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On Episode 3 of the Value in Giving Podcast, Rebecca Moffett, President of Vangaurd Charitable, is joined by Vanguard Charitable’s Chief Financial Officer Mark Froehlich to discuss how donors can maximize their charitable impact by aligning their investments with charitable values.
Philanthropy is a powerful tool that creates lasting change in the world. Hosted by Vanguard Charitable President Rebecca Moffett, the Value in Giving is a podcast that brings together leaders from nonprofit organizations and community foundations across the world of philanthropy. Learn more about the importance of giving, how nonprofits are responding to crises and addressing inequality, and how to take action now to support their efforts.
Podcast Host: Rebecca Moffett, President, Vanguard Charitable
Podcast Guest: Mark Froehlich, CFO at Vanguard Charitable
Rebecca Moffett: I'm Rebecca Moffitt, your host of Vanguard Charitable podcast The Value in Giving. For the next three episodes, our conversation will focus on how donors can maximize their charitable impact. And today, we're discussing how to align your investments with your charitable values to maximize impact. joining me for today's conversation is my colleague, Mark Froehlich Chief Financial Officer at Vanguard Charitable. Mark oversees the investment operations for donor-advised fund.
Mark Froehlich: Thanks, Rebecca for having me on today's podcast.
Moffett: To get started, we are often asked about how a donor can maximize their charitable impact by evaluating different information about the organizations that they're considering getting to as well as through granting mechanism like recoverable grants. However, a donor-advised funds investment strategy is another critical way for donors to maximize their charitable impact.
As we dive into the various considerations that donor should make about their investment strategy, it's important to first understand our investment philosophy. And that's truly the basis for the investments that we offer at Vanguard Charitable. Can you share what that investment philosophy is?
Froehlich: I'll start by saying that while we're not a program or an activity of Vanguard, we are strongly aligned with Vanguard's time-tested investment philosophy and values here at Vanguard Charitable our investment philosophy includes a commitment to diversification, transparency, and cost-effectiveness. To ensure diversification, we offer high-quality investment options across a range of asset classes which span the risk spectrum. We provide transparency into these options by sharing information on each investment goal, time horizon risk level and expense ratio, and also by reporting actual returns versus the relevant benchmark. As for cost-effectiveness, we ensure that our options have low investment fees without sacrificing quality. And because our investments are both high quality and low cost, our donors are truly able to maximize investment growth to support granting overtime. In fact, Vanguard charitable has granted more than $12 billion since we were founded in 1997. And our investment approach has been key to supporting this impact.
Moffett: Mark, every time I hear that $12 billion number of how much we have granted since inception, I just have to pause because the number is staggering. In the amount of organizations that were able to support with a $12 billion number and the critical missions out there. Really takes your breath away. So thanks for sharing that.
Froehlich: It's truly incredible, it really is.
Moffett: The investment philosophy that you shared is really helpful to understand. And now I think we need to help our donors understand and our listeners understand how that really foundational philosophy helps to provide the basis for what is included in our investment lineup. So can you provide some information on what do we actually offer that aligns with that investment philosophy?
Froehlich: We offer three different types of investment options. Each option is offered in a pooled structure. And consistent with our investment philosophy, the majority of our pools hold high-quality and low-cost Vanguard investment funds. The first set of options are called portfolio solutions. These are pre-allocated portfolios which are rebalanced daily, and these options are ideal for donors looking to pick a single option which can be maintained over time. The portfolio solutions range and risk level and a popular example is our moderate growth portfolio, which allocates 60% to equities and 40% to bonds. The second category of investments are portfolio builders, donors who wish to create custom allocations across various asset classes may choose from a menu of different portfolio builders, which serve as building blocks to create a custom portfolio. Popular examples include total US stock, total bond and money market. The third category of options are what we call values driven investments. These options allow donors just to align charitable investments with personal values through index funds, which are screened for environmental, social and governance. For simplicity, we use the acronym ESG when describing this type of investment.
Moffett: Mark, this line up I know has been considered very thoughtfully from ensuring that we're providing a range of options all across the risk spectrum that you discussed, and ensuring that the wide ranging needs of our donors can really be met through this offering. Can you help our listeners understand how they can maximize their charitable impact using the offering that you just provided?
Froehlich: There are four key principles we recommend donors consider in order to maximize their charitable impact. These are craft clear goals, remain balanced, minimize cost, and maintain perspective and long-term discipline.
Moffett: Oh, interesting. Okay, so there's these four different elements. I think Mark, we're going to need you to help elaborate a little bit in how these different recommendations can help donors to maximize their impact.
Froehlich: Sure. So first, it's important to craft clear goals. We recommend developing a mission statement to guide each of the decisions a donor makes with their giving for example, your goal might be to provide consistent annual support to a number of favorite charities where you might be planning and saving for a large grant several years in the future. Either way, it will be important to have clear philanthropic goals and there are a number of resources on our website that can assist you in that process.
Moffett: I think another place that donors can probably look right is that their own favorite charitable organizations and understanding some of their own mission statements. It could be a good guiding source or if you're defining your own personal mission statement.
