When foundation officials talk about using investments to advance their grant-making goals, they almost always mention the example set by the F.B. Heron Foundation.
A little more than a decade ago, the New York philanthropy began to look for ways to harness its investment portfolio to further economic development and create wealth in economically depressed areas. Today more than $96-million of the foundation’s $266-million in assets is held in investments tied to Heron’s grant-making priorities.
The effort started with Heron’s board taking a hard look at what it means to be a foundation, says Luther M. Ragin Jr., the foundation’s vice president for investments. Heron was founded in 1992 by an anonymous donor.
“The question, frankly, was are private foundations just private investment companies that happen to use some of their excess cash flow for charitable purposes?” he says. “Or is it possible to think of private foundations as stewards of resources that can be applied in a broader way to tackle some of the problems and challenges that their missions and program areas identify?”
Now the Heron Foundation has become even more ambitious: It is creating investment products that will attract other investors who want to help depressed neighborhoods and emulate its goals for encouraging homeownership and spurring small businesses.
By 2004, Heron had made investments in support of its charitable mission using a variety of asset classes — in its short-term, liquid investments, bonds, private equity, and real estate — but stocks had the foundation stumped.
“There were lots of socially responsible investment products that were available and had been available for some time, but very few of them actually were closely related to our mission,” says Mr. Ragin.
Creating an Index
The foundation began to wonder if there was a way to determine which publicly traded companies had the best records as employers, investors, and philanthropists in low and moderate-income neighborhoods.
Heron worked with Innovest Strategic Value Advisors, an investment research company in New York, for almost two years to develop a methodology to identify those companies. The criteria used to judge companies include the neighborhoods where they base their operations, their employment and procurement practices, how much they get involved in charitable causes, and whether they take steps to reduce the amount of damage they do to the environment.
To test the index, the foundation invested a portion of its stock allocation — $10-million — using the methodology for two years.
“We wanted to make sure that this was capturing something that was socially useful,” says Mr. Ragin. “Could we really distinguish those companies with above-average practices with respect to underserved people and communities, and secondly, would the performance of such a portfolio of companies be competitive?”
The test was a success, so this year Heron hired Neuberger Berman, a wealth-management company in New York, to create a stock fund, the U.S. Community Investing Index, based on the criteria it had developed with Innovest. Heron receives a licensing fee from Neuberger Berman for use of the methodology it developed.
Neuberger Berman is owned by Lehman Brothers but is not part of that company’s bankruptcy proceedings. Mr. Ragin says that while Neuberger Berman manages the fund, the assets are held by an independent third party. If at some point the company becomes unable to fulfill its obligations, he says, Heron would transfer the license to another asset-management company.
According to Mr. Ragin, several hundred million dollars have been invested in the U.S. Community Investing Index, which has been available since May, including $25million from Heron’s endowment.
The index has not been immune to the bloodletting on Wall Street. As of October 31, it had declined 31.4 percent for the year. But Mr. Ragin points out that even with big losses, the fund did almost 1.5 percent better than the Standard & Poor’s 500, which had lost 32.8 percent.
Mix of Funds
Heron is also working on another investment product to promote its mission: a fund made up of privat-equity real-estate funds that focus on urban neighborhoods where mostly poor and moderate-income people live.
The benefit of that approach is that it helps investors diversify their holdings — the fund will probably include a mix of regional and national funds — and it will not take a huge commitment, explains Mr. Ragin.
“If you were trying to get diversification across five, six, seven real-estate funds with minimums of $5-million to $10-million each, you’d have to be willing to invest $30-million to $70-million,” he says. “Being able to invest through a fund-of-funds vehicle allows you to achieve diversification with a smaller initial commitment.”
The fund has already attracted three big investors — Heron, the Annie E. Casey Foundation, and the Prudential insurance company — and a search for a manager is under way.
The investment products that Heron is developing are part of a larger awakening by companies and investors to the economic potential of underserved areas, says Mr. Ragin.
“Just as we’ve begun to appreciate that there’s opportunity in emerging international markets,” he says, “there are, in our own backyard, markets that have been overlooked or undervalued that may represent significant opportunities as well.”