Building the Market for Mission: A Case Study of the W.K. Kellogg Foundation Emerging Managers Program

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1 Building the Market for Mission: A Case Study of the W.K. Kellogg Foundation Emerging Managers Program By Irene Kao January 2012

2 About Tides Tides partners with individuals and institutions to support valuesbased social change throughout the world. Tides pursues multiple, related strategies to promote this mission. From green nonprofit centers to programmatic consulting, donor advised funds to fiscal sponsorship, grants management to risk management and more, Tides gives members of the nonprofit and philanthropic community freedom to focus on the change it wants to see. Tides PO Box San Francisco, CA For copies of this publication, please contact Tides at (415) or This publication will be available online at

3 Introduction In an economic climate that has heightened the urgency and scale of challenges facing vulnerable communities, foundations have sought more effective and impactful ways to fulfill their missions. The philanthropic sector has acknowledged that grants alone will not address the world s most pressing issues, and there has been a greater push for foundations to seek cross-sector solutions and leverage resources in more innovative ways. Most recently, there has been marked interest in and movement towards impact investing: activating investment portfolios in vehicles and products that have social and financial returns in order to align market and mission. The W.K. Kellogg Foundation (WKKF) building upon its mission-driven investing program started in 2007 has taken an additional step to directly influence the market and change financial and philanthropic institutional infrastructure by creating and developing a demand for minority investment managers. In 2010, the Kellogg Foundation partnered with Progress Investment Management Company, LLC to launch an emerging manager program with up to $100 million to support and cultivate smaller, entrepreneurial, high-potential minority- and women-owned investment companies. The program s goal [is] to generate positive market rate returns for the foundation while providing entrepreneurs in the investment industry with the resources they need to build their businesses, thereby helping further the foundation s commitment to engender success and to support communities across the country. 1 While it is still too early to judge the success of the program after only a year and a half, the individual managers have performed well, affirming the value of the program to the foundation, as well as providing a compelling case study and promising model for the social change sector. The Catalysts The emerging manager program grew out of discussions between the Kellogg Foundation s finance committee and board about the common desire to further promote the organization s mission and to take a new perspective on how to make a difference, including in its investment portfolio. Based on the foundation s mission to propel vulnerable children toward success and its commitment to racial equity, WKKF leadership wanted to promote equal access to opportunity in addition to their philanthropic grantmaking. When Chief Investment Officer Joel Wittenberg joined the foundation in 2009, he was charged with moving the idea into implementation. With a referral from Chris Williams, Chairman, CEO and founder of The Williams Capital Group, an African American-owned investment bank based in New York, he contacted Progress and other potential partners with whom he could work to identify minorityowned firms for the program. The foundation was specifically interested in firms that would serve the dual purposes of generating competitive investment return and embodying their mission. Thus, they found managers located outside of the typical financial hubs (i.e., New York City and San Francisco) in cities like Detroit and Atlanta. 1 W.K. Kellogg Foundation Partners with Progress Investment Management to Create $100 Million Emerging Manager Program. Battle Creek: W.K. Kellogg Foundation, March 22, Building the Market for Mission 1

4 After an extensive selection process, the foundation chose to contract with Progress because the firm offered a proprietary database of over 1,000 emerging managers 2, had the ability to customize a portfolio and embrace the goals of the client, and has a long commitment of both community involvement and supporting and advocating for emerging managers. In fall 2008, Wittenberg initiated a series of conversations with Johnita Walker Mizelle, Head of Corporate, Foundation and Endowment Sales at Progress, to jointly define the goals of the program and to begin the process of prospecting firms and performing full due diligence. Through Progress, the Kellogg Foundation engaged Detroit-based Ambassador Capital Management and Atlantabased Herndon Capital Management to manage the portfolio, currently valued at $32 million. 2 Progress defines an emerging manager as a registered investment advisor that has at least 51 percent employee ownership and $2 billion or less in assets under management at the time of initial evaluation, as well as all women- and minority-owned investment advisors regardless of size. 2 Building the Market for Mission

5 Democratizing Capital: The Case for Emerging Managers The recent global economic crisis demonstrates that the concentration of capital in so few large firms leads to financial volatility and vulnerability, and contributes to corporations being more accountable to their stockholders than their clients and communities. To mitigate risks and ensure financial sustainability at all levels, public market investment strategies must feature diverse firms with business models strongly tied to their communities. The Spread of Wealth The largest one hundred (3.1%) of 3,237 institutional asset management firms manage 65.9% of the total combined $50.3 trillion in assets. Research shows that,in many instances, firms with less than $2 billion under management have a performance advantage: they provide higher returns than large firms, tend to be open to innovation, are efficient users of technology, and execute swiftly, free from bureaucracy and driven by ownership incentives (Progress Investment Management Company, 2011). Democratization and Representation Minorities make up an increasing proportion of the general population, with non- Whites accounting for 27.6% and Hispanics and Latinos (of different races) constituting 16.3% of the total US population. Population growth was higher in all non-white racial categories than that of Whites between 2000 and 2010; the lowest rate, among African Americans, was 12.3% compared to 5.7% growth in White population since 2000 Census. The highest rate was 43.3% among Asians (U.S. Census Bureau, 2011). Despite the trend towards increased diversity, the financial services industry remains stalled, in terms of reflecting the demographics of the general population. The US Government Accountability Office (GAO) found no substantial change in overall diversity at the management level in the financial services industry from 1993 through 2008, and that diversity in senior positions remains limited. Minorities held 10% of senior-level positions compared with 17.4% of all management positions: African Americans held 2.8%, Hispanics 3%, and Asians 3.5% (Brown, 2010). Thus, engaging firms like Herndon and Ambassador that are minority-owned and managed and have proven performance results directly impacts the demographics of leadership and access to opportunity. Community Investment Emerging managers bring more business to and invest in their communities. For instance, since early 2010, Herndon has created 13 new jobs and increased its community involvement, supporting organizations like Foreverfamily in Atlanta that works with families with an incarcerated parent, focusing on hand-in-hand, faceto-face engagement. As such, targeting managers in metropolitan areas with large minority populations like Detroit and Atlanta where African Americans are 84% and 54% of the population, respectively strengthens community assets and retains local talent, especially as these areas experience greater out-migration of people and resources to the suburbs (U.S. Census Bureau, 2011). Building the Market for Mission 3

