GERMANY – German foundations need to improve their control mechanisms in terms of external advisers and the development of an active portfolio strategy, according to a recent report from the Centre for Social Investment (CSI) at the country's Heidelberg University.
Of those foundations with a board of trustees or an advisory board with a brief to control long-term investment strategy, 73% had neither asset management specialists on the board, nor regard asset management expertise as a relevant skill when appointing to the board.
Dr Volker Then, managing director, CSI, which carried out the survey in conjunction with the Association of German Foundations, commented: "The most important finding of the survey is that almost all the largest foundations are dependent on external advice."
"So it is all the more important to establish a good mechanism of control, because they will have to supervise their advisers," he added. "This could be achieved either by competitive mechanisms to determine their asset management service providers or by tight governance control."
The sample consisted of the 200 largest German foundations in terms of assets to invest, although only 44 foundations took part. All foundations have assets worth over €20m, the average size being €33m.
Of the sample replying, 41% do not publish annual accounts, which means they avoid any public control through the transparency mechanism. German foundations are not required by law to publish their accounts, although they have to send them to the supervisory authorities.
Most respondents monitored their financial results on a monthly basis, with a similar number conducting quarterly reviews.
However, one-third only do so every six months, which Then said is "of concern".
Furthermore, while most foundations have a supervisory board to which the executive board is accountable, 41% have only a single-tier executive board.
Then recommended that all foundations should publish annual reports, including full accounts and balance sheet.
He added: "They should also have a competition-specific governing body, and either a financial committee or specialist members of the board with expertise in asset management.
"We would recommend a two-tier board structure, either by setting up a second-tier board with reviewing or supervisory powers over the executive board, or by giving those powers to the finance committee."
But he said there was no need for more supervision by public authorities: “What we do need is more public awareness of generating good returns, in order to make these foundations as effective as possible."
The survey also revealed that over half of German foundations have not changed their investment behaviour following the financial crisis.
Those foundations which have responded to the crisis said they pay more attention to financial management (70% of those which reacted) or have invested in less risky asset classes (55%).
"This conservative approach to asset strategies is one of the main findings of the survey," said Then.
Legally, German foundations are required to maintain their asset value, reducing their appetite for taking on risk.
"But fixed income investing will never give you anywhere near the returns needed to balance inflation," Then added.
'With inflation at 2.2% you need an annual return of 6.6% to retain real asset value, given that legally, German foundations can set aside one-third of the revenue generated to a general reserve fund to balance inflation."
However, Then said that the lack of strategic changes in response to the financial crisis was partly because the bigger foundations were already pursuing market opportunities, so did not have to change direction.
When asked their opinions of different asset classes, respondents were positive towards real estate (seen as secure), slightly positive towards foreign currency and global market opportunities, neutral towards fixed interest bonds, and negative towards emerging markets.