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.
Chart 1
| Asset mix | ||
| Targeted | Year-end | |
| Total | 100% | 100% |
| 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.
Chart 2
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.
Chart 3
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.
Chart 4
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.
Chart 5
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.
Chart 6
| 2023 | 2022 | |||
| 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) | ||
| 11,404,955 | 11,568,526 | |||
| Deduct: | ||||
| Investment fees | (1,150,840) | (1,147,044) | ||
| Investment income allocated to funds held on behalf of third party | (83,409) | (88,213) | ||
| $ | 10,170,706 | $ | 10,333,269 |
Fund balance
Fund balance includes:
A. Capital
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.
Donations to the Foundation are invested for the long term in public markets and in alternative investments. Investment income is then allocated annually to support granting, community leadership and operations. The summary and charts presented here provide both a financial snapshot and a history of recent activity that underlies the grants and community leadership activities represented in this annual report, made possible by remarkable donors.
Donations to the Foundation are from individuals, corporations and other charities. Donors may contribute to named endowment or flowthrough funds, to the Board-directed Community Fund, or to HCF’s community leadership projects.
The $35.1 million in donations this year is the second highest total in HCF’s history. Annual donations are influenced by the timing of the realization of donations in wills and significant one-time donations like the $27.7 million in donations of property and private equity. As illustrated in Chart 1, annual donations have ranged between $3.2 and $35.1 million over the past eight years. The five-year rolling average of donations ranges from $5.0 million to $13.3 million over the past eight years.
The five-year rolling average number of donations is 1,787 with 2019-20 at 1,853. The number of donations fluctuates based on “in memoriam” donations and the number and nature of events sponsored by donors to raise money for their funds.
Chart 1
Grants are made annually from both endowed and flowthrough funds. Because flowthrough fund balances are distributed in a shorter time period, granting from these funds can materially influence HCF’s total annual amount granted.
As illustrated in Chart 2, grants and community leadership project spending over the past eight years has ranged from $4.7 million to this year’s historic high of $11.5 million. Granting from endowment funds was reduced in 2013 as a result of the decline in investment returns in 2012 which a) lowered the asset base used for the granting calculation (currently four percent of the fund balances), and b) resulted in less income available to grant. Flowthrough granting and expenditures on community leadership projects has ranged from 22 to 56 percent of total granting in any given year and is dependent on the timing and nature of flowthrough and project activity. At 893, the number of grants for this year is 37 percent higher than the eight-year average.
Chart 2
Investments traded in active markets are reported at fair market value. Investments not actively traded are recorded at their cost less any impairment of their value.
To support our strategy of aligning our assets with our mission and to provide a more diverse and robust portfolio, HCF has committed to investing in alternative asset classes including loans to charities and not-for-profits, private debt, real estate, infrastructure and private equity. These alternatives are consistent with the Foundation’s long-term investment horizon and liquidity requirements. Since these investments are not actively traded, they are valued at cost in the investments. These alternatives total $25.8 million.
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:
As an endowment builder, HCF’s policy focuses on long-term investing and is supported by reserve accounts that are currently at their 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 this range. Chart 3 reflects the current and target asset mix. Note: $25 million of private equity relates to a fund established by a donor and is not part of the asset mix or the consolidated portfolio results.
Chart 3
Two long-term portfolios are invested in the public markets with Jarislowsky Fraser, and Connor, Clark & Lunn. Chart 4 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 compared to the average market performance. HCF’s investment policy target is a long-term investment return in the 6.5 to 7.5 percent range.
Chart 4
The effect of the global pandemic has materially affected investment returns, resulting in a -8.4 percent public market return for the year. The seven-year annualized return at 6.8 percent is within the targeted investment policy range and is 1.2 percent higher than the 5.6 percent benchmark. As noted in the financial highlights, the current 10-year annualized return of 7.0 percent is in the target range and is higher than the benchmark by 1.2 percent.
