of that on the debt side is now in private sector holdings
because we’ve been able to find some relatively liquid
opportunities—some short-duration cash funds—that have
yielded a nice combination of reasonable financial return
and impact investing.
Margaret M. Towle: Ron, you mentioned incorporating investment strategies within the developing world. Would you
explain what you mean by that?
Ron Cordes: We’ve long been trying to figure out ways to provide trade finance in a more meaningful way. We’re invested in
some funds that include trade finance investments as a component, but just this week we approved a London-based portfolio
management firm that provides working capital financing to
non-bank financial institutions in the developing world that
factor invoices for small and medium-size enterprises.
We spent time working on the ground with the London firm to
understand the non-bank financial institutions they work with
or don’t work with as well as the underlying small and medium-size enterprises these institutions finance. The firm has built
ESG factors into what they do, and we became comfortable with
them from both an impact and a financial perspective.
The firm offers a typical 3(c)( 7) debt fund with a one-year
lock-up up front and ninety-day liquidity options from there.
The fund has a track record of consistently delivering about a
6-percent net return per year. We actually had to re-run and
verify the Sharpe ratio, which looked too high but was indeed
correct, as the strategy the fund employs has allowed it to
achieve its monthly returns with extremely low volatility.
We made a modest investment in this fund— 1. 5 to 2 percent of
our assets. Eventually, we’ll probably put more in this fund as
we season the investment, but we’re also looking for other
opportunities in this category.
Margaret M. Towle: Debbie you’re the quant in this group.
What are your thoughts about integrating ESG strategies
within an institutional portfolio? Do you use a factor-based
Debbie McCoy: I’ll answer your question by starting with the
macro-level portfolio view. As groups become more familiar
with ESG or sustainable impact investing and develop considerations they want to incorporate in relation to these investments,
many start by transitioning their core holdings to reflect their
awareness of ESG or impact options.
Often these groups do research to figure out what thematic
issues matter most to them. For some it’s climate broadly, or
carbon emissions specifically; for others it might be women and
composed of long-only equity, plus we have a private equity
bucket and we have cash. When we’re dealing with implemen-
tation related to the public equity part of the portfolio, we use a
barbell structure, in part because this is a legacy to the family’s
Approximately 55 percent of the overall portfolio is in index
strategies. For implementation in the long-only equity category, we first have to deal with the index portfolio. We’re doing
some heavy lifting in that part of the portfolio right now, and
we’ve started implementation by focusing on the theme of
climate change. We’re not considering a complete shift to
ESG at this time. First, we’re going to look at companies that
are concentrating on scope 1 greenhouse gas emissions; then
we’ll see how close we can get to companies that are addressing
scope 3 emissions.
The challenge is that this part of the family’s portfolio is related
to the liquidity event and it has zero tax basis, so we’re fully
invested. We have to be mindful of capital gains, and what that
tax bill is on an annual basis, for any rebalancing we do. So
we’re thinking about implementation over an extended time
horizon. We will get there, but the amount of time required may
overlap two generations because we can’t afford to make that
shift wholesale. We’re starting with criteria related to climate
change and then moving to more ESG criteria.
We expect the private side of the portfolio to be a little more
nimble, but we have some legacy investments that need to wind
down so some capital can be distributed before we can transition that part of the portfolio into the sustainability areas we’d
like to support.
Ron Cordes: Our foundation portfolio has an advantage in that
it was created out of a liquidity event and has no tax considerations. That has made for a painless process of moving to
100 percent and allocating assets from some equity portfolios
with significant embedded gains in 2014 and 2015. We might
not have had the capacity or the interest in moving as quickly if
the portfolio had included tax considerations.
Given the low returns available today in public fixed income
holdings, we’ve been moving our fixed income allocation into
more direct private impact investments. We just made our first
investment in factoring in the developing world, and we’re
involved in a number of ventures linked to working capital
finance and financial inclusion. We’re finding some interesting
risk-adjusted return opportunities in these areas, and we’re
coupling them with specific, discrete impact investments particularly related to women and girls.
Today our portfolio is composed of about 70-percent equity
and 30-percent fixed income investments. More than half