Slowly But Surely, Foundations Are Changing How They Invest Their Endowments

For Erika Seth Davies, changing the way foundations invest — and by extension, changing how all investment works — isn’t just a moral, financial or environmental imperative. It’s personal for her, particularly as a Black woman and mother of two from Baltimore.

Throughout her travels, in meetings and conferences, during networking events and happy hour conversations, there’s one particular example she finds herself bringing up recently: despite women being half the population, she says, startups focused on women’s health issues only receive two percent of healthcare-related venture capital investment. She sees that as a direct result stemming from the fact that men represent 89% of senior partners at venture capital firms — some of whom are managing investment dollars on behalf of foundations.

“There’s so many things that don’t get funded because of who is evaluating them,” Seth Davies says. “The idea, the very idea, that this is somehow a neutral and objective process is bonkers to me.”

A small but growing number of foundations are finally starting to listen and make some of the changes that Seth Davies has been researching and advocating for more than a decade, codified in the “Due Diligence 2.0” commitment that she co-created in 2020. The changes have made way for more diverse-looking investment advisory firms and, perhaps even more importantly, for more diverse-thinking investment advisory firms that are able to dig deeper and manage investment portfolios in ways that don’t conflict with the work that foundations support through their grantmaking.

And they do this all without sacrificing any performance in pure financial terms.

“It’s kind of like, I told y’all so,” Seth Davies says. “Performance is possible when you do these things and it matters to be in line with your values when it comes to all of your decision making, not just the grantmaking.”

Where does grant money come from?

Foundations have long positioned themselves as central players in community life, funding everything from food pantries to affordable housing to performing arts. Yet foundation finances are largely a mystery, even to many insiders.

Currently, U.S. foundations hold a record $1.6 trillion in stocks, bonds, real estate, private equity, certificates of deposit and other assets in their investment portfolios. With the income generated by those investments, they paid out more than $100 billion in grants in 2024 — the first year ever that foundation grantmaking hit twelve figures.

But what if dividends from oil companies are getting paid out as grants to environmental justice organizations? Or profits from private equity are being granted out to community organizers fighting against private equity incursions into housing and healthcare? Or interest banks pay on certificates of deposit getting distributed to organizations fighting discrimination by those same banks?

More and more foundations are starting to realize such misalignments are not just awkward, but untenable. The F.B. Heron Foundation and the Jessie Smith Noyes Foundation started analyzing their endowments for mission-alignment in the 1990s. The Rockefeller Brothers Fund — as in the Rockefeller family who infamously gained their fortune from oil — announced in 2014 it would completely divest its endowment from fossil fuels. The East Bay Community Foundation announced in 2021 it would begin moving its endowment assets into mission-aligned investments.

Such moves are the result of years of conversations, both internally among foundation trustees and staff as well as externally with grantees who call out their own funders for being deeply invested in the very systems that grantees are fighting.

One of the big winners so far has been Westfuller, a Black, LGBTQ- and woman-owned investment advisory firm co-founded in 2011 by Ian Fuller and Lola West.

The duo had spent years working together at the same big Wall Street firm. They’d often talk about launching their own firm that would invest dollars in ways that were more in line with the values they’d come to share in spaces outside the office — serving as board members for nonprofits working in racial or gender equity, abortion rights, and worker justice, or working with Nelson Mandela in West’s case. In the aftermath of the global financial crisis, they finally struck out on their own to launch Westfuller.

Westfuller now manages $3.45 billion in assets, with much of its growth coming just since 2021, the year the firm took on its first of what are now 21 foundation clients, taking business away from larger and more established firms. It even has a waiting list for prospective clients.

“More and more foundations are trying to step in that direction,” Fuller says. “It’s not overnight. It’s still very much a journey for many organizations, but it feels like there’s a broader movement. This year has really galvanized people to reconcile with [the question of] what do they stand for?

Redefining due diligence

Changing the way foundations manage their investments portfolios is no small task. While each foundation hires dedicated employees to administer their grantmaking, foundation employees are rarely involved in the day-to-day selection of which investments end up in foundation portfolios. The vast majority of foundations outsource that work to professional investment advisory firms.

That became obvious to Seth Davies back in 2008. After several years working in fundraising, she took a job at Credo Capital Management, a Black-owned investment advisory firm in Baltimore. As a marketing associate at the firm, her job involved calling foundations and other institutions to try and get some of their business managing the investments in their portfolios.

Seth Davies encountered a vast, opaque network of relationships riddled with all kinds of implicit and explicit discrimination. It’s a network that operates on rules and conventions ostensibly intended to encourage sound financial management and maximize the amount of funding available for grants every year.