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. In addition, these investments provide a pool uncorrelated to the public markets which, in turn, buffers the portfolio from the volatility currently experienced.
More than 15 percent of our long-term assets are in impact investments. Chart 5 illustrates HCF’s impact investing progress over the past five years, with $25 million currently placed or outstanding and another $15 million committed. This brings the total commitment to $40 million, up from $34 million last year. Impact investments cover areas including affordable housing, arts, environment and sustainable development.
Chart 5
Local loans since inception total $9.7 million with $7.1 million outstanding at year end. Chart 6 shows the impact areas our loans have supported. Since the loan program’s 2012 inception, $2.6 million in loan principal has been repaid and recycled as new loans. In addition, the interest from these loans supports HCF granting.
Chart 6
IRP is a Government of Canada program being delivered nationally by partners including Community Foundations of Canada. As the first phase in the government’s long-term investment in social finance, the IRP’s goal is to make social-purpose organizations “investment ready” so they can make a difference in new and innovative ways through their participation in the social finance market. HCF has partnered with community foundations in London and Niagara, and the McMaster Innovation Park to manage the program regionally on behalf of Community Foundations of Canada. The first request for proposals for funding in January created enormous interest nationally and garnered 65 submissions to our regional partnership. Approved funding is expected to be released in June 2020. As an additional benefit, the IRP brought a growing number of potential opportunities for local loans to HCF’s attention.
These investments include private equity, private debt and real estate investments. Many of these investments are long term in nature, are maintained at cost and do not have a regular income stream. As these investments are maintained at cost, their results include interest income and realized gains, but not unrealized gains. Results for these investments are closely monitored and are reported when realized. Chart 7 identifies the investment areas, with $18.0 million placed and a total commitment of $33 million across 21 investments.
Chart 7
Operating expenses for the fiscal year ended March 31, 2020 total $2.5 million and were 2.5 percent higher than last year. Staffing costs related to the Foundation’s 22 employees represent 70 percent of HCF operating costs.
In addition to breaking out cost by type, operating costs are allocated to each of the Foundation’s operating areas: grants administration, community and philanthropic leadership, community relations and knowledge dissemination, development activities, and administration and governance. Examples of community and philanthropic leadership include convening around the city’s critical issues and fostering the growth of philanthropy by sharing staff time and knowledge to support other charities. Charts 8 and 9 illustrate these costs by operating area and by expense type.
Charts 8 and 9
The Foundation’s annual development expenses are not necessarily attributable to the donations received in that year. The nature of donations to the Foundation can result in costs preceding the receipt of the donation by several years (for example, donations through wills). As a result, consistent with the community foundation sector, operating costs are evaluated by a ratio of total operating expenses to average total assets. Ratios fall within a range depending on the size and stage of the community foundation’s development.
Management considers the ratio of 1.26 percent (1.25 percent in 2019), as illustrated in Chart 10, to be within an acceptable range for a foundation of HCF’s size, stage and level of community leadership, compared against benchmarks established in the community foundation sector. We continue to monitor both the actual results and the benchmarks on an ongoing basis.
Chart 10
Hamilton Community Foundation’s total assets of $201 million at March 31, 2020 include balances of HCF funds and funds held on behalf of others at $1.7 million.
Hamilton Community Foundation’s fund balances, illustrated in Chart 11, represent accumulated donations plus the net investment earnings on these donations, minus granting and operating costs. Funds include both endowed and flowthrough funds. Endowed funds are held permanently and grant from investment earnings. Flowthrough funds are fully distributed as grants over a pre-determined term.
Chart 11
The fund balances have grown 55 percent to $198 million at the year ended March 31, 2020 from $128 million in 2013. Donations of $35.1 million included $4.4 million in flowthrough donations that were largely distributed as grants in the year and, as a result, do not remain in the fund balances at year end. This results in a modest total funds balance growth of 4.8 per cent for the year. The number of funds has grown 19 percent to 377 from 318 in 2013.
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