When the Investments Drop: Foundations and Portfolio Managers Navigate a New Type of Market Crisis

Guiding foundations through market calamities is nothing new for Michael Quigley. He began managing his first endowment portfolio in August 1997 — two months before that year’s market crash. Later came the protracted financial crisis and the “flash crash” of 2010.

Market meltdowns are never alike, he says, but this one feels unique. “When it’s a financial problem, people in the industry think they can model it and find a solution. This is a medical problem. Most CFAs [chartered financial analysts] don’t know how to model a virus.”

An executive vice-president at Fiera Capital in Montreal, Quigley manages investments for foundations, pension funds, and other institutions. Like most in his industry, he has spent the past two months calming clients’ nerves and devising scenarios for how markets will respond to the downturn triggered by COVID-19. After the largest drop in its history, the Toronto Stock Exchange has recovered some ground, but remains down 15% for the year, leaving many foundations and charities worried about funding their commitments without dipping into their capital.

This crisis is hitting the non-profit sector particularly hard: not only have endowment values plummeted but fundraising activities and volunteer operations are severely restricted. “It’s a double whammy,” says Marcel Lauzière, president and CEO of the Lawson Foundation. “We’re experiencing financial issues just as demand for the sector’s services is growing.”

Foundations rely on investments to cover expenses, support their long-term growth, and fund disbursements to grantees. “Whatever the foundation policy is, they are way below where they expected to be at this point,” Lauzière adds.

Another complication, says Anthony Messina, head of private wealth management at Guardian Capital Advisors in Toronto, is that stock markets reached “an all-time screeching high” in February — a scenario that usually benefits foundations as wealthy individuals donate shares to avoid capital gains. “Unfortunately, five weeks later, a lot of those capital gains have evaporated, so the likelihood of those share donations has also dropped.”

As most institutional investors know, the proof of a successful portfolio strategy isn’t how well it performs in boom times but how it reacts to market drops. This is particularly critical for foundations. A pension fund promises to finance retirement payouts 20 to 30 years in the future, giving it time to make up losses from a market slump, says Quigley. “An endowment makes a commitment to fund an organization’s commitments this year, so stability of returns and managing the downside are even more important.”

So how are foundations and seasoned portfolio managers navigating the crisis?

The priority is to avoid knee-jerk reactions. “Anyone invested in capital markets needs to expect significant pullbacks from time to time,” says Greg Rodger, who works with family foundations as chief investment officer at HighView Financial Group in Oakville, Ontario. “When we build portfolios, it’s always with the eye that a downturn is going to happen.”

Advisers have been updating clients on market developments while cautioning against selling. “One of the adages on Bay Street is, when you’re getting your haircut it’s best to sit still,” says Messina. Since dramatic market movements can push a portfolio calibrated to be 60% equities and 40% fixed income far off the mark, investment teams have been assessing holdings against their mandates as the early market gyrations stabilize.

So far, investment managers interviewed for this article have seen little panic, especially among large foundations with strong governance committees and defined investment and gifting policies. The Lawson Foundation, for example, has made no changes, says Lauzière.

Ted Garrard, CEO of the Sick Kids Foundation, likewise reports a calm response. “We have long taken a value-investing approach: we hold positions for the long term,” he says. The foundation’s investment committee (led by billionaire investor Prem Watsa) sticks with managers through ups and downs. “When corrections happen, we don’t panic,” says Garrard. “Our experience has been that, over the long term, we come out of corrections and there are many buying opportunities.”

In late March, in fact, the foundation’s endowment managers were starting to buy into companies whose valuations had plunged. “The difference this time versus 2008-2009 is that back then we went back [into the market] all at once,” says Garrard, “but now we are being selective and making sure the companies’ fundamentals are strong.”

Many charities and smaller foundations, however, are struggling. Jennifer Bent, director and portfolio manager of private wealth management at investment firm Jarislowsky Fraser, notes that foundations primarily dependent on program fees or event revenues are likely the hardest hit. “In these situations, understanding and planning around short- and medium-term cash flow requirements are the primary concerns.”

In terms of grants, Bent notes, some foundations have become “more strategic with respect to the timing of disbursements.” Others are tapping into cash reserves, “a practice,” she says, “that has proven particularly helpful in light of the pandemic and many of its unforeseen impacts.”

While some foundations have deferred program spending for the year, others (especially those serving vulnerable populations) are ramping up grants. Lawson, for example, has deferred most strategic initiatives to 2021 and will use the money this frees up to help grantee organizations fund emergency response, reports Lauzière.

Bruce Lawson, CEO of The Counselling Foundation of Canada (CFC), says that the foundations he works with are spending more in spite of market losses because of the gravity of the emergency. “I have heard it said that foundations retrenched in 2008 and were missing in action,” he says. Today, he is seeing many organizations finding ways to spend over and above what they had committed. While CFC is fully granted for the year, Lawson says it added more money into its donation pool and is considering a loan guarantee program.