In reality, those rules and conventions help protect entrenched firms and reinforce existing patterns. A Knight Foundation study of the asset management industry finds that investment advisory firms owned by white men still control 98.6% of the investment industry’s $82 trillion in assets under management.

One of the most common barriers Seth Davies encountered was the practice of using assets under management as a proxy for risk assessment. The idea is that in order for a foundation to consider working with an investment advisory firm, the firm must already have beyond a certain dollar amount of assets it’s managing on behalf of existing clients. In theory, this threshold is supposed to weed out advisory firms who don’t already have a large enough client base and a track record of producing sufficient, reliable returns for those clients.

But that also locked out newer firms, like Credo or Westfuller, whose founders had years of experience previously working at larger firms where they managed client portfolios far exceeding those minimum thresholds.

“It’s not that these rules are useless,” Seth Davies says. “But if we’re using these rules and over and over again there is a pattern of exclusion, then you need to think differently about those particular criteria.”

Seth Davies moved on from Credo to the Association of Black Foundation Executives, where she continued working on the issue. In 2012, the association published a landmark white paper based on Seth Davies’ experience and research. The paper laid out a series of recommendations for changes to the due diligence process that foundations use for assessing whether to do business with an investment advisory firm.

Over the next decade, Seth Davies found new supporters and new places to advance the work of getting foundations to do business with more diverse investment advisory firms. In 2018, she founded the Racial Equity Asset Lab to give this part of her work a long-term home.

By 2020, during the nationwide period of racial uprisings after the police killings of George Floyd and Breonna Taylor, Seth Davies was getting calls from foundations everywhere asking to “pick her brain” on how they could diversify their investment advisors. She and a few allies in this space eventually wrote down some of the things they found themselves saying over and over again. They called it the “Due Diligence 2.0” Commitment.

Rethinking assets under management as a risk assessment metric is just one of nine reforms Due Diligence 2.0 calls for institutions to adopt. Crucially, none suggest any sort of quota — like having a certain number of investment advisory firms led by women or people of color managing a foundation’s assets, or targeting a certain percentage of assets to be managed by those firms. The suggested reforms are about changing practices and reexamining criteria that have proven to be a barrier for more diverse investment advisory firms and looking for different ways of getting at what those criteria are supposed to be a short cut for assessing.

“We wanted people to be thinking differently about what information is telling you,” Seth Davies says. “I don’t think it’s less rigorous, I think it’s actually more rigorous because you’re really having to show your work.”

“I think it actually reduces risk,” Seth Davies says. “Because you’re now actually looking at the different aspects of both operations and investment that tend to be cited as reasons for not working with these managers, you’re actually getting under the hood to understand where actual potential risk lies, and you can address it, as opposed to just throwing everybody into a bucket and never really addressing things from a systemic level.”

The Due Diligence 2.0 Commitment now counts over a hundred signatories, including 20 foundations and 48 investment advisory firms. It adds up to nearly $100 billion in assets owned or under management

That’s still just a tiny drop in the bucket. According to Candid, an organization that researches America’s charitable sector, there are more than 127,000 foundations across the country. And even for some of the most dedicated signatories to the Due Diligence 2.0 Commitment, there is still so much work left to do.

Outsourcing the outsourcing

Long before foundations grew to the $1.6 trillion in assets they represent today, it was common for foundation portfolios to be managed by an investment committee, often consisting of some board members, some staff and a few external financial professionals volunteering their time. The committee might choose a few investments on own, but more likely they would select a few different investment advisory firms to select those investments — one or more firms for stocks, others for bonds, others for “alternative assets” such as private equity funds and so forth.

Today, the most common arrangement among foundations is to use a specialized investment advisory firm as an “Outsourced Chief Investment Officer.” With oversight from the foundation’s investment committee, an OCIO operates as a consultant that selects and supervises other investment advisory firms who actually pick the investments in a foundation’s portfolio. Thirty-nine percent of private foundations and 43% of community foundations said they used an OCIO to manage their investment portfolio in 2023, according to Institutional Investor Magazine. Both percentages have been trending upward in recent years.

Many OCIOs are very much enmeshed in Wall Street; some are just divisions within a major Wall Street bank. They often hire from the same circles of financial professionals. OCIOs don’t just provide their services for foundations, either. Many colleges, universities and corporations also use an OCIO to manage their endowments.

OCIOs across the U.S. hold $2.9 trillion in assets under management, according to investment research firm Cerulli & Associates. And like the financial sector overall, it’s a top-heavy market, with the top 12 largest OCIO providers accounting for 60% of those assets.

Foundations today still have investment committees, but increasingly their job is just to oversee the foundation’s chosen OCIO, reviewing investments and financial performance, and ensuring compliance with the foundation’s investment policy statement.

But every now and then, an OCIO’s contract with the foundation expires, creating an opportunity to do things differently.

