We believe the concentration on superior relative performance, instead of the future consumption requirements of each fund, has been a major contributor to missing disbursement targets.

What Are Foundation Boards Seeking?

Asset ManagementThese challenges, combined with the still-difficult conditions of the past decade, have led some foundations and their Boards to increasingly search for true professional support in the management and oversight of the wealth entrusted to them.

Informed Boards are increasingly coming to understand that their foundations are not simply ‘pools of capital’ but actual ‘Asset Management Businesses’. As Asset Management Businesses, they require disciplined operation, wherein revenues, expenses, assets, and liabilities are prudently managed.

In our experience, Boards are desperately seeking someone who will:

  • Provide real advice, not just a list of manager/product recommendations
  • Be objective in the advice provided
  • Be accountable (both ethically and legally) for the advice that they provide
  • Collaborate with the Foundation Board/Investment Committee and other professionals, such as accountants, to create real sustainable solutions to their foundation business problems
  • Not ‘blow smoke at them’ by pitching new investment fads and trends as a purported ‘high return’ solution to their challenges
  • Provide full transparency of all investment related fees and expenses

Given these requirements, we believe that the way forward for foundations and endowments is to return to the roots of the asset management industry: The Investment Fiduciary.

The Solution: The Investment Fiduciary

In our view, a ‘fiduciary’ is a professional or firm who holds a trusted position to conduct asset management activities on behalf of and for the benefit of, a third party. Investment fiduciaries are therefore held to higher standards non-fiduciaries. A true Investment Fiduciary does not sell products and they do more than simply provide a list of suggestions and recommendations – they provide real and objective advice to which they are ethically and legally bound.

An Outsourced Chief Investment Officer (OCIO) acts as a legal and ethical investment fiduciary to ensure optimal asset management on behalf of foundations. Stay tuned for our upcoming blogs regarding how OCIOs approach the day-to-day management of foundation wealth.

HighView is an experienced asset management firm for affluent Canadian foundations. We are investment fiduciaries and would be happy to discuss our goals-based investment approach with you and your Foundation Board. Schedule a complimentary discovery session now.

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