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Why greenhouse matters, even at the coalface

and other lessons in managing money

Goldman Sachs JBWere Philanthropic Services

Goldman Sachs JBWere Pty LtdABN 21 006 797 897

AFSL 243346

13th October 2006

John McLeod

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Philanthropic Services

Has been established to:

• Promote Philanthropy across our client base

• Provide advice and assistance to Endowments and Foundations, not-for-profit and charitable groups

• Assist corporate clients to establish and manage an appropriate Philanthropic Strategy

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Traditional Foundation Structure

Fund manager

Grantmaker

Philanthropic ATM

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Let’s go back to the start

What is the real purpose of your Trust’s existence?

• To reduce tax• To earn money to make donations• To provide for philanthropy in perpetuity

The real reason is to generate a social return.

Investments are just a tool. You judge your success on the impacts you have, not on the dollars given.

Earning money from sweat shops and giving that to fight poverty might not produce a net positive social return.

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What is the role of private Philanthropy?

Government money has certain boundaries and corporate money should be somehow aligned to the business.

Without these constraints what options are available for private philanthropy?

• Complementary – fill the gaps

• Substitution – take on areas that Government is retreating from

• Redistribution – higher to lower incomes

• Innovation – exploring and promoting new ways of solving long term problems

• The opportunity is to do what others can’t

• This has implications for their investments

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But how do we do it?

It can be as simple or as complex as you choose

Negative “ethical” screening

Positive “ethical” screening

Sub market rate investments/loans to NFPs

Alternative asset classes

Private equity

Small enterprises

Venture philanthropy

Microcredit

Increasing complexity requiring greater measurement of social returns and effects on financial returns (+ve/-ve)

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What is ethical?

Can a company be a bit non ethical, say 5%?

Use of Various Screens in US Ethical Funds

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Animal Welfare

Birth Control/Abortion

Labour

Human Rights

Environment

Weapons

Alcohol

Gambling

Tobacco

Source - The Allen Consulting Group

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Companies aren’t what they used to be

• They have ever increasing global reach and economic force

• They’ve taken over from the Church in terms of assets controlled

• They are a large part of the social environment of many people

• Public and press quick to condemn perceived bad behaviour

• Global information sharing is instantaneous

• Increasing power and effectiveness of NGOs and social movements

This position of power has a requirement to gain and maintain a “licence to operate” which goes beyond just legal requirements.

Remember, the law just evolves from public views, albeit very slowly.

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What is Corporate Social Responsibility anyway?

It is simply about the way a company operates and how it relates to all of it’s stakeholders.

Companies do not operate in isolation from the broader community or society in general.

However, this simple statement has very broad ramifications when you start to consider the real range of stakeholders a company has.

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Who are a company’s stakeholders?

Depending on the company and the industry, the range and importance of each stakeholder will vary.

Shareholders

EmployeesGovernment

Customers

Competition Suppliers

Community

Company

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Economic and social returns are related

• To be competitive you need employees who are safe, educated, motivated etc.

• To generate products you need infrastructure, security, sustainable environment.

• You’ll have a bigger market to sell into if you solve poverty.

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Don’t ignore the social returns

Increasing Economic Return

Increasing Social Return

Unmeasured economic loss of social investments

Net economic return

Net social return

Un

mea

sure

d s

oci

al l

oss

of

eco

no

mic

in

vest

men

ts

Source - GSJBW Philanthropic Research, Blended Value - Jed Emerson

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The perfect corporate world

Is when a company gets the right.

This should result in social change achieved that is so positive for the company that it would strive to achieve it anonymously.

where to give

what to give

how to give

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Does the investment world think this way?

•Q What should the role of Wall Street Banks be in shaping corporate policy. Should they become involved?

•Ans Absolutely not. The cornerstone of free markets is efficient capital markets. It would be inefficient and inappropriate ……………………

•Ans As a fiduciary, I have a moral obligation to my investors to maximise return. I would reduce the opportunity set if………………………..

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Corporate governance – addressing the two key questions

Is there an investment signal?

How do I manage my portfolio obligations?

GSJBW quantitative testing using CGI Corporate

Governance rating database

GSJBW “Conehead” risk analysis tool accessing CGI Corporate

Governance rating data

Indications of a quantitative link to aspects of company

performance

As ESG obligations increase, Conehead provides an easy way to manage portfolio corporate

governance exposures

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Investment link – Share price performance

The analysis below shows the performance of simulated portfolios investing in various “governance investment strategies” using the CGI ratings as a basis. These strategies are

• Overall,

• Board Overall (Skills & Structure)

• Board Skills

• Accounting

• Audit

• Remuneration

CGI ascribes a rating of 0 -5 for each stock for each factor (0 poorer, 5 better)

Portfolios are rebalanced each time CGI reissue their ratings for the entire year (approximately annually)

Equally weighted portfolios have been constructed consisting of stocks ranked 3-5 in the long portfolio and 0-2 in the short portfolio

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Other measures of company performance – ROE

A relationship between ROE levels and corporate governance is evident across most rating categoriesChart below plots median ROE over the last 4 years for each rating level within each governance category

7.0

9.0

11.0

13.0

15.0

17.0

19.0

Overall Board Audit Accounting Remuneration

5 4 3 2 1 0 Source: GSJBW Research/IRESS

Average Median ROE of Stocks within each Corporate Covernance Criteria

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How do we manage a corpus?

