Fund balance represents accumulated donations plus investment earnings on these donations. Investment earnings are allocated to granting, operating cost recovery and to growing the accumulated donations to account for inflation. For a more detailed explanation of the fund balance, refer to the details below.
A fund does not distribute its total net income each year. Instead, a spending amount is calculated for each fund in accordance with the Foundation’s spending policy. A Foundation-wide spending rate is determined annually based on long-term investment return expectations, reserve requirements for years where returns are below average, and Canada Revenue Agency’s disbursement requirement.
Federal government legislation has increased the “disbursement quota,” (the minimum amount that charities are required to spend on granting and charitable activities), to 5.0 percent from 3.5 percent of invested assets, beginning with HCF’s coming fiscal year. This change represents a 43 percent increase in required expenditures. HCF has exceeded the new five percent requirement for the last five years, with disbursement rates ranging from 5.4 to 6.2 percent. In total, over the five years ended March 31, 2022, HCF exceeded the disbursement quota by more than $22.5 million. In addition, the Foundation has continued to mobilize its capital to contribute to positive social and environmental outcomes with 18 percent in impact investments locally, nationally, and globally. HCF’s endowment spending policy will remain at four percent for 2023-24 which, when added to our flowthrough granting and charitable activities, will meet the disbursement quota.
To account for investment market volatility, and in accordance with best practices for endowment management, the spending amount is calculated using the spending rate applied to the fund value averaged over a period of time, rather than at a single point in time.
Investments traded in active markets are reported at fair market value. Effective April 1, 2022, the Foundation changed its accounting policy for certain private equity, real estate and infrastructure investments (collectively “alternative investments”) from cost to fair value. When HCF first invested in these types of alternative investments, they represented a small proportion of the entire investment portfolio and accordingly management made an irrevocable election to record these types of investments at cost as the information to record them at fair value was not readily available.
However, over time the alternative investments have become an integral part of the Foundation’s investment strategy and thus have increased as a proportion of the total investment portfolio. Therefore, management has determined that maintaining certain alternative investments at cost does not provide relevant information to the Foundation’s stakeholders. As such, management has changed their previously irrevocable election and elected to measure certain alternative investments at fair value. This change in accounting policy has been applied prospectively with no restatement of prior year’s figures.
Those investments where fair value is not reliably measurable continue to be recorded at cost, less any impairment.
HCF invests according to policy guidelines established by the Board of Directors. Two committees of the Board oversee investments to ensure compliance with the policy:
HCF is endowment based, thus its policy focuses on long-term investing. It is supported by a reserve account that is currently at its policy maximum.
The investment policy sets out a total portfolio target asset mix, as well as a range around these targets. The public market investment managers have mandates within this targeted asset mix and use their discretion to invest the portfolios within these ranges. Chart 1 reflects the targeted and year-end asset mix. Note that $23.4 million of private equity relates to a fund established by a donor and is neither part of the asset mix nor of the consolidated portfolio results.
|Fixed income||10 – 40%||13%|
|Public equity||30 – 85%||73%|
|Alternatives||0 – 20%||14%|
Chart 2 reflects the public market and impact investment returns including and excluding the one-time adjustment to fair value on alternative investments for the year. This $8.0 million unrealized gain included $1.6 million related to infrastructure, $1.8 million to real estate and $4.6 million related to private equity impact investments. These unrealized gains reflect the increase in the value of these investments that have occurred over the last 10 years.
Impact investments include loans, community bonds, private debt, real estate investments and private equity. As noted, those investments where fair value is not reliably measurable are recorded at cost, less any impairment. Currently, $10.7 million or 24 percent of the $44 million impact portfolio is carried at cost until investments are realized (and cash is returned). As a result, the total annual impact return will continue to lag behind the long-term impact return until realized; however, the current adjustment to fair market value will begin to more realistically reflect the impact portfolio results. We continue to monitor the performance of our impact investments closely and are encouraged by both their positive social and environmental impact as well as their financial returns.
Two long-term portfolios are invested in the public markets with Jarislowsky Fraser and Connor, Clark & Lunn. Chart 3 compares those portfolios against benchmarks as follows:
Benchmarks reﬂect the performance of each market index based on HCF’s speciﬁc target asset mix. Comparing actual results to the benchmark measures the value added by investment managers against the average market performance. HCF’s investment policy target is a long-term investment return in the 6.5 to 7.5 percent range.
