Fund Status Notes for 2022
Fund balance represents accumulated donations plus investment earnings on these donations. Investment earnings are allocated to granting, operating cost recovery and to growing the accumulated donations to account for inflation. For a more detailed explanation of the fund balance, refer to page 7.
Granting: Our spending policy
A fund does not distribute its total net income each year. Instead, a spending amount is calculated for each fund in accordance with the Foundation’s spending policy. A Foundation-wide spending rate is determined annually based on long-term investment return expectations, reserve requirements for years where returns are below average, and Canada Revenue Agency’s disbursement requirement.
The most recent federal budget introduced proposed legislation to increase the disbursement quota for foundations to 5.0 percent from 3.5 percent annually. Hamilton Community Foundation meets this quota through its granting and charitable activities; this legislation will take effect for HCF’s fiscal year beginning April 1, 2023. As our investment income supports both granting and operations, the increase is significant. Over the next several months, our staff and Board will review any amendments required to our investment policy and spending policy to accommodate the change.
For 2022-23 the spending rate has returned to the pre-pandemic rate at four percent. To account for investment market volatility, and in accordance with best practices for endowment management, the spending amount is calculated using the spending rate applied to the fund value averaged over a period of time, rather than at a single point in time.
Investments traded in active markets are reported at fair market value. Investments not actively traded are recorded at their cost less any impairment of their value.
To support our strategy of aligning our assets with our mission and to provide a more diverse and robust portfolio, HCF has committed to investing in alternative asset classes including loans to charities and not-for-profits, private debt, real estate, infrastructure and private equity. These alternatives are consistent with the Foundation’s long-term investment horizon and liquidity requirements. Since these investments are not actively traded, they are valued at cost. These alternatives total $31.6 million.
HCF invests according to policy guidelines established by the Board of Directors. Two committees of the Board oversee investments to ensure compliance with the policy:
- Public market portfolios are managed by two professional investment firms and are overseen by the Finance & Investment Committee. This committee reviews the investment managers’ reports quarterly to assess each manager’s performance, and formally evaluates their performance semi-annually.
- Impact investments are overseen by the Impact Investment Committee, with due diligence and other support from professional consultants.
HCF is an endowment builder, thus its policy focuses on long-term investing. It is supported by a reserve account that is currently at its policy maximum.
The investment policy sets out a total portfolio target asset mix, as well as a range around these targets. The public market investment managers have mandates within this targeted asset mix and use their discretion to invest the portfolios within these ranges. Chart 1 reflects the targeted and year-end asset mix. Note that $24 million of private equity relates to a fund established by a donor and is neither part of the asset mix nor of the consolidated portfolio results.
Public market and impact investment returns for the year are as follows:
|Annual investment returns||Public markets||Impact investments||Total portfolio|
Impact investments include loans, community bonds, private debt, real estate investments and private equity. As noted, private equity investments are carried at cost until investments are realized (and cash is returned). The impact investment benchmark is based on investments being carried at market rather than at cost. As gains are realized on private equity investments, the comparison to benchmark will become more relevant. We continue to monitor the performance of these investments closely and are encouraged by both their positive social and environmental impact and their financial returns.
Two long-term portfolios are invested in the public markets with Jarislowsky Fraser and Connor, Clark & Lunn. Chart 2 compares those portfolios against benchmarks as follows:
- Returns for each year against the annual investment policy benchmark for that year
- 10-year annualized return against the 10-year annualized investment policy benchmark
- Both return rates against the targeted investment policy long-term return range
Benchmarks reflect the performance of each market index based on HCF’s specific target asset mix. Comparing actual results to the benchmark measures the value added by investment managers against the average market performance. HCF’s investment policy target is a long-term investment return in the 6.5 to 7.5 percent range.
The investment markets resulted in a more moderate return at 5.6 percent after last year’s record- breaking HCF public market return of 40.8 percent. Overall, for 2021-22, our managers were significantly below the 13.2 percent benchmark return. Market volatility seen in the last quarter of 2021-22 has continued into 2022-23. Recent macroeconomic and geopolitical developments favoured both the energy and materials sectors which make up a very small portion of HCF’s portfolio. Our investment managers invest in companies they believe will provide durable, quality and sustainable growth with less emphasis on cyclical sectors of the markets. As the market rotates away from energy and materials our managers anticipate a return to over- benchmark performance. The Finance & Investment Committee continues to monitor and meet with the managers semi-annually.
Despite the current year under-benchmark performance, the 10.1 percent
10-year annualized return is significantly higher than the targeted investment policy range and is 0.6 percent higher than the 9.5 percent benchmark.
Impact investments enable donations to endowed funds to drive positive change beyond granting, because they represent investments of capital that deliver financial returns coupled with positive social and/or environmental outcomes. In addition, these investments provide a pool uncorrelated to the public markets.
More than 14 percent of our long-term assets are in impact investments. Chart 3 illustrates HCF’s impact investing progress over the past five years with $31.6 million currently placed and another $21 million committed. This brings the total commitment to $52 million, up from $45 million last year. Impact investments cover areas including affordable housing, arts, environment and sustainable development, and support Truth and Reconciliation Calls to Action.
Local loans since inception total $11.9 million with $8.8 million outstanding at year end and an additional $4.1 million committed. Chart 4 shows the impact areas our loans have supported. Since the loan program’s 2012 inception,
$3.1 million in loan principal has been repaid and recycled as new loans. In addition, the interest earned from these loans supports HCF granting.
Nationally and globally
These investments include private equity, private debt and real estate. Many of these investments are long term in nature, are maintained at cost, and do not have a regular income stream. As these investments are maintained at cost, their results include interest income and realized gains, but not unrealized gains. Results for these investments are closely monitored and are reported when realized.
Chart 5 identifies the investment areas, with $22.8 million placed and a total commitment of $39.5 million across 25 investments.
Fund balance includes:
Accumulated donations plus inflation adjustments.
B. Inflation adjustment
Protects the value of distributions over time by adding to the fund’s capital. The Board of Directors annually determines if an inflation adjustment will be made and, if so, the size. This is based on current year returns and whether the last several years of returns have resulted in accumulated investment income greater than the amount required for annual distribution and fund administration costs. Based on the current year returns no inflation adjustment was made for 2021-22.
C. Undistributed income
Accumulated investment earnings less:
(a) Administration fee cost recovery: Each fund is charged an administration fee to recover the investment counsel and custodial fees, administration, financial management and grantmaking costs of the fund. This is calculated in accordance with the fund agreement.
(b) Available to grant: A fund does not distribute its total net income each year. Instead, a spending amount is calculated for each fund in accordance with the Foundation’s spending policy. A Foundation-wide spending rate is determined annually based on long-term investment return expectations, reserve requirements for years of below-average return, and Canada Revenue Agency’s disbursement requirements. The spending rate for 2022-23 is set at four percent for 2022-23. The spending amount is calculated using the set rate, and the fund value averaged over a period of time, in accordance with best practices for endowment management.
Depending on the nature of the agreement, when current investment returns are not adequate to meet the full spending amount, the funds may grant from:
i. amounts that have accumulated from prior years when the returns were greater than the spending amount
ii. capital in down markets, or
iii. reserve established for the fund.
Any amount not spent by a fund in a year is carried forward and available to be used for granting by the fund in a subsequent year.