On July 16, 2020, members of CFA Society Chicago, among others, gathered on Zoom to hear Roy Swan, director of Mission Investments at the Ford Foundation, speak about the Ford Foundation’s Mission Investments strategy as well as Mission Investments broadly. Swan opened his presentation with background about the Ford Foundation and how the Mission Investments team came into existence, he then proceeded to detail the impact of the foundation’s Mission Related Investments portfolio to date before closing out with some Q&A moderated by CFA Society Chicago’s Jeremy Heer, CFA, senior portfolio manager of the University of Chicago Endowment. The presentation began with background on the Ford Foundation.
Background on the Ford Foundation
Swan opened with some background information about the Ford Foundation, noting that it was founded by Edsel Ford in 1936, over 80 years ago. Today the foundation has 11 offices around the world and boasts a diverse 16-member board as well as a diverse team. Swan is located at the Ford Foundation’s Center for Social Justice, which was established in 1967 in New York City. In his role as Director of the Mission Investment Team, he oversees a diverse team of individuals that are responsible for both the Mission Related Investments (MRI) Portfolio, the Program Related Investments (PRI) Portfolio, and grant-making. After covering the history of the Ford Foundation, Swan proceeded to discuss the development of his team.
The inception of the Mission Investments Team
Swan pointed the audience to a New York Times article from April 2017 that discussed the Ford Foundations foray into Impact Investing. He pointed out that the challenge in obtaining buy-in for the strategy was proving that impact investments could provide a sustainable return. As a foundation, Ford has a hurdle rate for its investments of 8%, as such the MRI Portfolio has a goal to “invest in endowment capital to help solve social problems while seeking to achieve a total return consistent with prudent risk taking.” Swan’s MRI team seeks to achieve these returns through investments in affordable housing, biotech and health technology, diverse owned companies, financial inclusion, and quality jobs for minorities. Diverse owned companies is currently the largest portion allocation of the MRI portfolio. After covering the inception and strategy of the MRI portfolio, Swan directed attendees’ attention to the Ford Foundation’s recent announcement of an unprecedented $1 Billion dollar bond issuance that is the first labeled social bond by a non-profit foundation in the U.S. taxable corporate bond market. Next, Swan discussed the impact of the MRI portfolio.
Impact of the Mission Related Investments Portfolio
Swan offered several metrics that demonstrated the MRI Portfolio’s impact. Starting with affordable housing, Swan noted that 43% of American renters spend over half of their income on rent. To combat this widespread problem the foundation has invested with managers that have supported over 16,000 housing units that provide access to social services, health improvement, quality transit, and green tech.
Next, Swan discussed the portfolio’s Financial Inclusion investments, which are selected based on their support of the mission to expand inclusive financial products and services available to underserved communities. To date the portfolio has invested with managers that have impacted over 23 million emerging markets consumers through investment in products such as agricultural loans, high quality education, quality healthcare, and quality life insurance.
Swan then moved on to discuss quality jobs investments and touched on how technological innovation and globalization have led to lower wages and limited upward mobility in traditional workplaces. The portfolio has invested with managers whose investments have created 534 jobs, improved almost 3,000 jobs, and provided over 80% of these jobs to women and minorities, combatting the aforementioned trend.
The discussion of the portfolio’s impact concluded with the portfolio’s largest allocation, diverse managers. Before diving into the impact the portfolio has had in this space, Swan took a moment to discuss the “moment we are in,” addressing the current pandemic, recent riots related to racially-driven police brutality, and the history of racial injustice in America. He prefaced the discussion by acknowledging that it is an uncomfortable topic to discuss, but he noted that while “nobody wakes up intending to perpetuate inequality, doing nothing doesn’t help the problem.” To quantify the level of inequality in the US investments industry, Swan pointed out that only 1% of the $71 trillion in AUM in the US is managed by women-and minority-owned firms. The MRI portfolio seeks to shift this statistic by investing in funds led by diverse managers. At present, 31 of the 37 funds in the MRI Portfolio are Diverse-Manager owned and 57% of the MRI Portfolio’s AUM is managed by diverse fund managers.
Defining success and mission investments broadly
To conclude the keynote presentation, Swan offered some lessons learned from the last two years of directing the MRI Portfolio, and defined how success is measured by his team. He started his lessons learned by stating that authentic and skilled impact investors are out in the field today, so the achievement of risk adjusted returns for impact is not just a fairytale. However, he also pointed out that impact funds may have higher costs due to impact tracking. He concluded his lessons learned by contrasting impact investments to the traditional private equity investment. Specifically, he pointed out that impact strategies are generally long-term in nature, which is in stark contrast to the traditional private equity that promotes destructive short-term behavior in the pursuit of superior returns. Next, Swan provided his definition of success for the MRI Portfolio as well as for impact investing broadly.
First and foremost, success is measured by double bottom-line performance—that is not only the fiscal bottom line, but also the social bottom line. Swan hopes that the actions of the Ford Foundation, which seek to broaden the vision of fiduciary duty to include positive impact, will raise corporate awareness of the inequities that exist in our economy and inspire action to balance the scales. He acknowledged that sustainable returns are paramount in the successful growth of the impact space, but he also noted that, in contrast to the Friedman Doctrine, profits aren’t the end-all be-all. To support his point he pointed to quotes J.P. Morgan Chase’s CEO, Jamie Dimon. Swan closed his keynote by sharing the “virtuous cycle of capital,” where impact companies make socially positive investments and asset owners take a long-term approach which allows a long-term rate of return for impact funds. The presentation concluded with Q&A.
Q: How is additionality maximized in impact investing strategies?
A: Swan has found that impact strategy can be steered more easily at private market companies because less capital is required to build influence at those companies.
Q: Does the MRI Portfolio invest in startup impact funds?
A: There is an allocation of the program-related investments portfolio that is dedicated to startup asset managers.
Q: How does the Ford Foundation source their impact investments?
A: Sourcing investment has mostly been through the Mission Investments team. They have a diverse team with diverse networks, so Swan leans on his team to source investment opportunities within their networks.
Q: Do you think the Ford Foundation will construct their entire portfolio to be impact driven?
A: Over time Swan expects the impact allocation can continue to expand as long as acceptable returns are realized. Additionally, the growth and success of the space can be aided by partnerships with educators who can spread the message that impact investments are not losing investments.
Q: Does the MRI portfolio make direct investments into impact companies?
A: Currently, the MRI Portfolio only makes indirect investments through Fund Managers. However, the portfolio may venture into direct investment in the future.
Q: Does the MRI Portfolio follow standardized metrics to measure the success of impact?
A: Swan reiterated that the portfolio is measured relative to the same sort of financial metrics as any other investment strategy. For impact measurement, there isn’t yet a widely accepted standardized approach. So the MRI portfolio tracks impact through metrics like those shared in the presentation, but they don’t follow a standardized approach.
Q: What actions do you tell portfolio companies to take for employment impact?
A: Swan advocates for management benchmarking. He and his team lean on models such as those published by the Good Jobs Institute and the Shared Prosperity Model.
Q: What impact strategies are currently the most attractive?
A: There is significant capital from the MRI Portfolio being directed toward healthcare and biotech industries as well as the global south geographic region. Investments are made in spaces where the MI team has competence. Once an attractive idea is escalated, the team works to identify if the idea is investable for the MRI portfolio (i.e: if there are currently fund managers pursuing those strategies).
Q: What needs to be changed in the regulatory framework to make impact investing the norm?
A: The impact investing space does not require regulation to grow and succeed. It only needs individuals with the moral resolve and skills necessary to take action to grow the space.