The board of the McKnight Foundation, one of the US’ top 50 largest foundations by assets, was “naturally sceptical of impact investing”, says David Crosby, the Chair of its investment committee. But a $200m commitment to explore the growing space three years ago has proven lucrative.
An initial $25m investment in the Generation Global Equity Fund as part of McKnight’s impact investing programme has grown to more than $38m, returning 17.3% against the MSCI World benchmark’s 6.6% (as of June 2017). The investment, which originally sat outside McKnight’s $2.2bn endowment in an experimental impact portfolio, has been increased to $75m and added to the main portfolio.
Elizabeth McGeveran, Director of Impact Investing at the McKnight Foundation, recently blogged about the holding’s strong outperformance, saying it proves that impact investing can have financial success. Expanding on this with RI, McGeveran says: “From my vantage point they [Generation Investment Management] seem to merge very strong fundamental investing practices with an innovative, well-considered understanding of the future of our global economy. Fundamentally, they appear to be strong investment managers — clearly a good buy/sell discipline, picking stocks well, etc. I expect they also have an edge in terms of human capital — they are able to hire extremely bright, analytical and creative thinkers.” She says Generation staff are “fundamentally curious and open-minded about sustainability as an organising principle in our future economy”.
“One thing that stands out as unique in their process is how they explore issues/trends deeply. They periodically host multi-day, cross-disciplinary explorations of emerging topics with fascinating groups of experts. These form the basis of their proprietary understanding of a theme that is then woven into their portfolio.”
McGeveran joined the McKnight Foundation in 2014 following a role in London as Senior Vice President of Governance & Sustainable Investment at F&C Asset Management (now BMO Global Asset Management). She says the McKnight family’s ties to innovative companies has created the enabling conditions for impact investing. “William McKnight was the first major CEO of the 3M corporation (US-based manufacturing multinational) in Minnesota,” she says. “And it is well known that he had the idea that if you give scientists free time during the work day to pursue their outside interests, innovation will happen through that intellectual engagement. “So one of the things that’s been useful in working with his descendants is that they place a high value on innovation and they aren’t afraid of new things. The fourth generation of the family joined the board of directors – people in their 40s. They had a different idea about the endowment in that it could provide additional leverage to solve the social and environmental problems that our grant-making was already working on.” These discussions led to the creation of McKnight’s impact investing programme to which 10% of the foundation’s endowment was allocated.Initially, $79m has been put into the public markets at a standard benchmark performance, $75m into private investments and $50m is reserved for programme-related investments. Alongside delivering social and environmental impacts with financial return, McGeveran was also asked by the board to deliver ‘learning returns’. “My engagement with public and private markets has to yield valuable information and new sets of knowledge for the people who do the grant making,” she explains. This includes market information to judge whether a project needs a grant or can raise money through different sources.
“We took $100m and built a carbon efficiency strategy rather than do something like a Russell 3000 Tracker Fund” – McKnight’s McGeveran on aligning its mission with its investments
McKnight has so far made 23 impact investments in a portfolio constructed by Goldman Sachs Asset Management. Along with investments in three Generation products and RBC Global Asset Management, McKnight has recently made allocations to long-term investor Ownership Capital and asset manager Parametric.
McGeveran, says its impact investing work has also influenced the main endowment. “We are doing things with the investments to create a greater sense of alignment between the mission of the foundation and our investments. For example, in the main body of the endowment we took $100m and built a carbon efficiency strategy rather than do something like a Russell 3000 Tracker Fund. It’s still low-cost. It’s still broad market. It’s still low tracking error. But now we are over- and under-weighting companies based on how much greenhouse gas they produce, per unit of sales, against their sector peers.”
McGeveran estimates that around every $1 out of $4 in McKnight’s endowment is aligned with ESG, and she says it tries to think about impact investing as broadly as possible.
“A lot of times foundations look at impact investing and all they think about is new managers and investing in sub-par products. We try to think about how we as a customer influence our managers or act as responsible shareholders. That’s something that European pension funds and asset managers are quite sophisticated at already. In the US, foundations are uncovering these opportunities for leverage.
“Our understanding is that our entire endowment has an impact on the world and if there are ways we can understand, improve or enhance those impacts, then that is a net benefit to the foundation and a net benefit to our endowment.”