During a recent business trip to the East Coast, we had the opportunity to visit with representatives of the Calvert Foundation at their offices in Bethesda, Maryland. The Calvert Foundation is the issuer of the Calvert Foundation Community Investment Note, which many of our clients interested in socially responsible/impact investing own.
The note is a fixed income vehicle that invests in a global portfolio of approximately 140 non-profits, microfinance institutions, social enterprises and funds. These organizations work in areas such as affordable housing, community development, small business lending, education and international microfinance.
We continue to believe the Calvert note offers an efficient means of making an impact investment with one’s portfolio. Moreover, the Calvert Foundation is an established and experienced capital provider in this area, having established its note program over 20 years ago.
This said, despite the fact that the foundation’s historical investment repayment rate has been 100% and there’s been less than a 1% portfolio/credit loss since 1995 (with this loss ultimately covered by the foundation’s loan loss reserves), it bears reiterating that the notes are unsecured debt instruments. Therefore, from an overall risk management perspective, we remain comfortable allocating only a very modest portion of one’s overall fixed income exposure to the notes.
A few highlights from our meeting follow:
- One of our priorities was to gain more clarity on the Calvert Foundation’s programmatic targeting. Specifically, per their website and other correspondence, the foundation has communicated the ability of note holders to “target” an increasing number of specific lending areas.
However, we confirmed that this does not mean that a note holder can actually allocate his/her investment dollars to specific projects/geographic areas. Rather, the targeting is essentially a means of surveying investor interest, which the foundation takes into consideration when managing their overall loan portfolio. Per a subsequent follow-up exchange with a Calvert Foundation investor relations contact: “All Noteholders are invested in the same global pool, have their proportional share of the pool, and benefit from all the risk management & capitalization backing. Targeting does not change risk/return, but allows investors to show their support for the places and causes [in which] we see portfolio opportunities. The Calvert Foundation tracks targeting and commits to deploying capital in line with investor interests, providing impact reporting back to them, and having it collectively inform portfolio strategy.”
Moreover, should one desire to target, one must register one’s note with the Calvert Foundation and disclose one’s name and the dollar amount invested. Otherwise, for non-targeted notes purchased through brokerage firms (such as Fidelity, our firm’s dedicated broker and custodian), this personal information remains undisclosed and one remains anonymous to the Calvert Foundation.
- There is still a plethora of impact reporting on the Calvert Foundation’s website, at http://www.calvertfoundation.org/impact. This includes an annual impact report, as well as a global map which identifies their borrowers by name and geography. The map can also be filtered by specific lending area.
Some relevant statistics:
- The foundation currently has over 5,000 investors, with an overall note balance in excess of $260MM. On a dollar-weighted basis, the majority of the note balance comes from institutional investors (namely, some large foundations) and individual investors via brokerage platforms. Maryland and California are the largest states in terms of deposits.
- The notes have had a historic reinvestment rate of 90%.
- The foundation is seeing a lot more demand and opportunity to deploy impact capital, particularly in affordable housing, and their lending pipeline is typically between $100MM–$200MM at any given time.
- Relatedly, the foundation recently raised the interest rates on their notes, in order to entice more investors to meet this demand (indeed this was the main factor driving the increase, as opposed to the Federal Reserve’s slight rate hike towards the end of last year).
- Similar to banks, they manage interest rate risk via asset/liability matching, so that the “duration” (average maturity) of both is relatively in balance. The current duration of their notes (liabilities) is less than 4 years; the duration of their assets (loans to borrowers) is just 5 months longer.
- Approximately 40% of the foundation’s existing loan portfolio is international. From a risk management/diversification perspective, this is close to their current desired geographic threshold.
- The foundation has more than $45 million of loan loss reserves, net assets, subordinated investments and guarantees for loan loss protection. This is compared to just $4 million in loan losses/write offs, in total, over their 20+ year history. Furthermore, for additional support, they have received institutional support from larger foundations (i.e., Ford Foundation) in the form of recoverable grants.
- In their latest financial statements, we noticed a pick-up of $1.2 million of 90+ day loan delinquencies in 2015, after a prior period of no such delinquencies. We were informed this relates to two specific loans in the fair trade area—specifically, the impact of a poor coffee harvest. The foundation has arranged different payment plans for both loans, but either way, they are already 100% reserved against the aggregate loan amount.
- As a non-profit entity, the Calvert Foundation is exempt from federal regulatory oversight; rather, they are regulated by individual states. They are registered in all 50 states except for the state of Washington. We learned their exclusion from Washington is not specific to the Calvert Foundation, but pertains to all non-profit securities issuers who do not pre-qualify their investors.
- Again, the Calvert Foundation provides a lot of information on their website: http://www.calvertfoundation.org/. They expect to post their 2016 Social Impact report shortly. And for more final detail, their prospectus is available here: http://www.calvertfoundation.org/storage/documents/CF-Community-Investment-Note-Prospectus.pdf
We continue to keep abreast of the socially responsible investing/impact investing landscape, and will let you know of any relevant updates. As always, please feel free to contact us with any questions or comments.