Investment Approach

Our investment approach has been developed to help us achieve our vision. We rely on investment returns to provide the grants and operating budget each year, making investment performance critically important. The Foundation’s Investment Committee continuously reviews and adopts global best practices in the oversight of the Foundation’s portfolio. 

Our Investment Mission is to prudently preserve and grow our capital in order to make grants, now and in the future.

Our investment goals are to:

  • Invest the Foundation’s assets in such a way as to deliver the best possible risk-adjusted returns over the long term
  • Ensure funds are available for distribution to meet the needs and distribution policies of the Foundation
  • Maintain the value of the Foundation’s capital base in inflation adjusted terms
  • Provide a modest level of additional capital growth
  • Use best endeavours to invest prudently and consistent with our commitment to the United Nations Principles of Responsible Investment
  • Invest funds directly by community loans to achieve improved outcomes for communities in our funding regions

We aim to achieve a real return after investment and operating expenses (and tax, if any) of at least 4.0% per annum over rolling ten year periods.

Investment Beliefs

We believe a set of well-founded investment beliefs provides a sound foundation for investment success. In particular we believe:

  • Effective governance and efficient management can reduce costs and risks, and lead to better investment outcomes
  • Risk and return are related and over the long term investors are rewarded for taking on additional risk
  • Broad diversification among asset classes is the cornerstone of modern portfolio management.  The differing characteristics of the varying asset classes provide risk-reducing benefits from diversification when they are aggregated into a total portfolio
  • Asset allocation has a greater impact on investment returns than decisions concerning which specific securities to invest in
  • Taking a sustainable investment view is more likely to create and preserve long-term investment capital
  • Responsible investors who consider ESG (environmental, social and governance) factors improve long-term returns
  • Markets are behavioural in nature and not always perfect. Active management of securities and asset allocation can often (but not always) add value and reduce risk
  • External investment specialists are able to offer greater resources and flexibility in relation to investment strategy design and implementation.

Investment Strategy

Reflecting our investment beliefs, the Foundation is a long-term investor.  We use an independent Investment Consultant, Mercer to assist in the design of the investment strategy and the selection of Investment Managers.

We aim for an investment strategy that includes a diverse set of investment assets.  We believe the investment structure should not be so complex as to introduce unnecessary costs.  We prefer sector specialist Investment Managers.  Manager-of-manager strategies are considered a useful means of implementation.  Active management is favoured, but if considered appropriate, passive management may be used in some cases.

We’re committed to integrating consideration of environmental, social and governance (ESG) issues into our investment decision making process and developing guidelines to integrate ESG considerations across different types of investments.

As a long-term investor, emphasis will be given to monitoring our investment strategy and investment managers over the medium-to-long term, although short-term monitoring also has a role to play at times.

Statement of Fiduciary Responsibility

We recognise we’re fiduciaries and our fiduciary responsibility does not end with maximising return and minimising risk.  We also recognise economic growth can sometimes come at a considerable financial and nonfinancial cost to communities and the environment.

We believe efforts to mitigate environmental degradation, address social issues and promote healthy communities should be incorporated as part of business and investment decision making. We believe management, directors, employees and investors should consider these issues in the pursuit of financial objectives.

We believe in light of the social, environmental and economic challenges of our time, fiduciary responsibility in the coming decades will dictate the integration of prudent financial management practices with principles of environmental stewardship, concern for community, and corporate accountability to shareholders and stakeholders alike.

We believe foundations have a particular role to play in this process, seeing their mission not only in terms of the uses of income to fund programs, but also in terms of the ends toward which endowment assets are managed. Wealso believe the Foundation creates substantial social benefit through its grants and related philanthropic activities.  We consider it is essential to harmonise philanthropic mission and endowment management.

Our Risk Profile

We seek to avoid excessive volatility in returns, both within years and between years. Accordingly, investment decisions aim to limit the downside risk of the Fund by diversification across investment sectors and local and global economies.  We’ve assessed our investment risk profile as medium, as follows:

  • Returns - medium returns are desired, but lower returns are acceptable
  • Volatility - is medium in order to avoid wide variation in distributions
  • Timeframe - is over the medium term, though also have a long term focus
  • Distributions - to enable stable distributions
  • Capital - have a strong desire for real capital preservation

Strategic Asset Allocation

The Trustees have agreed a target allocation of 40% to growth type assets is appropriate for the long-term target SAA, balancing the need to earn income to meet desired distribution levels and operational expenses with a desire to preserve and grow capital over time.

The portfolio is made up of three main asset groupings:

  • Growth assets include listed and private equity, both global and Trans-Tasman. These assets are expected to contribute the most to the growth of the Foundation’s capital.
  • Diversifying assets include real and alternative assets, including real estate, infrastructure and hedge funds. These investments offer a different risk and return profile to equities. They also play an important role in protecting the value of the Foundation’s capital by offering a hedge against inflation.
  • Income assets include fixed interest and cash. These assets are expected to contribute to the regular return on the Foundation’s capital. Perhaps more importantly, as they are expected to provide protection against the impact of both prolonged economic contraction and equity market crises, this group will include a significant allocation to government bonds.

Responsible Investment Processes

In our fiduciary role we believe environmental, social and corporate governance (ESG) issues materially affect the performance of investment portfolios and in support of these beliefs the Foundation is a signatory to the United Nations Principles for Responsible Investment (UNPRI). The UNPRI embodies an internationally accepted framework for investors to manage ESG issues in a manner consistent with improving long-term investment returns. By becoming a signatory, we will, over time, apply the following principles:

  1. Incorporate ESG issues into investment analysis and decision-making processes.
  2. Be active owners and incorporate ESG issues into its ownership policies and practices.
  3. Seek appropriate disclosure on ESG issues by the entities in which it is invested.
  4. Promote acceptance and implementation of the Principles within the investment industry.
  5. Work together with other signatories to enhance its effectiveness in implementing the Principles.
  6. Report on its activities and progress towards implementing the Principles.

