The OAF Blog

Recycling Capital of Endowments

May 13, 2013

There is no shortage of material to read about the challenge of securing arts funding at a time when government sources are static or facing cutbacks. A recent article in the Toronto Globe and Mail (April 20, 2013) references this in the context of arts organizations winding up, which can be one way of ‘freeing resources’ for younger performing artists.

As I read the article, another reality came to mind – when an arts organization or artistic director decides it is time to close up shop or move on, how is their artistic legacy preserved? We see few solutions or resources allocated to for instance, preserving the choreography and staging of a ballet or archiving music composition. As senior artists or organizations make the decision to retire or are in transition, it is important that resources preserving the best of their art form as a legacy for future artists/arts organizations be  part of the funding equation.


Recycling Capital

We don’t have a perfect solution today to address the question of legacy, but one way the Ontario Arts Foundation is able to continue supporting arts organizations is by ‘recycling capital’. Within the fine print of endowment agreements, is a provision that has turned out to be a quiet blessing to arts groups in Ontario. All endowments contain a provision which states that if an arts organization winds up, or loses its charitable status, the Foundation Board has the responsibility to re-allocate the capital to another arts organization. The endowment capital is not returned to the organization as it winds up, or to the original donors. The capital must continue to be used to support the arts in Ontario through another arts organization. Our Board identifies an arts organization whose arts mission/discipline is comparable to that of the organization winding up. In other words, private capital and government matching dollars (Arts Endowment Fund program) raised to support ‘dance’, will continue to support ‘dance’. The endowment may be added to an existing organizations’ endowment, or we may invite a new arts organization to create an endowment and receive immediate funding. We try, as much as possible, to keep the capital within the same geography/community where private donations were originally raised.

Since the OAF was established in 1991, we have re-cycled over $850,000, money which continues to be invested on behalf of arts organizations across Ontario. The income arising from the endowments is unrestricted and has tangible value to an arts organization.

At a time when arts organizations struggle to secure funding, the security of long term unrestricted annual income becomes quite attractive. Without the burden of lengthy, time consuming annual grant applications, arts organizations gain time to dedicate to their artistic endeavors. This is appealing to young arts groups trying to build a sustainable operation, and at the same time offers comfort to donors, who see their donations continuing to serve their initial purpose.

As the Globe article concludes, nobody thinks there is one solution for all companies. Endowments held by the Foundation are one quiet way that capital is kept at work, supporting Ontario arts organizations as they grow, mature and transition over the long term.

http://www.theglobeandmail.com/arts/theatre-and-performance/making-way-for-new-blood-in-canadas-performing-arts-scene-without-killing-the-old-guard/article11415344/

 

 

Characterizing Donors and Motivations for Giving

April 22, 2013

I recently read a report prepared by a group Hope Consulting – “Money for Good II” which researched factors motivating donor preferences for supporting financially a charitable organization. The motivation for the research was to gain a deeper understanding of the ‘voice of the customer’ for charitable giving – what drives an individual, or a granting organization to decide to financially support an organization. What type of information is key to the decision making process?

It is an interesting read – you can delve into detailed research findings, or scroll through the summary findings. I liked the way the report characterized donors into six segments:

 

¢ Repayer :

“ I give to my alma mater, I support organizations that have had an impact on me or on a loved one”  23% of donors
¢ Casual Giver :

“ I give to well-known nonprofits because it isn’t very complicated”  18% of donors

¢ High Impact  :

“ I support causes that seem overlooked, I give to nonprofits I feel are doing the most good” 16% of donors

¢ Faith Based: “ We give to our church, we only give to organizations that fit with our religious beliefs”  16% of donors
¢ See the Difference :

I think it is important to support local charities, I  give  to small organizations where I feel I can make a difference” 13% of donors

¢ Personal Ties:

“ I give where I am familiar with the people who run the  organization” 14% of donors

 

 Key Drivers

Overall and not a surprise, a key driver for a donation is ‘caring deeply about the cause’ – 35% of donors. Generally donors are not highly motivated by maximizing social impact. Few donors ever research a charity before making an initial donation. When research is undertaken about a not for profit, it is more to confirm the ‘acceptability’ of the organization, and not on finding organizations that are ‘best in class’. Individuals and granting organizations begin to differ in behavior in some respects – individuals want to support organizations which make good use of their dollars. They care about legitimacy, respect and where the funds are going. Granting organizations differ in that they seek to maximize impact and find the most ‘effective’ organizations.  A high premium is placed on effectiveness and impact of their grant. Granting organizations research almost every grant and have a high need for comprehensive information about the organization – they are ‘information hungry’. Any arts organization applying for grants know this well….

 

Loyalty

All groups tend to be loyal with their giving – repeated donations to organizations they develop a relationship with.  All donors would like financial information from the organization they support, followed by information on the effectiveness of programs. It appears that information describing effectiveness of programs represents an ‘unmet’ need, or opportunity. This is an opportunity for not-for-profit to enhance their reporting in order to attract additional or increased support. An interesting comment was made on the role of advisors – the report suggests that advisors tend not to advise clients on where to donate. When you consider that most financial advisors want to be involved in every aspect of a client’s financial affairs, it is interesting that this is an area where they are less involved.

 

The implications of the research suggest that not for profit organizations can be more responsive to donors by:

  • Improving information, particularly on the impact of programs, charitable activity
  • Provide information in more detail, following a ‘consumer reports’ style format
  • ‘Push’ information to where people look for it today – people rarely ‘shop’ for a charity – websites/forms of solicitation to build awareness
  • Adapt constantly – always try new things

 

The report did not break out the not for profit sector, it would be interesting to see if the general results change at all for arts organizations.

For more detailed information, you can access the report here

 

 

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.

 

Strategic Review

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.

 

 

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