Request for proposals

The contract for an OCIO to manage the $450 million endowment at the Nathan Cummings Foundation came up for renewal in 2020.

The foundation had already been working with an OCIO since 2010. In 2017, it began discussing internally, with support from external consultants, whether it could be possible to move its entire endowment into investments that aligned with the foundation’s social and racial justice mission.

The Nathan Cummings Foundation’s board of trustees, which still includes members of the founder’s family, voted unanimously in 2018 to make that move. The vote empowered foundation staff to sort all of its investments into four categories: those that were out of alignment with its mission and values; those that were at least avoiding harm; those that were actively making a positive social impact in some way; and those that were directly contributing to solutions advancing the foundation’s mission and values. The foundation made it a new goal to move all those dollars toward the mission-aligned end of that spectrum.

The Nathan Cummings Foundation had made significant progress through its existing OCIO. When it started, nearly half the foundation’s investment portfolio was out of alignment with its mission and values. By 2020, that number was down to 5%. But it still wasn’t enough, especially when it came to racial and gender representation among those who managed its investments.

Under an OCIO arrangement, the OCIO functions as a “manager of managers.” Based on the financial performance goals and risk tolerance laid out in the client’s investment policy statement, the OCIO first decides how much of the portfolio should be in each asset class: stocks, bonds, private equity, real estate, venture capital funds or other assets including cash deposits held at banks. Then, within each of those categories, the OCIO typically works with a roster of other investment advisory firms who each handle slices of a client’s pie.

The firms on an OCIO’s roster, or what’s known in the industry as the firms on an OCIO’s platform, are the ones that actually pick the investments that end up in their clients’ endowments. It’s really the OCIOs that determine the criteria, such as minimum assets under management, that determine which investment advisory firms end up on their platforms.

At one particular meeting in August 2018, the Nathan Cummings Foundation’s OCIO informed their investment committee that it had declined to add a firm led by a woman of color to its platform. The decision didn’t sit well with the committee. It set them off on another journey that culminated in 2020, when the investment committee adopted new policies based on Seth Davies’ earlier work at the Association of Black Foundation Executives. That included lowering the foundation’s own minimum assets under management threshold for selecting an OCIO.

Then, in 2020, Nathan Cummings Foundation put out a request for proposals to search for an OCIO that would meet its new requirements.

More than 40 OCIO providers responded. With a unanimous vote from the Nathan Cummings Foundation investment committee, the winning bid came from Bivium Westfuller — at the time a brand new joint venture formed by Westfuller and Bivium, a Black-led firm based in the Bay Area that already had a small set of its own OCIO clients. Nathan Cummings Foundation was Westfuller’s first foundation client, and the Bivium Westfuller joint venture has since gone on to add 20 more foundations as clients, adding up to $3 billion in foundation assets. Together, the two firms now co-manage more than $7 billion in assets.

“It’s the flywheel effect and it’s incredibly exciting to see what’s happening for Bivium Westfuller because the other thing is the partnership with Nathan Cummings has deepened their impact lens and their ability to do that side of things,” says Seth Davies, who joined the Nathan Cummings Foundation investment committee in 2023. “They’re having conversations about how to get alignment with mission and values in a serious way, not just a checkbox way. That not only benefits their clients but the field more broadly.”

Getting into the weeds

The investment world has created ways to cater superficially to demand from mission-oriented investors without actually making much meaningful change beneath the surface.

According to the U.S. Sustainable Investment Forum, a trade organization for socially-responsible investment firms, there are at least $6.5 trillion in professionally-managed assets that are explicitly marketed as sustainability-focused or “ESG,” That means the firms managing the mutual funds have applied some kind of environmental, social and governance criteria in selecting those company stocks to be part of the mutual fund’s portfolio.

But the level of “greenwashing” — putting various forms of lipstick on the pig of business as usual, for the sake of marketing — is becoming more and more extensive every year. Even the Harvard Business Review has taken notice of mutual funds branded as environmentally responsible or “ESG” while still including big oil companies in their portfolios.

For the Nathan Cummings Foundation, one of Bivium Westfuller’s selling points was its willingness to dig deeper when assessing investments for their social or environmental impact in addition to financial performance. The foundation wanted an OCIO they believed would ask the same questions its grantmaking staff or grantees might want to ask the investment advisory firms picking investments for the foundation’s portfolio.

By necessity, those questions get deep into the weeds. Take a municipal bond offering. Foundations aren’t normally interested in municipal bonds because the interest income from municipal bonds are tax-exempt, and foundations are already tax-exempt entities. But local and state government bodies often use municipal bonds to finance affordable housing, schools, parks or other infrastructure that might benefit communities that the foundation cares about as a grantmaker.

