The OAF Blog

Investing in a Low Growth Environment

August 13, 2015

We are sometimes asked by an arts organization why the 2015 income paid from their endowment was 4.5%, when the Foundation earned investment returns of almost 14% for the year. There are two answers to the question:

    • Our investment policy goal is to earn returns ( interest, dividends, capital gains ) that allow for consistency in income payments year over year. In years where portfolio returns are particularly strong, we ‘bank’ some of that return so as to be able to keep income distributions stable against years where returns are lower/more volatile. The Board takes a long term view and considers long term results as well as short term  returns making the annual payout decision. In 2014, one year returns were almost 14%, but looking at 10 year Foundation investment returns, the average is closer to 7%.  An income return of 4.5% is in our view, reasonable and allows for a reserve (“cushion”) to cover future inflation and periods where markets are volatile or returns are lower.
       
    • The second reason is that the Board and our investment managers believe that the double digit investment returns of the past 3 to 5 years are not likely to continue.

Lower Investment Returns

Opinions will always vary, but there is a common view that suggests the world is moving, over the next 3 to 5 years to an environment of lower investment returns. Slower global economic growth, appears to be the new norm. This results from continued high levels of government  and household debt,  aging demographics as boomers retire  (they save more and spend less which impacts government tax revenues), and slower transitioning of emerging economies.  After a period of years where interest rates have been at low to near zero levels, it is anticipated the US Federal Reserve will begin to slowly increase interest rates in 2015. The increases are expected to be small and Canada will likely lag moves in the US.  Canada’s economic growth is more mixed than the US, due to challenges faced by an energy and commodity led economy.  

The US economy remains a global driver and is slowly improving, but at a slow pace. As it strengthens, US interest rates are expected to rise.  High equity returns of the past 3 to 5 years have resulted in high asset valuations. Our managers don’t see this as sustainable. The likely outcome, in the near term are positive equity returns, but at lower levels closer to a 10 year average of 5 to 7%. Our expectation is that the managers the Foundation employs will achieve, and exceed those returns.

Investment Strategy

We believe that equity and fixed income markets will deliver positive, but lower total returns in 2015 and for the next 3 to 5  years. Our strategy and asset allocation policy continues to be biased towards equities,  and is focused on high quality companies, well managed, holding conservative balance sheets and a history of generating positive returns.

We believe the beneficiaries of endowments want their capital to be protected, to grow and to deliver a sustained level of income. In times where other sources of income to an arts organization are more variable, this stability is important and a comfort as an organization builds its future arts programming.

 

 

Arts and Aging

June 30, 2015

I’ve observed a rise in published materials and articles on the intersection between the arts and the areas of aging, healthcare and wellness. The driver may be the “Boomer” generation, who as they retire seek to keep active, learning and finding a place for the arts in their lives.

Pre-War Generation
When you consider that one of the most active participants and financial supporters of the arts are the ‘pre-war’ generation, this is important for arts organizations to incorporate into arts programs. It seems clear there is a general recognition that the arts ( in all disciplines ) benefit older adults emotionally, cognitively and socially. A number of research initiatives indicate that participating in the arts is good for the body, psyche and brain and warrants investments to enable participation.

Arts Integration
Integrating the arts with this age group is increasingly moving beyond a ‘nice to have’. Providing culturally enriched programming enhances quality of life, engages this sector and sustains deeper relationships with arts and culture organizations. We know this manifests through volunteerism by retirees who have time, energy and experience to bring to an organization. It also reflects in current and legacy financial support. 

This is a great opportunity for arts organizations to review programs, community engagement and education activities to more broadly include and appeal to this age group. It is an opportunity to be more intentional in providing culturally enriched programming for this age cohort.

Blog Posts & Video
Two recent posts I read provide interesting background on the topic – a series of conversations organized by Barry Hennius and a Huffington Post commentary on a US conference organized by Aroha Philanthropies. There is a particularly charming short video clip titled ‘The Wall’ on the Aroha Philanthropies website.

This intersection between aging and the arts can be a a great opportunity for arts organizations and the patrons who participate, attend and support. As one of the posts concluded –..”Happily, growing older is looking a lot more promising, interesting and even exciting.

 

 

2015 Federal Budget Measures Affecting Charities

May 04, 2015

A measure Canadian charities have long lobbied for was recognized in the 2015 Federal Budget announcement on April 21st. An exemption from capital gains tax will be available to certain disposition/sale of shares of private corporations and real estate. It will apply to dispositions made after 2016 and the tax exemption will apply to:

  • The cash received from the disposition of shares of a private corporation or real estate where the proceeds are donated to a qualified charitable donee within 30 days of the sale transaction and the shares or property are sold to a buyer who deals at arms length with both donor and qualified charitable donee

  • The amount of the capital gain to be exempt from tax will be based by reference to the proportion of the cash donated to the total proceeds of sale ( i.e. not all of the proceeds are donated to the charity )

This has long been sought for by Canada’s large charities, but can benefit all charities where a donor wants to provide financial support, but a significant portion of their personal wealth is held within a private business.

Limited partnerships
A more ‘technical’ measure will now provide that a registered charity will not be considered to be carrying on business where it acquires or holds an interest in a limited partnership. This expands investment opportunities for charities, where the investment is intended to be a passive investment, and the charity does not hold more than 20% of the interests in the limited partnership, and the charity deals at arms length with the general partner.
 

Canada 150 Community Infrastructure Program
A new program – the Canada 150 Community Infrastructure Program will provide funds to support the expansion and improvement of existing community infrastructure, which may provide towns and cities will resources to include cultural projects as well as those supporting tourism, sport and recreation. To help celebrate Canada’s 150th anniversary, $210 million will be funded over 4 years to support community events to recognize this milestone in Canada’s history. This funding has been much awaited by the arts sector and hopefully details arising from the budget will make clear how the funding can be put to work. Funds will be invested over 4 years, starting with $24 million (nationally) in 2015.

As always, the devil will be in the details of the budget measures and how this will be implemented. Happily there were no new measures adding compliance requirements to be imposed on charities.

 

 

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