Fair Returns

On the Gates Foundation’s portfolio and the ironies the Los Angeles Times didn’t mention.

The recent series in the Los Angeles Times on the investment practices of the Gates Foundation highlighted the foundation’s holdings in companies abroad and in the U.S. that cause significant health and environmental problems – the very problems the foundation aims to redress, in the very same areas of the world.  A friend at a large California foundation described the series as “half cheap shot, half right”. Within days, the Gates Foundation first announced changes to its investment policies, and then backtracked and said it would maintain its prior approach. Though the Times reported that it gave the foundation a chance to explain or amend its policies before the stories ran, it’s hard to say whether the stories were a cheap shot, and at this point, it is unclear whether the articles will have a beneficial impact.  I bet that, in the end, the foundation will join the the ranks of the handful of prominent U.S. foundations that already consider the social impact of their investments – Ford, MacArthur, Rockefeller, and Mott. 

There is another irony in the Gates Foundation’s investments that the Times did not mention.  Many professional investment advisors argue that a social responsibility screen – one that might discourage investments in oil, pharmaceuticals and other similarly problematic stocks – sharply reduces the odds of strong earnings results.  And yet in the absence of a screen, the Gates Foundation’s portfolio performance, like that of many foundations, is still only modest.  In fact, as Daniel Gross noted in Slate Magazine last summer, a key reason that Warren Buffett did not grant all of his funds to the Gates Foundation in one swoop may have been because he believes that its goal of a 5% return overall is too low, and that he could earn at least twice that over the same period. I don’t know what the Times would say about Berkshire Hathaway’s portfolio, but my sense is that this point holds more generally: that many foundations may both fail to realize the purportedly higher returns of less restricted investment policies, and in any case, still earn less than they should.

Another irony, also not mentioned in the Times, is that the sheer size of Gates Foundation’s endowment may make it harder to find suitable places to put their funds. Harder, but still manageable. This is a problem familiar to managers of large public pension funds, like CalPERS (the California Public Employees Retirement System) and CalSTRS (the State Teachers Retirement System) CalPERS, for example, currently manages assets of over $225 billion – nearly three times the size of the Gates endowment – yet they have a socially responsible investment policy and have been very active in proxy battles over how the companies they own are run. Even with those higher standards, CalPERS earned an overall return of 7.45% last year and 13.98% over the past three years.  Foundations, which unlike pension funds do not bear the burden of their members’ retirement dreams (or their watchful eyes), should be even better able to institute socially responsible investment policies and still earn a sufficient return.

Asking foundations to change their balance between two fears – fear of a deteriorating corpus and fear of negative publicity – is probably not the best way to encourage more positive investment policies.  A better way would be to focus on all the good their investment funds can do – to look at their portfolios not simply as the engines that fuel their grant funds, but instead as an integral part of how they pursue their mission.  Gwen Walden at The California Endowment made a strong case for this last summer in her article “When a Grant is Not a Grant: Fostering Deep Philanthropic Engagement”. The National Committee for Responsive Philanthropy, among others, has also long called for foundations to attend to the social justice and equity issues involved in their investment practices.

So, while articles like the Times series can in some cases lead to changes, much broader improvement in investment practices is more likely to happen when foundation leaders see their peers make good use of investment assets, and most importantly, when those peers receive praise and recognition for doing so.  Given its sheer size and the energy it has shown in its philanthropic work to date, we shouldn’t be surprised to eventually see the Gates Foundation help lead the way.

Please share your comments below.

imagePeter Manzo is the director of strategic initiatives for the Advancement Project, a civil rights advocacy organization, and a senior research fellow with the Center for Civil Society in the UCLA School of Public Affairs. Previously, he was the executive director and general counsel of the Center for Nonprofit Management. 

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  • BY Gary Wexler

    ON February 17, 2007 07:17 AM

    Bottom line, business is about profit. Bottom line, nonprofits are about cause. Should businesses be more about social responsibility? Theoretically, yes. Should nonprofits be more about business? Theoretically, yes. But both have their cultures and the people who choose either for a profession are motivated by very separate satisfactions. The Gates Foundation is a foundation created by a business as well as by Bill and Melinda Gates. The foundation also believes in bringing more business principles into the nonprofit sector. In this case there is a mixing of two cultures. It can get significantly muddy at times. However, let’s not forget that the major social responsibility that the Gates Foundation is demonstrating is through the very good works of its foundation, as well as its courage to motivate other mega donors to do the same. As those involved in the nonprofit sector, if we want more businesses to become donors to the nonprofit sector, we cannot act with the culture of academic purity. Let’s not lose the forest for the trees.

  • Pete Manzo's avatar

    BY Pete Manzo

    ON February 18, 2007 11:54 AM


    Good to get your comment.  I agree about the need for nonprofits and for-profits to do their core work well.  The Times articles noted, though, that in many cases, socially responsible investment funds match or outperform others without such a double bottom-line.  Couldn’t foundations both do well, and do good, with their investment portfolios? 

    Great to hear from you.


  • BY Kevin Rafter

    ON February 18, 2007 01:19 PM


    This is a great topic that several philanthropy bloggers have been discussing since the LA Times article, and particularly since Gates backtracked on their original response. In my view, Lucy Bernholz has had the most interesting comments on her blog Philanthropy 2173 (http://philanthropy.blogspot.com/). Most recently, she participated in a panel discussion at the Hudson Institute, “Aligning Investing with Grantmaking”.  A link to the full transcript of that panel is available from her blog.

    Personally, I think aligned investing is a no-brainer. Foundations should be investing in businesses and industries that support their mission, or else engaged in shareholder activism if they are investing in businesses that operate contrary to their mission. To argue otherwise is disingenuous to the idea of having a social mission at all. I think your comparison to CalPERS is absolutely correct in this regard. Foundations are often thought to be innovation leaders in the nonprofit sector, but many are failing in regards to their investments.

  • A year or two ago, someone from the AG’s office in Pennsylvania told me that the state was looking into whether Foundation Boards who do NOT invest in businesses that support their mission may be violating their fiduciary duties.  Did anyone else follow this?


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