Balancing Risks and Returns

A Conversation with Investment Committee Chair Grace Fey

The Boston Foundation is a steward for almost $1 billion in charitable assets, a public trust it takes very seriously. Grace Fey, a seasoned investment manager and president of Grace Fey Advisors, heads the six-member board committee that sets investment policy and oversees the Foundation’s more than 40 investment managers. Fey, formerly a senior executive and director at Frontier Capital Management, recently talked with Philanthropic Advisor about how the Foundation manages the assets in its Donor Advised Funds and its endowment, the Permanent Fund for Boston.

Q: What are the Foundation’s investment objectives?

Grace Fey:
 It’s simple. We want to achieve the highest returns with the lowest amount of risk, and that means we’re always balancing risk and returns. A couple of other factors are important to us: We need liquidity, to make grants, and we want quality investment managers and a diversified portfolio.

Grace Fey
Q: How does the Foundation balance risk vs. return?

 We hire high-performing managers and we diversify… Sometimes an investment manager will have great returns, but when you look closely and see what kind of risks they’re taking, you don’t want to go with that firm. We don’t shy away from aggressive managers, but we look at ourselves as fiduciaries for very important assets. Diversification is the primary way we protect these assets; we want to make sure our asset allocation is appropriate for our objectives, because it’s the asset allocation that really determines your return.

Q: How do you allocate the assets and what does that look like?

 In addition to our written investment policy, which provides overall guidance, our committee covers one asset class at every meeting. We have a terrific committee made up largely of people with many years of experience in the investment business, so we have very thorough, interesting debates about things. Eventually we come to agreement.
We have three investment pools in our Fund for the 21st Century. The Balanced Plus Pool is designed to produce the highest long-term returns, and it’s heavily weighted toward global equities with significant investments in flexible capital and lesser stakes in private equity, real assets and U.S. Treasury securities; the Balanced Pool is also heavily invested in these assets but has no exposure to private equity. The short-term pool is predominantly invested in short-term U.S. Treasury Bills. Our real assets include real estate, timber and energy. We also make four Socially Responsible Investment funds available for donors who want them.

Q: How do you choose investment managers? Can you name some names?
GF: Sometimes the ideas for managers come from the committee, which is advised by George Wilson, the Foundation’s Chief Investment Officer. Then the managers are vetted by our consultant, Prime Buchholz, which does the due diligence and makes sure they’re appropriate for our portfolio. We prefer not to change managers often, so the only reason we would do so is poor performance, a change in management or style, or another issue with the firm. We are very lucky to have two of the best investment managers in the world, Adage and Baupost, both based here in Boston. These firms are our two largest investment positions and manage 19 percent of the pool’s assets.

Q: How do you define success?

 Ultimate success is providing the best possible performance, and I think we have been able to achieve that. When you look at the past 10 years, we have beaten our targeted benchmarks and we have delivered equity returns while taking less risk with our portfolio. Our results are posted online and distributed to our donors each quarter.

Q: What developments do you foresee in the coming year that could affect the portfolio and how is the committee positioning it accordingly?

 The short-term is hard to gauge. You can’t be looking at your portfolio and making moves based on something you’re really not sure of. October 19 was the 28th anniversary of the 1987 stock market crash, when the market plummeted 22 percent in one day. No one anticipated it, but it happened. You can’t always anticipate everything, but you can manage how you respond to it. That’s something we pride ourselves on.
We went through 2008, and we certainly lost money in the portfolio, but not in an egregious way and not as much as the market itself. So we manage for the long-term, which is based on earnings and valuations. World events, wars and all these kinds of things don’t have any significant impact on the market long-term. In the end what really matters is the health of companies and the economy, not socio-political events. Interest rates, however, do affect the market and they will go up at some point, but we’re not as vulnerable because we don’t have much fixed-income exposure.

Q: What would you like professional advisors to know about the Foundation?

 We feel like the advisors are our clients, too. They’re bringing us their clients and our fiduciary responsibility covers them as well. We’re a great resource for advisors because not only do we invest their clients’ charitable assets wisely, we offer in-house expertise on grant making, planned giving, gifts of complex assets and more.