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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).

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. 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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