Some of the issues to consider

• Understand the relationship between risk and reward

• Understand the financial requirements of achieving your mission

• Formulate investment objectives and policy to reach these goals

• Determine asset allocation and, if any, ethical investment choices

• Include roles and responsibilities of internal and external managers

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What is an Investment Policy?

Board of the Organisation

Investment Committee

- Spending Policy- Risk - Return - Asset Allocation- Investment Management Structure

Plan

Choose Investment Managers

Review Investment Performance

Investment Policy

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Elements of an Investment Policy

1. Preamble on the organisation and its reliance and expectations from its Investments. Any reliance on its Trust Deed or regulatory requirements for Investments beyond the “Prudent Person Principle”.

2. Fundflow Guidelines on spending out of (liquidity implications) and inflows to the Investment funds (including from variable investment returns and new gifts or bequests etc.) It should also include a statement on the ability of the Fund to borrow or lend.

3. Risk Statement to be set by the Board, defining the acceptable level of risk able to be taken in Investments. This should not only incorporate liquidity requirements and acceptable frequency of negative returns, but also consider reputational consequences of risk to the organisation. It should also recognise the benefits of diversification in reducing risk.

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Elements of an Investment Policy

4. Socially responsible or ethical investment considerations. What (if any) exclusions, limits or voting guidelines are to be placed on investments to ensure the overall maximisation of the organisation’s social mission?

5. Return objectives should define expected long term (5 years +) income and capital returns with reference to outperformance of inflation and net of costs. E.g. Total returns after costs of 4% above CPI and likelihood of a negative return less frequent than 1 in 5 years.

6. Allowed Asset classes and definitions, characteristics, acceptable quality descriptions within each asset class. Which benchmarks to be used for each asset class.

7. Asset Allocation decision including control bands. These should be set as a consequence of the previous risk statement and return objectives.

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Elements of an Investment Policy

8. Investment Management Structure • Will the funds be invested directly and in the name of the organisation, through

various managed funds or a combination of both?• Subject to the boundaries set by the risk statement, return objectives, asset

allocation and ethical considerations, who (external, internal or Board) is to make investment decisions on a day to day basis?

• What guidelines will be set around conflict of interest between Board/Investment Committee and the choice Funds Management organisations?

9. Performance Reporting. What is the desired frequency and format of reporting and the method of consolidation of difference asset class performances?

10. Investment Review. What mechanism is to be used for Investment review, rebalancing and manager changes? Also to highlight the requirement for updates and reviews of this Investment Policy.

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What is your time frame?

Foundations Perspectives on PerpetuitySource: Foundation Growth and Giving Estimates 2004, The Foundation Centre

Will Exist in Perpetuity69%

Undecided22%

Will Not Existin Perpetuity

9%

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Investment environment

CPI CashAust. fixed

interestListed

property Aust. shares Int'l sharesInt'l shares

HedgedAlternative

Assets

1985 6.7% 16.4% 8.1% 5.2% 44.1% 72.2% 30.1% na1986 9.1% 16.7% 19.0% 35.4% 52.2% 46.5% 30.5% na1987 8.5% 15.3% 18.6% 5.7% -7.9% 7.6% 0.6% na1988 7.3% 12.8% 10.1% 16.1% 17.9% 4.7% 27.1% na1989 7.5% 18.4% 18.9% 2.3% 17.4% 26.8% 24.8% na1990 7.3% 16.2% 19.1% 8.7% -17.5% -14.6% -21.1% 17.5%1991 3.2% 11.2% 24.7% 20.1% 34.2% 20.6% 16.6% 14.5%1992 1.0% 6.9% 10.4% 6.6% -2.9% 5.2% -0.7% 12.3%1993 1.8% 5.4% 16.3% 30.7% 40.0% 24.8% 21.3% 26.3%1994 1.9% 5.3% -4.7% -7.1% -8.8% -7.6% -0.2% -3.5%1995 4.6% 8.1% 18.6% 14.3% 21.1% 26.7% 20.1% 11.1%1996 2.6% 7.6% 11.9% 14.2% 14.4% 6.7% 17.3% 14.4%1997 0.3% 5.6% 12.2% 21.9% 12.7% 42.2% 23.1% 16.2%1998 0.9% 5.1% 9.5% 18.4% 9.8% 32.8% 21.2% -5.1%1999 1.5% 5.0% -1.2% -4.7% 18.7% 17.6% 28.3% 26.5%2000 4.5% 6.2% 12.0% 19.7% 6.4% 2.5% -9.8% 4.1%2001 4.4% 5.3% 5.5% 14.6% 10.4% -9.6% -14.2% 2.8%2002 3.0% 4.8% 8.8% 11.8% -8.8% -27.1% -24.0% 1.0%2003 2.8% 4.9% 3.0% 8.8% 14.6% -0.3% 25.8% 11.6%2004 2.3% 5.6% 7.0% 30.7% 28.0% 10.4% 11.5% 6.9%2005 2.7% 5.7% 5.8% 12.5% 22.8% 17.7% 17.5% 7.4%