Froehlich: Agreed. That's a great point. The second, it's important to remain balanced. This refers to setting an investment asset allocation, which aligns to your grant-making goals considering both risk level and grant-making time horizon and then selecting diversified investments within each asset class or portfolio. We make this easy for donors by offering pre-allocated portfolio solutions, and we also ensure that all investment options are very well diversified. Third, it's important to minimize cost. As I mentioned, we ensure that all investment options are low-cost. And since Vanguard Charitable investment balances are pooled we are able to access even lower institutional investment pricing in what is available to traditional investors. The positive effects of low costs are compounded over time, which helps to maximize the dollars available for granting. Finally, it's important to maintain perspective and long-term discipline once you identify one or more investment options aligned to your goals, it's imperative to remain focused on that strategy and avoid distractions, such as short-term market volatility or news headlines. Not surprisingly, we have observed the majority of our donors maintaining our asset allocations, even during periods of volatility, and this long-term discipline results in greater growth, generating more dollars for grantmaking over time.
Moffett: We've talked about that donors need to craft really clear goals, they need to remain balanced. They need to have an eye on cost and take a long-term disciplined approach. These four different elements sound really good, and they sound really important conceptually. But I do think we need to probably talk about how this can apply to a real-life example. So let me throw an example out there that I've actually heard about recently, and let's see how this can apply to what you just described. So, let's say that we have a donor that has goals to address hunger and homelessness issues in their local community, ranging from getting food on the tables and the short term to longer-term efforts to build sustainable housing. How might they actually apply these principles in order to help them maximize their impact?
Froehlich: This is a great example. And in this case, you've already noted that the donor started by establishing clear charitable goals that happen to both be short-term and long-term focused. Next, let's assume this donor considers their risk tolerance as well as the need to generate both short-term income and long-term growth to achieve their goals. And this leads them to select our growth portfolio, which maintains an 80% allocation to equities and a 20% allocation to bonds. As I've mentioned, the investments are low cost and well diversified and since this portfolio solution is automatically rebalanced daily, our donors are able to maintain this allocation over time, and focus their attention on recommending things which can be issued directly from the portfolio. In sticking with this example, let's assume this donor has recently reached retirement age is now contributing a bit less into their fund each year while looking for larger granting opportunities to fund sustainable housing projects. The donor might use this opportunity to revisit their investment allocation and ultimately decide to exchange into the conservative growth portfolio. This portfolio is 20% equities and 80% bonds, and the donor decides this allocation is more appropriate considering they're anticipating large grants within a short time frame.
Moffett: Okay, that's really interesting. And Mark, what I find so helpful is not only did you provide some different scenarios of the various options that the donor use based on their goals, but you also helped us understand how that might be able to shift or what the different scenarios might be as their contributions might change over the course of their life. So really helpful. Thank you. I do want to just switch gears slightly and dive into the topic of impact investing. It's a term that I just feel like it's being used everywhere. And I often find has several different meanings depending on who I'm in a conversation with. But can you help our listeners understand first, what impact investing means?
Froehlich: Of course, so as you've mentioned, impact investments have become very popular in philanthropy. In these are investments made into companies, organizations or funds, with the intention to generate social and environmental impact alongside a financial return. Impact Investing is a very broad term, which includes investments with target returns ranging from below market to market rate. An example of a below-market rate investment is an interest-free loan to a charitable organization, while an example of a market rate investment would be an ESG index fund.
Moffett: Okay, thank you for providing that definition. I just think it's helpful since like I said, the term can often be used in a lot of different ways. What is it that we at Vanguard Charitable offer that aligns with this definition of impact investing?
Froehlich: So here at Vanguard Charitable, we've observed a growing demand for investments that provide both on the market rate and financial return, as well as social and environmental impact. Based on this demand, we began offering our values driven investments back in 2018. As I mentioned previously, our values driven investments include ESG index funds, which screen out certain holdings based on environmental, social and governance criteria. For example, our ESG US stock pool excludes stocks of companies in industries such as alcohol, tobacco, weapons, as well as companies that own fossil fuel reserves. Now, outside of our investment options, another way our donors can increase their impact is through the use of recoverable grants. recoverable grants provide upfront cash to charitable organizations that anticipates future revenue streams, which the organization may use to refund the grant back into the donor-advised fund. I understand you'll be discussing recoverable grants in more detail with our partners and Capshift as part of this podcast series. So I truly encourage our listeners to tune into that episode as well.
Moffett: We absolutely will be diving into that topic and I'm really excited to help our listeners understand the value of power that recoverable brands can have mark in the spirit of transparency. I know that we provide a lot of information about ESGs. On their website, where would be the best place for donors to dive in and find that information.
Froehlich: I would recommend that our donors go to our website, vanguardcharitable.org and visit the investments section. We provide full transparency into all of the details of the options that we offer, including our ESG options.
Moffett: Mark, I want to thank you so much for spending time with us today on this important topic as an organization whose mission is to increase philanthropy and maximize impact over time it's important that we not only continued to evolve our offer so that our donors have the ability to maximize their own charitable impact through their donor-advised fund, but that we also spend time on how donors can utilize the many valuable components of our offering today. Understanding how investments can be used to maximize impact is a really important area to spend time on. So, thank you for all of your valuable insights today. For more information about Vanguard Charitable Donor Advised Fund, be sure to check out Vanguardcharitable.org Also, be sure to subscribe to the Value in Giving Podcast.
Next time, we'll continue to talk about maximizing your charitable impact in using creative giving vehicles like recoverable grants. Thank you.