Press article
How asset management for foundations came about
Published: 24.06.2021 | By investify
Carsten Graßhoff and Harald Brock think that the new digital asset management including reporting offered by the SozialBank to foundations is unique. How the project and its implementation came about, the two project managers of SozialBank and Investify tell us in their field report.
The SozialBank has set up a digital asset management together with the fintech investify TECH. The new Gemeinwohl-Invest portal is aimed specifically at non-profit organisations and foundations that want to invest their assets in a value-oriented and sustainable way.
Tension between preservation of value and realisation of purpose
In recent years, a creeping development can be observed, especially at the grassroots level of social life and action: Many billions in foundation capital are still slumbering in fixed deposit accounts or in (federal) bonds at poor interest rates or even exposed to negative interest rates – often in the false assumption that the funds are well invested there in the long term. This makes it clear: these funds will not generate any social benefit in the foreseeable future, all the more so if inflation continues to rise. This is because it is becoming increasingly difficult to generate returns.
Thus, the challenge for foundations and other non-profit organisations in investing their assets is great: On the one hand, they are obliged to preserve their capital. On the other hand, their statutes prescribe the earmarked use of income. In addition, complex investment decisions are difficult to keep track of for boards that often work on a voluntary basis.
Genau hier setzt das zweite Problem an – diesmal auf der Seite der meisten Finanzdienstleister: Es wird den (oftmals wenig finanzaffinen) Entscheidungsträgern von gemeinnützigen Organisationen und Stiftungen bisher nicht gerade leicht gemacht, die Gelder zukunfts- und risikoorientiert in attraktive Wertpapiere anzulegen. Zudem fällt es vielen Finanzdienstleistern im Beratungsprozess schwer, auf einfache Weise aufzuzeigen, welche Wirkung die Mittel gesellschaftlich entfalten könnten.
Special requirements for asset management
“There has never been a smart digital asset management with a special focus on non-profit organisations before,” explains Harald Schmitz, CEO of the SozialBank, at the launch of the investment platform in May. As a specialised bank with total assets of almost 10 billion euros, SozialBank focuses exclusively on institutional clients from the social and health economy. These include organisations providing care for the elderly, disabled, children and youth, clinics, educational institutions and other social services. Many providers are non-profit or organised as foundations.
The special orientation lies in the history of the bank, which was founded in 1923: founding shareholders and to this day the main owners of SozialBank are the Caritas Foundation, the Diakonie, the Arbeiterwohlfahrt, the German Red Cross, the Paritätische Wohlfahrtsverband and the Zentralwohlfahrtsstelle der Juden in Deutschland.
Social economy organisations have to meet special requirements when it comes to investing money. The new solution called Gemeinwohl-Invest therefore takes into account essential requirements of the law on non-profit organisations and foundations as well as individual statutory requirements for the realisation of purposes. The investment strategy focuses on the dimensions of value preservation, purpose realisation, compliance with guidelines and sustainability.
High demands on the new platform
At the beginning, SozialBank asked itself which areas of asset management needed to be revised in order to simplify the securities offering in the foundation landscape and make it more attractive. SozialBank had identified four relevant areas that needed to be implemented.
Simple and target group-oriented reports
All documents should be rethought and from the perspective of the functionaries and stakeholders of a foundation or other non-profit organisation. This means, for example, that reports should be designed in such a way that the decision-making and supervisory bodies in the non-profit sector, which are often made up of volunteers, can also understand the contents at first glance and with little time investment. In addition to the Mifid-relevant quarterly reports, an annual report reduced to the most important information should be prepared, which addresses the four important criteria of a foundation in a clear and easily understandable way:
- Funds for the current and future realisation of the foundation’s purpose
- Performance of the investment
- Conformity of the investment with the foundation’s guidelines
- Sustainability of the investment
The portfolio’s sustainability performance can be measured by exclusion criteria as well as by its positive impact on the achievement of the UN Sustainable Development Goals (SDGs), an ESG score and contributions to the Paris climate goals. A dashboard provides transparency at all times with regard to investment strategy, distribution forecasts, investment history and return ranges.
The advisor’s work should be as simple as the reports. Scenarios for real and nominal capital preservation, risk simulations and cash flow forecasts, but also with the help of other tools, should make it possible to clarify the benefits of a sustainable investment in securities comprehensively and simply at the same time. In addition, the usual paperwork should come to an end through sensible digitalisation.
Foundation-oriented portfolio design
Contrary to the practice of many foundation funds, Gemeinwohl-Invest is based on a two-dimensional risk profile. Since foundations may only take on as much risk in their investments as is necessary to maintain their value (adjusted for inflation), this results in a conservative investment strategy for the foundation fund with a low share of equities (first dimension). However, in order to be able to position themselves more robustly in the long term, foundations have the possibility to build up free reserves for which there is no legal obligation to maintain value.
In a reserve pot (second dimension), a significantly higher proportion of shares can thus be selected. In the long term, the two-dimensional investment profile – conservative allocation in the foundation fund and opportunity-oriented allocation in the reserve fund – allows for a significant increase in value. This portfolio design results in a much more individual allocation for each foundation than conventional solutions can provide.
Minimise lot sizes
It was also important to FSO to create an offer that small and medium-sized foundations could also use. The entry hurdle should be lowered to 100,000 euros, while still making the business profitable for all parties involved. The offer should also be applicable to trusts and individual foundations. Nevertheless, there are no upper limits. For larger volumes, there are of course other individual solutions in the asset management of SozialBank.
The back office can be completely dispensed with
A major goal of the platform is to set new standards not only in client centricity, but also in the efficient handling of foundation mandates. The new asset management system should generate as little effort as possible in the back office. The users should be able to take care of asset management completely.
It was clear to the project team at SozialBank from the very beginning that these goals could only be achieved if there was maximum digitalisation in the front and back end, which would be successively expanded. In addition, all burdensome regulatory tasks of asset management must be outsourced to enable the intended concentration.
So an experienced partner had to be found. Investify Tech was chosen because, in addition to its proven technical and regulatory capabilities, the fintech brings a high level of innovation and flexibility to the project.
Opportunity through cooperation
Since numerous other projects have already been implemented on the basis of Investify technology, we were able to significantly minimise time, costs and project risks in the development of Gemeinwohl-Invest. Between the partners’ signatures on the contract and the launch of the digital asset management, there was only six months of project time. The internal implementation time at Investify Tech was only three months.
Another important aspect is that the service provider permanently takes care of the technological and regulatory updates of the platform without incurring additional costs. If, for example, Mifid changes, investify TECH implements this centrally. In addition, the platform is continuously updated technologically and expanded functionally.
SozialBank and investify TECH are convinced that the joint investment solution can generate sustainable social and entrepreneurial benefits.
About the authors:
Carsten Graßhoff has worked for the SozialBank since September 2013. Here he is head of institutional securities consulting. Previously, he was a corporate client advisor at Volksbank Jerichower Land.
Harald Brock is one of four managing directors of the technology and regulatory service provider Investify Tech. He previously held various management positions at the Gründerzentrum and in the Sparkassen-Finanzgruppe. Brock is also a supervisory board member at Cowork and editor of various publications on the topics of multi- and omni-channel management and digitalisation.
The article first appeared in Private Banking Magazin at https://www.private-banking-magazin.de/wie-es-zur-vermoegensverwaltung-nur-fuer-stiftungen-kam/
