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December 30, 2002
Community Investment Pays: More Conversation with F.B. Heron's Luther Ragin
by William Baue
Luther Ragin details F.B. Heron Foundation's returns on its community investments and urges other
foundations and institutional investors to consider community investing (part two of a two-part
article).
SocialFunds.com --
In part
one of this two-part article, F.B. Heron Foundation Vice President for Social
Investing Luther M. Ragin, Jr. began to explain why and how the foundation advances its mission by
committing a substantial percentage of its assets to community investment. In today's article, he
describes in detail the returns produced by such community investment. He also urges other
foundations and institutional investors to seriously consider community investing as a logical
fiduciary strategy that can generate competitive returns.
SocialFunds.com: What kinds of
returns are you getting on your various investments?
Luther Ragin: We have to go across
the spectrum. Of course, grants generate social returns, as I said earlier, so we do not include
them when we calculate the amount of assets we devote to mission-related investment, which again
amounted to $42 million this year. And as I said earlier, approximately one third of that $42
million is devoted to program-related investments [PRI]. So of the third that's in the PRI
category, the average rate of return on debt is three percent. Although that's the average, the
range of returns are from one to seven percent.
SF: And what are the average returns for
the market-rate double bottom line investments?
LR: For the sake of convenience, I'll
divide the double bottom line investments into three asset classes: one we'll call the insured and
uninsured deposit portfolio, which has an average return of 3.6 percent. Those tend to be term
certificates of deposit [CDs], one-, two-, or three-year. The benchmark for those deposits would
be the national average CD rates for paper of that term, so if we're looking at a one-year or
two-year or three-year CD, we would look at what the average is as reported through BanxQuote for
CDs of that duration.
SF: How are your investments compared to that benchmark?
LR: We're pretty much spot-on. The reason we have a 3.6 percent average, when you might say,
"Well, CD rates are pretty low, in fact in some places less than 2 percent," the reason is that
you've got one-, two-, and three-year paper, so you're getting an average blend there, the effect
of laddering.
The second asset class within that category comprises fixed-income
securities and private-placed notes that consist of investment grade, market-rate bonds. These
bonds include things like pooled mortgages for low-income families with Freddie Mac guarantees or
taxable municipal securities targeting economic development in cities or states or regions. In the
year-and-a-half that we've had that portfolio, it's tracked 20 basis points higher than the Lehman
Brothers Aggregate, which is the benchmark for the entire U.S. bond market.
The third
asset class within the double bottom line investment category is private equity, including things
like real estate and other private equity funds such as venture capital type investments. All of
those investments have been made since 2000, so they're all relatively new. Although they seem to
be doing quite well, it's really too early to tell you what the internal rate of return [IRR] will
be from them.
SF: Is there anything else you would like to mention that has not yet come
out in our conversation?
LR: Only that we think there are opportunities for all
foundations, and certainly other socially motivated investors, to engage in community investing to
a far greater degree than most have to date. What we find so intriguing about this market is that
there is such a product spectrum in which people can engage. Those who are unwilling to look at
below-market opportunities can find that, in the last three to five years, there has been
substantial growth in market-rate opportunities to invest in that are high-quality, well-managed
portfolios. This pertains to both the bond side and the private equity side. And that's something
that ought to be of interest and ought to be noted by the finance and investment sides of any
endowment or philanthropy. On the other hand, for those who prefer to work within the context of
below-market opportunities, specifically PRIs, there is also a wide range of products around which
sensible investments can be made. Both debt and equity products are available in domestic and
international markets. Our losses to date on our PRI portfolio have been negligible. And, of
course, insured deposits in community development banks and credit unions are a low-risk way to
promote community investment.
As we've shown with our bond and privately placed notes
portfolio, it's possible to have a social mission and to earn a very competitive risk-adjusted rate
of return in, for example, that asset class. That's not a matter of speculation now; it's
something that has been demonstrated. With respect to private equity, obviously, because most of
those funds are of recent vintage, the jury is still out as to what their IRR will ultimately be.
But investors who are interested primarily in economic returns should take note of the quality of
fund managers who are now launching double bottom line products.
In adopting this private
community investment trust concept, we have chosen to begin taking down the wall between programs
and investments at our particular foundation. But that doesn't mean other foundations have to take
down their walls in order to engage more in community investment.
Part One:
Helping
People Help Themselves: A Conversation with F.B. Heron's Luther Ragin
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SRI World Group, Inc. All Rights Reserved.
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