Source: I ress, Ibboston, Morningstar, Bloomberg.

* 20 years track record for Alternative Assets not available - these numbers relate to the 16 year history.Cash: UBS Warburg Bank Bill I ndex (Australian Cash - Source Ibboston prior to 1988)Fixed int - Aust.: UBS Warburg Composite Bond Index (All Maturities/All Series) (Australian Fixed Interest - Source Ibboston prior to 1990)Fixed int - int'l.: SSB/Citigroup World Govt. Bond Index - Hedged to A$Shares - Aust.: S&P/ASX 200 Accumulation Index (S&P/ASX All Ordinaries Accumulation Index prior to 1993)Shares - int'l.: MSCI World ex-Aust Accumulation Index Gross Div A$Shares - int'l Hedged.:MSCI World ex-Aust Accumulation Index Gross Div HedgedProperty: S&P/ASX 200 Property Trust Accumulation Index (S&P/ASX Property Trust Accumulation Index prior to 1993)Direct Property: Property Council Investment Performance - Australian Composite Property IndexAlternative Assets: HFRI Fund of Fund Composite Index

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Real and Nominal Asset Class Returns - perpetuity forecast

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Cash Aust. fixed interest Listed property Australian shares International shares Alternative Assets

Franking credits

Capital growth

Income less CPI

CPI

Source: GSJBW Philanthropic Services; GSJBW Quantitative Research

Investment environment – the future

Long term forecasts show the diversity in size and type of returns

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Why diversify? (continued)

Now let’s have 50% in each asset over the 10 years

Asset performances over time

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

Start 1 2 3 4 5 6 7 8 9 10

Years

Sam

ple

To

tal R

etu

rns

Asset A

Asset B

Combined Assets A and B

Source: Philanthropic Services

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Why diversify - the answer

While returns were averaged combining the two assets, risks can be lowered

Risk versus Reward

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Risk (Standard Deviation)

Rew

ard

(cu

mu

lati

ve r

etu

rn)

Asset A

Asset B

Combined Assets A and B

Source: Philanthropic Services

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Number of stocks needed for diversification

ACHI EVABLE TRACKI NG ERROR FOR RI SK OPTI MI SED PORTFOLI OS

0

2

4

6

8

10

12

14

16

18

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

Number of stocks in portfolio

Portfolio Risk (% p.a.) Portfolio tracking error vs portfolio size

RISK.XLS.C2

GSJBWQuantitative Research

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Asset allocation considerations for Foundations

Source: Goldman Sachs JBWere Research

Traditional asset allocations vs. GSJ BW preferredasset allocations for Foundations

25% 10% Alt. 15%

Equities Alt.

50%

Equities

65% 70%

100% 75% Equities Equities

Cash / FI / Cash / FI /

Prop. Prop.

50%

Cash / FI / 25%

Prop. Cash / FI / 15%

Prop. Cash/FI /Prp

Traditional Asset Allocation GSJ BWere Preferred AssetRanges for Foundations Allocation Ranges for Foundations

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For a donor - Two ways of giving

First option• Make a $2,000 grant from income

Second Option• Lend the same organisation $100,000 at a low interest rate• (say at 3% compared to a market rate of 5%)

Result• Both options see $2,000 of income used/foregone• But the second option also sees $100,000 used in the community• If just 2% of assets were invested this way, it would effectively be adding

40% to philanthropic support

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What and how to give?

What:• Broad analysis of assets and skills of an organisation

• Use all of Grant, Intellectual, Human, Political and Financial Assets

How:• Select the best not-for-profit partners• Signal, advertise the cause or solution to get others involved• Improve the activities of your selected partner• Advance the knowledge in the area

Source: Jed Emerson, Porter/Kramer

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Summary

Being a not for profit offers unique opportunities and challenges.

Where you invest:• huge advantages in investing for perpetuity • no tax environment offers different end returns and opportunities• asset allocation is the key• inflation not volatility is the enemy• consider alternative asset classes

How you invest: • consider your overall mission• think about the social impact of your assets• think laterally about your assets

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Important Notice:

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