Capital Investment Concept
« Humanity has the ability to make development sustainable to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs. »
Quoted from the UN report "Our Common Future" from 1987.
FEAT poses the following challenge to its fund management: On the one hand, it wants to comply with the statutory obligation to invest the capital in a profitable way in order to generate income needed to fulfill the objective of the foundation. On the other hand, investment funds often contradict the objective of the foundation. The strategy suggested in this draft paper will be centered on the solution of this dilemma.
The endowment fund of the foundation comprises all capital assets of FEAT. These are made up of the basic assets and their yield. The basic assets include all material assets available to the foundation upon their coming into existence, e.g. buildings, facilities, real estate, securities, shares and receivables.
The value of the basic assets therefore also includes the gain and loss of value in time and is not limited to the nominal value at the time the contribution is made. Moreover, the basic assets can, at any time, be supplemented or increased with subsequent non-monetary donations.
Important: Monetary donations are not included in the aforementioned donations, as they are intended to be used for the purposes of the foundation closer in time.
The financial basis of these basic assets is the source of income FEAT requires to fulfill the objective of the foundation. The yields, or "harvest from these basic assets", is allotted to group II of the endowment, including interests and dividends as well as expenses for leaseholders and tenants of the real estate.
Regarding the maximum value of the basic assets, there are no limits set by neither the German Civil Code nor any other acts governing foundations. In
order to fulfill its objective in a permanent and, most importantly, in a sustainable way, the supervisory authority of/for FEAT - before its establishment - required that the initial basic assets correspond to a value with a minimum of 9 digits. The persistently low level of interest rates is per se a justification for the need for cyclical monetary and non-monetary donations.
Methodology and Structure
The main responsibility of the asset manager is prescribed by the imperative of capital conservation. This imperative is as follows: "The endowment capital must be preserved in its undiminished total amount!" The principle of capital conservation provides for that only the earnings, and not the substance of the assets, may be used to fulfill the objective of the foundation. The necessity of preserving the real value is a consequence of the requirement to fulfill the objective on a permanent basis. There are no specific instructions given in the legal regulations concerning foundations regarding fund management. The only binding requirement is the permanent and sustainable fulfillment of the objectives stated in the statutes.
The capital investments always also have an impact on social development, which can be positive as well as negative. Accordingly, the FEAT capital might be invested for purposes conductive to the objective of the foundation (EG 4, see fig.) or also to the detriment of the goals (EG 3, see fig.).
In this respect, the fund management work is considered to be in line with the objective of the foundation if its efficiency is between efficiency degrees 1 and 4 (see fig.): EG 2! As part of a study conducted by the professorship for financial economy at the University of Stuttgart, foundations stated that increased risk was the main reason they did not invest in sustainable assets. The second most important reason is that they did not believe that such investments had a positive effect on the environment and social circumstances. (Schäfer, 2003 b, 311-312)
Influence on the Market
Lets take the Bill-Gates Foundation as an example for a highly controversial paradox: On the one hand, Bill spends billions of dollars on combating poverty and disease while, on the other hand, he invests his enormous stock of basic assets in companies that sabotage the objective of the foundation by destroying the environment and social structures. FEAT investments should only serve the purpose of the foundation and should be used in such way that they do not sabotage its goals - on the contrary: these investments should be conductive to the objective of the foundation. However, as FEAT exclusively seeks to invest in such purposes, a question arises: How safe and profitable are its investments?
The issue of sustainability is one that arises in a growing number of contexts and is not merely a short-lived "hype". Rather, it is the result of a growing, unstoppable trend towards increasing interdependency of foundations and the financial industry, who, as a consequence, need to collaborate more closely. Already in the 17th century, early industrial and capitalistic expansion fueled the fear of a civilization-threatening scarcity of resources in Europe. Inspired by the extensive forestry reformation of the "Sun King" Louie XIV, among others, Hans Carl von Carlowitz, the royal Polish and electoral Saxonian counselor of chamber and mines as well as first captain of the Ore Mountains, pleaded for a responsible use of the environment and natural resources. In the year before his death, he produced his masterpiece "Sylvicultura oeconomica", which coined the term "sustainability". Of all crisis years, it was in 2008 that this term engendered by Carlowitz was revived to such extent, that today, there now even is an annual "German Sustainability Award" (Deutscher Nachhaltigkeitspreis - DNP). Sustainability, however, also implies preventing the loss of capital, which can be achieved similarly to a virus prophylaxis, by adamantly rejecting speculative investments, just as FEAT does. Speculative investments may promise short-lived, high yields, but at the same time also imply equally great risks (which is why the viral loss of substance of ecological and economical resources are inevitable). And this is the precise reason why integrating non-financial information in the FEAT investment portfolio was such an important criterion for selection, as otherwise, sustainable investments are not possible. In simpler terms:
ecological + economical = sustainable!
