Our impact and lessons learned
Five years ago, the Ford Foundation made a $1 billion commitment to impact investing, the largest effort among all foundation endowments. The news of the commitment spread far beyond philanthropy. It garnered the attention of The New York Times and even Harvard professors, who came knocking on our door with a request to study this historic initiative as part of the Business School’s curriculum. Never before had a foundation, operating within its fiduciary duty, taken the risk to deploy such a large pool of capital to address both major social challenges and seek financial returns.
But in the announcement’s bright glow and high hopes that Ford could prove generating financial returns and social impact is possible, we also encountered some skepticism that our goal was little more than a pipe dream. Such skepticism is healthy—and it’s one reason why we spent a year researching whether we should put our endowment capital at risk and place a big bet on the emerging sector of impact investing.
So far, so good.
Since that announcement five years ago, our Mission Investments portfolio has generated measurable social impact across all of our areas of investment, including affordable housing, diverse fund managers, financial inclusion, quality jobs, and health tech. As of 2021, 80% of Mission Investments’ fund managers are at least part-owned by women and people of color. Our affordable housing fund managers have helped preserve over 23,000 rental units for families across the United States. Our financial inclusion fund managers have reached over 76 million consumers in emerging markets, helping to provide them access to savings, remittance, insurance and other financial products. And our health-tech fund managers have invested in 15 companies developing diagnostics, therapeutics, and vaccines in the Global South.
Some wondered whether we’d have trouble finding enough prudent market-rate impact investments. We are pacing well with our 10-year gradual investment program, having approved investments totaling 90% of our available capital ($385 million out of $425 million allocated through December 31, 2021), with a deep pipeline of potential investment opportunities.
Most of that early skepticism revolved around our ability to generate the financial returns required to sustain a perpetual foundation. A perpetual foundation must generate financial returns over the long term that amount to our spend rate plus inflation, a figure that has hovered between 7-8% over the last few decades.
Mission Investments has generated a compound annual return rate of 28% from its inception in 2017 through 2021. That’s triple the return required to sustain the foundation’s perpetual existence. While we are pleased with that strong performance, which was driven by careful investment manager selection and effective portfolio diversification, we also know it is far too early to draw a conclusion about the program’s long-term financial sustainability.
First, because our portfolio is still young, our financial performance is largely based on unrealized gains. Second, our performance was achieved during a period of extraordinarily favorable market conditions. Third, we are currently living through a period of high inflation, rising interest rates, and slowing growth. Like any investment, our portfolio is not immune to market forces and we expect it to fluctuate in value over time.
We also acknowledge that our portfolio cannot be compared with traditional endowment portfolios. For example, our portfolio has lower liquidity requirements than a traditional endowment, which allows more capital to be invested in higher-earning illiquid asset classes rather than highly liquid, lower-risk, lower-yield securities and bank accounts.
However, while it is still too early to draw a full conclusion about Mission Investments, we are thrilled our portfolio is on good footing. In 2021, we instituted a policy to manage the Mission Investments endowment contribution to the foundation’s spend rate because our portfolio has generated cash distributions that are more than sufficient. It was our hope when we made this bet, and we plan to increase our contribution to spend gradually over time as the portfolio matures.
We’ve produced our results in large thanks to an independent, interdisciplinary in-house team not only responsible for advancing inclusive capitalism through Mission Investments but also managing our long-standing Program-related investment fund and grantmaking. We elected the in-house model to maximize adherence to our mission, draw upon internal talent, and avoid the loss of control that can come with outsourcing investing. Our team includes four investment professionals, one investment operations professional, and one senior program officer, whose collective backgrounds include investing, corporate finance, investment banking, law, general management, and investment accounting and reporting. At the end of 2021, our team was 100% diverse across race and gender. Our Mission Investments are overseen by a committee of the foundation’s board, which is 60% women and 60% people of color. Our diversity is a great strength because it brings a range of experience, points of view, and networks that facilitate our ability to source and attract a wide array of investment opportunities, especially diverse fund managers.
Our investment strategy has evolved over time. We started with two areas of investment: affordable housing focused on multifamily rentals in the U.S. and financial inclusion in the Global South. We have since added four more areas: diverse fund managers and quality jobs in the U.S., biotech/healthcare in the Global South, and inclusive capitalism across all markets. We will diversify our current 100% private markets allocation by 2023, as originally planned, committing 15% of our portfolio to public equities through our focus on diverse fund managers.
Looking ahead to the next five years, we’ve set some new goals for Mission Investments. First, we plan to invest more capital in quality jobs. We are convinced that superior operational design and human capital investment can generate significant financial returns. It stands to reason that employees who are treated like owners and given voice alongside good wages, benefits, training, adequate sick leave, and scheduling certainty training will act like owners. Employees who act like owners can deliver higher productivity, more innovation, lower attrition, and higher profitability.
Second, we want to spread the word that fiduciaries have wide latitude to pursue impact investments, both because they are not automatically concessionary and because investing in the best interest of society is by definition in the best interest of beneficiaries.
Third, we aim to support efforts to identify and quantify the externalities companies contribute to society. An externality can be a positive or a negative. For example, a company that raises its wages above the level requiring government assistance contributes a positive externality to society because it reduces taxpayer burden. A company that discriminates against employees contributes a negative externality because such discrimination can increase workplace injuries and healthcare costs. Another example of an externality is the damage caused by pollutants, the cost of which often falls to governments and taxpayers. Companies might knowingly or unknowingly contribute externalities to society. We believe investors, elected officials, policymakers, society, and the companies themselves all benefit when a company’s costs and benefits to employees, taxpayers, and the planet are well understood.
Finally, we want to encourage more asset owners to commit capital to impact investing. While we’re still new players in the section, our results have inspired us to not only keep investing but to continue to learn as we go—and share what we learn—to motivate others and invite their collaboration as impact investing grows.