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Fund Status Notes for 2021

Fund balance

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 page 5.

Granting: Our spending policy

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.  

We do not view this year as “business as usual”. With high investment returns and the need in our community — borne out by the Grants & Community Initiatives team community survey and our Vital Signs report — our Board has increased the 2021-22 spending rate to five percent from four percent last year. This represents a 25 percent increase. 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 instead of at a single point in time.

Investments

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 $29 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:

  • Public market portfolios are managed by two professional investment firms and are overseen by the Finance and Investment Committee. This committee reviews the investment managers’ reports quarterly to assess each manager’s performance and formally evaluates their performance semi-annually.
  • Impact investments are overseen by the Impact Investment Committee, with due diligence and other support from professional consultants.

As an endowment builder, HCF’s policy focuses on long-term investing. The investment policy sets out a target asset mix range.  The public market investment managers have mandates within this asset mix and use their discretion to invest the portfolios within this range. The following reflects the current and target asset mix.

Public market and impact investment returns for the year are:

Public markets

Two long-term portfolios are invested in the public markets with Jarislowsky Fraser, and Connor, Clark & Lunn. The following chart compares those portfolios against benchmarks as follows:

  • Returns for each year against the annual investment policy benchmark for that year
  • Ten-year annualized return against the ten-year annualized investment policy benchmark
  • Both return rates against the targeted investment policy long-term return range

Benchmarks reflect the performance of each market index based on HCF’s investment managers 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.

HCF’s last fiscal year ended one week from the bottom of the investment market decline arising from the uncertainty caused by the global pandemic. This resulted in a -8.4 percent return. The markets experienced a V-shaped recovery as noted in the chart above. The year ended with a record-breaking public market portfolio return of 40.8 percent against a 38.6 percent benchmark. At 9.7 percent, the ten-year annualized return is higher than the targeted investment policy range and is 1.3 percent higher than the 8.4 percent benchmark.

Impact investments

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.

More than 14 percent of our long-term assets are in impact investments. The following chart illustrates HCF’s impact investing progress over the past five years, with $30 million currently placed or outstanding and another $15 million committed. This brings the total commitment to $45 million, up from $40 million last year. Impact investments cover areas including affordable housing, arts, environment and sustainable development and investment in programs supporting Truth and Reconciliation.

Locally

Local loans since inception total $10.4 million with $7.5 million outstanding at year-end and an additional $1.1 million committed. The following chart shows the impact areas our loans have supported. Since the loan program’s 2012 inception, $2.9 million in loan principal has been repaid and recycled as new loans. In addition, the interest from these loans supports HCF granting.

Nationally and globally

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.

The following chart identifies the investment areas, with $23.4 million placed and a total commitment of $36.3 million across 25 investments.

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 a 2% inflation adjustment was made for 2020-21.

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 2021-22 was increased to 5% because of the impact of the pandemic on communities. 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:

  1. amounts that have accumulated from prior years when the returns were greater than the spending amount
  2. capital in down markets, or
  3. 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.