Investment Manager and Stock Selection

Investment managers are selected with consideration given to their beliefs and practices relating to ESG issues. We are cognisant of the fact many of the managers selected by the Foundation see the greatest investment promise in companies with enlightened management that recognise sustainable practices and sound employment policies are in the best long-term interest of their companies and shareholders. The rising importance investment managers and company management each give to these policies is leading to a convergence between the portfolios of social investors and mainstream investors.

We may hold investments through pooled funds as an effective and cost efficient means of accessing some global markets. For such funds we recognise we will have no influence over the structure of the product or securities held in the fund.

Voting

Among the various avenues to try to generate social return through investing, the Foundation favours proxy voting aligned with its core mission. This strategy appears to have an increasing influence on management decisions, is unlikely to degrade investment returns, and can be accomplished with minimal administrative burden.

All investment managers must actively vote using guidelines developed around best practice fiduciary standards and may use the expertise of specialist providers of research and proxy voting services.

Exclusions

In general, we prefer engagement as the best way of getting companies to improve their behaviour, rather than exclusion. Our exclusions policies are guided by:

  1. Our purpose, vision and investment beliefs
  2. Our stakeholders’ perspectives
  3. Our fiduciary responsibilities
  4. Compliance with the laws of New Zealand

In addition, we believe taking a sustainable investment view is more likely to create and preserve long term investment capital. Taken together, our purpose, vision and investment beliefs form the basis for our Responsible Investment Exclusions Policy.

Consistent with our purpose, vision and investment beliefs, we may exclude investments in companies that do substantial and irreparable harm to society or the environment, provided it does not materially worsen the diversification or robustness of the total portfolio, and can be effectively managed.

In determining whether to exclude any investment on this basis we would consider:

  • Whether excluding the investment supports our purpose to support and be a catalyst for strong, connected, healthy, happy, prosperous communities
  • Whether New Zealand legislation, regulation or government commitments prohibit the product or activity or aim to severely curtail or make obsolete such products or activities in the foreseeable future
  • The impact of the exclusion or ongoing investment on the expected investment risk and returns
  • Our stakeholders’ perspectives
  • The impact of exclusion or ongoing investment on the reputation of Rātā and our stakeholders
  • The efficacy of other responsible investment approaches in addressing the issue of concern. Exclusion will only be considered as a last resort.

We have determined the following products should be excluded on this basis - companies manufacturing cluster munitions, nuclear explosive devices or tobacco. We may consider additional products or services for exclusion in future against this policy framework.

Distributions and Reserves

Our investment strategy contemplates an asset allocation which is likely to generate returns that demonstrate volatility over the short term.  In contrast we expect distribution requirements to remain relatively over time.  In order to account for investment risk or volatility, the assets of the Foundation are to be invested in such a manner as to achieve over the medium term a level of return in order to meet:

  1. Distribution and operational requirements in any one year
  2. Maintenance of the Real Capital Base
  3. The desire for building a (income) reserve fund to a level which would provide reasonable protection in years with low or negative overall investment returns
  4. The desire to grow the Foundation’s Real Capital Base 

Fluctuations in investment returns directly impact the level of income available for distribution, and also the Real Capital Base and hence the ability to grow distributions over time.

The Capital Base of the Foundation was set at $371.422 million as at 31 December 1996. In February 2013 a Special Fund of $25 million was established as a response to the Canterbury Earthquakes. This reduced the Capital Base by $17.615 million to $353.807million.

The Trustees have a desire to maintain the Capital Base in real terms and the Inflation Reserve is the amount required to achieve that. Together the Capital Base and Inflation Reserve amounts represent the Real Capital Base.

Distribution Policy

The Foundation requires funds for distribution on a regular basis.  The Trustees’ current policy is to distribute 4% of the lesser of:

  • The Real Capital Base as at 31 March of the previous year; or
  • The unaudited asset value as at 31 December of the previous year.

In the event annual income in any year is insufficient to meet distribution requirements this will be reflected as a deduction from the Accumulated Income Reserve.

Reserves Policy

We established the following Reserves to facilitate the achievement of our Distribution Policy:

Capital Base and Inflation Reserve

The Inflation Reserve shall be increased by an amount equal to the sum of the Capital Base plus the Inflation Reserve multiplied by the annual percentage change in the CPI.   This ensures the Real Capital Base retains its purchasing power over time.  If income is insufficient to make this adjustment, the Accumulated Income Reserve should be reduced accordingly.

Accumulated Income Reserve

Each year, any excess income, after distributions and the adjustment to the Real Capital Base, shall be credited to the Accumulated Income Reserve.  This Reserve will help offset income fluctuations in future periods.  In particular, this reserve can be used to meet distribution requirements during years with low or negative investment returns.

There is no fixed target for the value of the Accumulated Income Reserve, but in the normal course of events, a balance between two and four year’s annual spend (grants plus operational expenses) is thought to provide sufficient comfort to the Board that it will be able to maintain its Grants policy through a full investment cycle.

Statement of Investment Policies and Objectives

The Statement of Investment Policy and Objectives (SIPO) prepared by the Trustees of Rātā Foundation sets out the objectives, policies and beliefs governing decisions about investments in relation to the Foundation’s assets.

The SIPO takes account of the requirements of:

  • Trust Deed constituting the Foundation
  • Trustee Act 1956
  • Community Trusts Act 1999

Our SIPO can be found  here.