The OAF Blog

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.

 

 

2013 Federal Budget – Application to Charities

March 22, 2013

 

The 2013 Federal Budget contains a number of items that will be of interest to charities. The government references a continued dialogue with the charitable sector on measures that can increase the number of Canadians making donations. Initiatives promoted by the charitable sector, such as the ‘stretch tax credit’ or capital gains tax relief on donations of private company shares or real estate were not included. Many of the recommendations contained in the Report of the Standing Committee on Finance – Tax Incentives for Charitable Giving in Canada (February 2013) remain just that - recommendations.

That said, there are measures of interest – a good summary is found in the Charities and Not-for-Profit Newsletter published by Miller, Thomson, a Toronto law firm.

 

Canada Cultural Investment Fund: Endowment Incentives Component

For large charities, extremely positive news in the Budget – the $10 million limit on matching funding through the Endowment Incentives Component of the Canada Cultural Investment Fund is being increased to $15 million for the life of the program ( 2015.)

Economic Action Plan 2013 announces that the Endowment Incentive component of the Canada Cultural Investment Fund will increase to a maximum benefit of $15 million over the life of the program, an increase of 50 per cent. The Endowment Incentives Component of the Canada Cultural Investment Fund helps promote corporate philanthropy and private investment in the arts by providing government grants to match private sector donations.

Starting in 2013, the amount of funding an arts organization can benefit from, over the life of the program, will increase from a maximum of $10 million to $15 million, an increase of 50 per cent. This will help ensure that large arts organizations such as the National Ballet of Canada, the Orchestre symphonique de Montreal, the Banff Centre and the Stratford Festival can continue to demonstrate leadership in building private sector support, while maintaining access to the program for small- and medium sized arts organizations. With this program adjustment, the Government of Canada is taking concrete steps to help ensure that Canada’s arts and culture sector contributes to a strong economy, with arts organizations becoming more resilient and self-sustaining through the continued support of the private sector

 

 

The Diversity of Private Philanthropy

March 04, 2013

People of all means give time, and money to support an art form, artists and organizations important to them. That desire to contribute can be lifelong, and is a process that evolves from being a volunteer, to financial support and ultimately a bequest or legacy gift. The process of determining how support moves from time, talent to treasure is a process that is personal and unique to every person or family.

We are approached by individuals who would like to make a long term gift to support the arts, encourage new artists (scholarship or award) or a particular organization. Charitable gifts can be implemented through a variety of structures. We try to begin the conversation to discover:

  • Would you like your gift to have an immediate financial impact or take a form that supports financially over time?
     
  • Will this be your gift or one that involves your family?
     
  • Is your gift to be made now, or in future as part of your estate plan?

 

The Immediate Gift

For an immediate financial contribution, a cheque or donation of securities is easily accomplished and is tax effective (particularly securities donations) and is gratefully received by the organization. A gift that will benefit over time requires thought and planning, often requiring the involvement of your legal and tax advisors. Charitable gifts are tax effective and where possible, try to implement a gift that is most beneficial to your personal tax status.

 

Specific Purpose

If you wish to retain a degree of influence or control over how your gift will be used, more complex documentation is a requirement. This will happen where you want to restrict the use of your financial gift for a particular purpose or time period. The arts organization you support may have a particular financial need (capital campaign, new production, outreach program) that aligns with your goals. In any situation, it is wise to talk with the organization about your desire to support and learn what can best help the organization meet their arts mission, whether in the short or long term.

As an example, should you decide to make an endowed gift, your intent is to create an income stream for the arts organization and the principal is to remain intact. That can be in ‘perpetuity’ – one way to think is to see this as a gift lasting 100 years or longer. Or, the principal could be held for a fixed period, say 10 or 15 years, during which income and/or some of the principal is paid out. At the end of the time period, the organization benefits from a stable source of funding and perhaps a final capital gift.

 

Honouring a Family Member

In the situation of honouring a family member, considering the benefits of an award or scholarship can be very meaningful to the person and family member – whose personal legacy lives on through supporting future generations of artists.

 

Important Considerations

When making a gift to an arts organization, It is important to understand the organizations’ financial position – your desire to make a long term gift could be counter-productive if the organization is struggling to meet the financial demands of current programs. An arts organization whose operating income covers expenses, may be delighted to receive a long term endowed gift, where the income provides flexibility for planning, adapting and a source of extra income to support their arts mission. You will want to know if the organization has the capacity or access to expertise (such as the OAF) to effectively manage an endowment, or long term fund. Will an endowed gift meet the current or first priorities of the arts organization ? Discussions like this can help you clarify if your long term gift will be of greatest value, today and in future to the mission of the arts organization.

It is always a good idea to consider the contingencies – what would I like to happen to my gift in the event – the organization ceases to exist, or the program it supports comes to an end. Everything has its own life span and having the ability to re-direct to related artistic causes means your gift will continue.

 

For every person wanting to support the arts financially, there are many options that exist to meet your goal or which can be tailored to your financial situation and the goals you and your family have. Making an informed decision is most important, whether the gift is one time and immediate or one that will last a generation.

 

 

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