Independence from the Industry
Certain industries, e.g. weapons, chemistry, pharmaceutics, mining and aerospace, do not qualify for the sustainable portfolio, neither in positive nor negative terms, as they are either deliberately excluded or unattractive from the sustainability standpoint. This results in including only such investment titles in our sustainable portfolio that do not come from the industry, but have a greater degree of correlation.
In the case of FEAT, however - and this is what makes its concept unique - is that the investment portfolio is nearly undepletable, as promoting the talents of highly gifted individuals is, on the one hand, an activity that can be carried out irrespectively of the industry and, on the other hand, the benefit created can be offered to nearly every industry. Hence: FEAT has a unique industry advantage!
"... foundations are among the oldest instruments of civic action..." (Strachwitz, 1994, p. 9.)
Foundations play an indispensable role within our civic society and are therefore, in a sense, guarantors of democracy and civil order. Therefore, FEAT, as non-profit organization, contributes to social progress with its innovative and complementary function.
According to literature, a perfect foundation portfolio consists of a suitable mixture of bonds, shares and alternative investments. However, these alone are not enough to secure the ability of the foundation endowment to perform. Shares, for example, may offer attractive yields on the long term and are available daily as they are publicly noted. However, they often only yield small dividends and are also subject to exchange rate fluctuations, which is why they are most often underweighted in the asset portfolio. Therefore, "alternative investments" are to be encouraged, albeit with the necessary caution, only and as far as it is propitious to the non-profit nature of FEAT. For foundations, these are general monetary investments in private equity, certificates, hedge funds, raw materials, etc.
Risks and Opportunities
Investments do not only open up opportunities for FEAT but also bear risks, especially that of potential conflict of interest as a result of a separation of fund management and use of funds.
This separation is the greatest challenge FEAT faces when it comes to using the capital in accordance with its goals and therefore increasing its efficiency. The incompatibility of these two core issues suggests, that fund management exclusively pursues economic gain while the field of resource allocation alone is responsible for achieving social goals.
However, as soon as one area wants to integrate the goals of the other area, a conflict of interest, and therefore risk, arises. This could, for example, manifest as a lack of interest of the board of directors, which is mainly focused on promotional activities and therefore neglects the issue of fund management and "sustainable investments.
As a consequence, this lack of interest would pose an additional challenge, as if the board of directors has no interest in
-- FEAT supports this view, with reservations.
sustainable investments, such investments are simply not made. On the other hand, it is not within the power of the asset manager to convince the board of directors of the advantages of sustainable investments. This conflict of interests however, would also arise within fund management itself, as the latter will unavoidably face the challenge of coalescing the economic and non-economic goals of the FEAT capital investment. However, as long as the foundation does not have a global view of its financial resources, it will always make a distinction between economic goals or fund management and non-economic goals in the field of resource allocation. This would mainly complicate the vital integration of non-economic goals. Therefore: What option should FEAT favor if the investment in a given company is in line with the talent- promoting goals of the foundation but yields less than an
investment in a company, which is not in line with the mission of the foundation but promises higher yield? Or, in other words: Which goal should be given priority? The economic goal or the one that would further the mission of the foundation? A publication by Ernst & Young from 2002 clearly indicates that "combining investment assets and a non-profit goal complicates commercially rational decisions and leads to conflicts of interest that cannot be resolved." This means that while on the one hand, the foundation solves such conflicts of interest by aligning its investments with its goals, it would, on the other hand, cause a new conflict of interest in fund management.
LP and Dr. Schmitt agree that both boards will consider and jointly revise their decisions in this regard.
Conclusions and Outlook
The arbitrary categorization of the socio-economic and purely economic value, which in natura are actually two sides of the same coin, is expressed in the well-known play of words doing well and doing good. Without the many non-profit organizations, the gross domestic product of any country would be much smaller. After all, their promotional activities create those economic values (e.g. saving expenses for third parties) without which no for profit organization would be able to achieve comparable success. Ultimately, the business activities of the later account for innumerable social and ecologic values (negative or positive). FEAT, therefore, also expressly takes social yield into consideration (Blended Return on Investment) to the extent that it can hedge them effectively. see fig.
FEAT can only achieve full efficiency if and when it identifies with its endowment to 100% and uses it as an active resource. This also aims at a change in thinking in society, as FEAT sees itself as a "stakeholder of civic society" and can put its innovation and complementary function to the service of a positive change within society.
However, in spite of all ideals: fund management, by self-definition, will have to take a central, crucial role, as in essence, FEAT is nothing more than an estate. Fund management therefore provides not only the largest resource, but also the greatest lever for the efficiency of the foundation.
In conclusion, the legal form foundation alone has an independent effect in every aspect: financial, ideal and substantial! FEAT is not bound to a specific era - it is a legacy independent from any generation or economy or time, carried on with its values by its endowed assets in the hand of responsible fund management.