The public markets experienced a negative and very volatile year ending at a -1.5 percent benchmark with HCF’s portfolios posting a 0.2 percent increase. Overall, the impact of inflation and the central banks response in raising interest rates created significant negative returns for the first two quarters of HCF’s financial year. The third quarter ending December 31, 2022 saw all markets delivering positive returns as inflation appeared to be easing. Despite a tumultuous final quarter, where concern about the continued high levels of inflation and banking issues heightened volatility, all markets experienced positive returns. This helped to offset some of the significant negative returns for the first half of the year.
As long-term investors, HCF’s investment and spending policies recognize that volatility is a reality of public market investing. Our spending policy determines the amount available to grant in any given year, and enables HCF to grant at a consistent level, with excess income in higher-return years used to support income shortfalls in lower-return years. As noted in the overview, HCF’s spending policy for granting from endowed funds is set at four percent for 2023-24.
The 8.9 percent 10-year annualized return continues to be higher than the targeted investment policy range and is 0.5 percent higher than the 8.4 percent benchmark.
Impact investments enable donations to endowed funds to drive positive change beyond granting, because they represent investments of capital that deliver financial returns coupled with positive social and/or environmental outcomes. These investments also provide a pool uncorrelated to public market volatility.
Approximately 18 percent of our long-term assets are in impact investments. Chart 4 illustrates HCF’s impact investing progress over the past five years with $39.4 million currently placed and another $15 million committed. This brings HCF’s total commitment to $54.5 million, up from $52 million last year. Impact investments cover areas including affordable housing, arts, environment and sustainable development, and support Truth and Reconciliation Calls to Action.
Local investments since inception total $20.8 million with $14.9 million outstanding at year end and an additional $1.6 million committed. Chart 5 shows the impact areas our investments have supported. Since inception in 2012, $5.9 million in investments have been repaid and recycled as new investments in our community, and have also supported granting. Affordable housing continues to be a primary focus of our local investing with 59 percent of our investments since inception supporting housing providers to build and preserve affordable home ownership opportunities, affordable rental housing and supportive housing options.
These investments include private equity, private debt and real estate. Chart 6 identifies the investment areas, with $24.5 million placed and a total commitment of $38.0 million across 27 investments.
|Investment returns include:|
|Interest and dividends||$||6,176,342||$||9,107,630|
|Realized gains on sale of investments||2,275,193||12,532,624|
|Unrealized gains (losses)||2,953,420||(10,071,728)|
|Investment income allocated to funds held on behalf of third party||(83,409)||(88,213)|
Fund balance includes:
Accumulated donations plus inflation adjustments.
B. Inflation adjustment
Protects the value of distributions over time by adding to the fund’s capital. The Board of Directors annually determines if an inflation adjustment will be made and, if so, the size. This is based on current year returns and whether the last several years of returns have resulted in accumulated investment income greater than the amount required for annual distribution and fund administration costs. Based on the current year returns no inflation adjustment was made for 2022-23.
C. Undistributed income
Accumulated investment earnings less:
(a) Administration fee cost recovery: Each fund is charged an administration fee to recover the investment counsel and custodial fees, administration, financial management and grantmaking costs of the fund. This is calculated in accordance with the fund agreement.
(b) Available to grant: A fund does not distribute its total net income each year. Instead, a spending amount is calculated for each fund in accordance with the Foundation’s spending policy. A Foundation-wide spending rate is determined annually based on long-term investment return expectations, reserve requirements for years of below-average return, and Canada Revenue Agency’s disbursement requirements. The spending rate for 2023-24 is set at four percent for 2023-24. The spending amount is calculated using the set rate, and the fund value averaged over a period of time, in accordance with best practices for endowment management.
Depending on the nature of the agreement, when current investment returns are not adequate to meet the full spending amount, the funds may grant from:
i. amounts that have accumulated from prior years when the returns were greater than the spending amount
ii. capital in down markets, or
iii. reserve established for the fund.
Any amount not spent by a fund in a year is carried forward and available to be used for granting by the fund in a subsequent year.