6 Comprehensive Returns In order to ensure the program meets its goals, WKKF and Progress committed to creating the right conditions to develop the managers and support the growth of the firms. Through direct mentorship and access to opportunity, the managers were able to meet business challenges and provide competitive returns. Additionally, the foundation did not try to limit or impose programmatic goals on the managers; they placed their trust in the firms and allowed them to execute their investment strategies as they saw fit. As a result, the managers have the ability to be more nimble and more deliberate with their investments. This development not only builds a field of diverse professionals to directly address the gross underrepresentation in the financial sector, but supports the growth of profitable firms that then can invest back into their businesses and communities. While these more nascent firms have greater survival risk, the partnership with WKKF and Progress provides an important foundation for gaining traction and attracting additional clients. The program has already received a great deal of attention and interest from other institutions, which Wittenberg hopes will lead to replication and, in the larger picture, social compounding of its greater impacts. Conclusion A year and a half after launching the emerging manager program, the Kellogg Foundation and Progress are seeing significant benefits: participating managers perform well compared to their peers in the field, the firms are creating employment and are socially responsible corporate citizens in their communities, and the returns are invested back into the foundation s work. Additionally, corporations and foundations are now seriously considering the investment performance and social impact of hiring smaller firms, with this example being a successful model for others to build a case within their own organizations. Eventually, WKKF hopes to expand the program by bringing the firms in to manage portions of the larger trust portfolio. In the meantime, the foundation and Progress continue to dedicate the necessary resources to develop their partnership, the program and the managers in an effort to catalyze a new, common sense way for institutions to meet their missions. As Wittenberg stated, This is not rocket science. It s not complicated. It s just a slightly different twist. Key Factors for Successful Implementation Alignment of mission and program goals, both in terms of objectives and communities impacted. Buy-in from foundation board and leadership staff. Partnership based on common goals and culture and the resources and infrastructure necessary for proper execution. Knowledge of risks and investments financial and human needed to inform planning and implementation. Learning environment structured with clear opportunities and metricsto support all stakeholders, both internal and external. Plan for evaluation and consequent growth based on achievementandsuccess. 4 Building the Market for Mission

7 Acknowledgments The author would like to thank Joel Wittenberg, Vice President and Chief Investment Officer at W.K. Kellogg Foundation, Johnita Walker Mizelle, Head of Corporate, Foundation and Endowment Sales at Progress Investment Management Company, Brian T. Jeffries, President and Chief Executive Officer at Ambassador Capital Management, and Randell A. Cain, Jr., Principal/Portfolio Manager at Herndon Capital Management, for their generosity, insights and time in contributing to this case study. About the W.K. Kellogg Foundation The W.K. Kellogg Foundation, founded in 1930 by breakfast cereal pioneer Will Keith Kellogg, is among the largest philanthropic foundations in the United States. Based in Battle Creek, Michigan, WKKF engages with communities in priority places across the country and internationally to create conditions that propel vulnerable children to realize their full potential in school, work and life. About Progress Investment Management Company Founded in 1990 and headquartered in San Francisco, CA, Progress Investment Management Company, LLC, is a registered investment advisor and manager of emerging managers. Progress creates diversified, risk-controlled, multi-manager investment funds in a variety of asset classes for institutional clients, including public funds, corporations, foundations and endowments. Progress specializes in working with smaller, entrepreneurial money management firms with innovative investment strategies. Progress currently manages over $7 billion in assets in domestic and international equities, fixed income and private equity. About Ambassador Capital Management Ambassador Capital Management is an investment management and advisory firm specializing exclusively in the fixed income markets. Founded in 1998, the firm provides management of fixed income and cash portfolios for public and private sector retirement plans, municipalities, corporations, endowments and foundations. The firm s goal is to build long-term partnerships with clients based on trust and confidence, and enhanced through exceptional customer service and high-quality performance. About Herndon Capital Management Herndon Capital Management is an institutional investment management firm specializing in large and mid capitalization equity strategies. Founded and registered with the SEC in 2001, the firm is an affiliate of Atlanta Life Financial Group (ALFG), a 106-year-old financial services firm. The firm began managing assets in June Serving a variety of institutional clients, HCM has a primary focus of Large Cap Funds. These funds serve to help balance the sectors of public pension funds, endowments, and other institutional assets. Building the Market for Mission 5