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Foundations should not use crisis as 'excuse' to preserve capital

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  • Foundations should not use crisis as 'excuse' to preserve capital

EUROPE - Foundations should not use the global financial crisis as an excuse to preserve capital at the expense of beneficiaries, trustees have been warned.

Richard Robinson, investment director at the Paul Hamlyn Foundation (PHF), said: "The oxygen masks are down, but they are fixed to the parents' mouths and not being passed to the children.

"Simply preserving their end-spending power is not doing their duty. Endowed charities are charitable by what they spend, not what they save. They are not banks."

Robinson was speaking at a session of the recent European Foundation Centre's Annual General Assembly in Belfast.

Richard Jenkins, a consultant and author of the recent report 'The Governance and Financial Management of Endowed Charitable Foundations', agreed.

"Many people are now questioning the concept of perpetuity as being the default that foundations should adopt where the deed isn't explicit," he said.

"Moreover, while pension funds are driven by future specific liabilities, endowments in contrast are able to adapt and move in new directions.

"It means foundations are free not only to spend more money but, relative to pension funds, can also be less risk-averse and so potentially make more money."

Turning to investment strategies during the current financial crisis, Robinson said PHF was very conservatively positioned, as "the crisis is serious and will continue for a long time".

PHF's £550m (€683m) portfolio is 55% equities and 15% absolute return funds, real assets such as property and commodities, and cash and bonds.

The portfolio holds the most conservative investments within each asset class.

It also uses "soft market timing" - taking profits when markets are good and putting risk on the table when things are bad.

But Robinson warned against overweighting fixed income.

"Top-quality sovereign bonds are now overpriced, and you have to ask if it's sensible to maintain a long exposure," he said.

There was some agreement among speakers that Europe was going to experience short-term deflation, then enter an inflationary environment over the longer term.

"Monetary growth is declining, and there is not enough credit to finance business expansion, so the climate is becoming deflationary," said Robinson.

"However, there are three options when you borrow money - pay it back, inflate out of it or write it off. Governments are printing money, which means, in the long run, inflation will go up."

Meanwhile, the Van Leer Group Foundation is choosing to hold high-quality, large-cap, well-financed, conservative equities in its portfolio.

Rien van Gendt, vice-chair of the foundation's governing council, said: "In this economy, when you expect inflation, you need to be riding a mammoth. With these assets, we have a chance of growth, but if things get tough, we have something to hang on to."

Delegates also highlighted mission-related investment as one way of furthering a foundation's purpose at a time when there were fewer resources on the grant-making side of the balance sheet.

Support that is not in the form of cash - loans or guarantees, for instance - can sometimes be leveraged to get further loans from banks, they said.

This process requires an evolution in thinking from a simple 'cash in, cash out' model towards one that revolves around assets and liabilities, which in turn moves the grantee organisations to a more sustainable way of thinking, they said.

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