In some cases, foundations need to access their capital to support their commitments. Such “restricted funds” usually entail conditions on how they can be used or invested, and Andrew Valentine, a partner at Toronto law firm Miller Thomson, recommends checking whether those restrictions provide flexibility. In late March, Ontario introduced temporary guidelines for public guardians and trustees that allow charities in danger of closing to access income and capital of restricted funds. Elsewhere, Valentine notes in a blog, a charity can apply the “salvage doctrine” if its situation is “sufficiently dire that it will be unable to continue to operate unless it encroaches on its restricted funds.”

Meanwhile, investment professionals are considering how this downturn may affect markets and their portfolio strategies. At Fiera, for example, a team is modelling scenarios. One scenario assumes that an existing medication is approved for treating COVID-19, with the economy starting to resume this summer. Another is based on the development of a vaccine, which is 12 to 18 months away and means a longer period of economic stagnation.

“You have to come down to a manageable number of scenarios, based on the probabilities you assign to each,” says Quigley. The aim, he says, is that “you will be precisely wrong but you’ll be roughly right.” Those conclusions will then guide endowment managers’ decisions around when to start to position the portfolios for gains versus preventing losses.

For years, many foundations and other institutions have followed the Yale Model, an investment strategy developed by the university’s investment managers. The approach, which has produced superior returns, shifts a significant portion of investments away from stocks and bonds and into real estate, infrastructure, agriculture, and other non-traditional assets. The strategy has been popular since the financial crisis, a period during which low interest rates have dampened returns.

For example, today, some of Fiera’s foundation clients own pieces of a Scottish ferry service, the electrical grid in Spain, and Vermont maple syrup producers — and they probably count themselves lucky. Portfolios with alternative real assets have likely escaped the worst of the market carnage. Not only have Fiera’s real estate portfolios yielded 6-7%, reports Quigley, but “real assets are very favourable during market declines. While the markets are terrible, our cotton operations in Australia are doing great.”

A foundation should aim to fund distributions from investment income, says HighView’s Rodger, who recommends a mix of stocks, bonds, and high-yield investments, such as income-based commercial real estate or yield-oriented private debt. HighView allocates various portions of foundations’ portfolios to these building blocks.

“Having exposure to alternative investments not traded on public markets lessens the risk of reduction in capital,” he says. “Foundations that haven’t taken that approach would be feeling more stressed now.” Smaller foundations whose portfolios don’t meet the buy-in of some alternative funds can still find options that mitigate market volatility while maintaining a respectable yield, such as commercial real estate funds for which the entry levels are less than $1 million.

But just as this is a bad time to sell stock, it’s also a poor time to change advisors or revamp investment policies. “That should have been done three to five years ago to put you in a position today where you feel comfortable,” says Messina. “The real work has to happen when things are calm.”

The coming months will likely see many discussions about how well investment advisers have managed to protect foundations’ capital. In the wake of the 2008 financial crisis, notes Messina, some foundations revamped their investment committees and changed portfolio managers after realizing they were overexposed to equities. “The foundation president generally isn’t an investment professional and relies on the skill of the board and investment committee,” says Messina, who sits on the board of Mackenzie Health Foundation. “And there is no shortage of egos among investment professionals.”

As some clarity starts to return to the economy, foundation boards should undertake audits of their investment policies. How did we come to select this strategy, asset mix, or manager? Did we appropriately assess our appetite for risk? Have we reviewed it in the past few years?

If changes are needed to protect endowments from future corrections, boards should evaluate money managers based on five- and 10-year track records that include downtimes, recommends Messina. “Investment committees have to be aware that some managers are very good when markets are galloping but not good at bad markets.” Those managers should also ideally have experience in handling institutional and high-net-worth portfolios. “It’s a different skillset than individual accounts.”

In addition, Mark Fattedad, who manages institutional portfolios at Jarislowsky Fraser, notes that foundations should take this opportunity to sharpen their focus on environmental, social, and governance (ESG) risks and opportunities. “The current pandemic has reminded us all why it is so important to consider issues such as the broader functioning of society and the health of other stakeholders when making long-term investment decisions,” he says. “These so-called ‘non-financial’ elements that impact broader society have also had some of the most profound and widely distributed impact on businesses during the pandemic.”

For example, a company’s moves around offering flexible work arrangements, increased safety measures, or leniency with supplier financing can be important markers of resilience and quality. “From an investor perspective, the ability of companies to be agile and innovate to solve for societal needs may also help them to be better positioned to capture emerging demand in a post-pandemic world,” says Fattedad.

Meantime, his colleague Bent advises that, even as foundations examine governance practices of the companies in which they invest, they should also look at their own. “We often say that good governance is like wearing a seat belt. You often don’t know you need it — until you do.”


The charitable sector is responding rapidly to the expanding impact of the pandemic, in terms of outreach, operations, and advocacy. In the coming weeks, The Philanthropist will provide up-to-date coverage, as well as our usual reporting and commentary on other news of relevance to foundations, charities, and non-profits. Read more of our COVID-19 coverage


Weekly news & analysis

Staying current on the Canadian non-profit sector has never been easier

This field is for validation purposes and should be left unchanged.