Maybe there’s an opportunity for the foundation to buy some of those municipal bonds and still earn a solid rate of interest even if it doesn’t need the tax exemption. Or maybe it’s not such a good option, if some of the proceeds from those bonds are funding settlements paid to families of those unlawfully killed by police. Those are the kinds of weeds Nathan Cummings Foundation wanted its OCIO to be able to wade into when picking investment advisory firms on its behalf.

“Culturally, Nathan Cummings has adopted this approach to racial, economic and environmental justice, and that flows through the veins of Bivium Westfuller,” says Rey Ramsey, CEO at the Nathan Cummings Foundation. “I viewed [selecting an OCIO] as hiring part of our team and not just a distant outside mechanical thing that you can start outsourcing more to AI. The human element is really, really important.”

It’s often smaller, newer investment advisory firms that can prove they are able to do this highly specialized deeper analysis of portfolio investments — looking below the surface to reveal if something that’s branded as “sustainable” isn’t really all it’s cracked up to be — because they aren’t bound by the traditional conventions and limitations that can be found at larger, more established firms.

Reducing or eliminating the assets under management threshold to be on an OCIO platform helps clear the path for these kinds of investment advisory firms — in addition to reducing a barrier for any firms led by women or people of color.

“We don’t have a stated minimum assets under management for our investment platform in part because of our own experience around that,” Fuller says.

“Many boutique managers… may be very talented, coming from some of the best schooling, best training at large firms, but maybe didn’t have that network to support getting them an initial significant starting amount of assets under management,” Fuller says. “For us, we’re really trying to understand the team, their process, their motivation and their ability to drive repeatable market rate returns.”

Fuller says Bivium Westfuller currently has around 100 investment advisor firms on its OCIO platform, managing investments on behalf of clients across all asset classes — stocks, bonds, private equity, venture capital and more. According to Fuller, their OCIO investment research team evaluates as many as 500 potential firms to add every year, while also regularly reevaluating the firms it previously added.

But back on the client side of things, Fuller says his firm can only take on three to five new clients a year. Everyone else goes on the waitlist. For now. It takes time to vet and onboard new clients while also maintaining vigilance to ensure those dollars really do get and stay invested in line with the expectations of clients, both financially as well as in terms of alignment with grantmaking work. Sometimes potential clients only think they’re ready to make the changes necessary until they start talking to Fuller and his team about what it actually entails.

“We have said no to many different opportunities as well, which is the strangest of things to me, I never would have imagined after doing this work for 20 years being able to say that,” Fuller says.

Changing the market

Investment advisory firms are a bunch of copycats. When one firm or a few firms get a little bit of traction doing something new or different, it starts to spread like a disease. Like diseases, new approaches to investment can spread at different rates.

Twenty or 30 years ago, real estate was still much more localized. Local developers, local investors, local bankers dominated. Things are different today. The 2008-2009 global financial crisis drew a few leading firms into the market for distressed properties, and it opened the door to many more investment advisory firms moving client dollars — including foundation dollars — into real estate. According to investor data tracking platform Preqin, private real estate assets under management went from $64 billion in 2000 to over $1 trillion in 2019. The consequences of that change haven’t been all good for communities, but it’s an illustration that investment advisory firms can change over time.

What’s happening now among foundations and OCIOs isn’t necessarily going to spread as fast. The opportunities in mission-driven or values-driven investing don’t offer the same seemingly limitless profit potential that real estate offers as a draw for investor dollars.

Investment advisory firms are a bunch of copycats. When one firm or a few firms get a little bit of traction doing something new or different, it starts to spread.

But other OCIO firms are taking note, including a few that have signed on to Seth Davies’ Due Diligence 2.0 commitment. Nathan Cummings Foundation, Bivium and Westfuller are all signatories. The more OCIO firms start operating differently, the bigger the market for existing or new investment advisory firms whose founders look different, talk differently and think differently.

In a survey of Due Diligence 2.0 signatories conducted this year, the Racial Equity Asset Lab found 56% of respondents incorporated suggested reforms into their process for selecting investment advisory firms. As proxies for impact, 56% of respondents reported increasing the number of initial meetings with firms, 50% reported onboarding at least 11 new firms, and 60% reported increasing allocations to newly onboarded firms.

In other words, signatories are reaching out and evaluating investment advisory firms they’ve previously excluded, some of those advisors are making it through the selection process, and those newly onboarded firms are managing a growing slice of those portfolios. Nobody has backed out and asked to remove themselves as Due Diligence 2.0 signatories. The Racial Equity Asset Lab is now in the process of gathering even deeper feedback and possibly updating to a 3.0 version of the commitment.

“Looking at where we are now in society – MAGA, attacks on DEI calling it illegal, attacks on civil rights legislation – all of that tells me that it was starting to work,” Seth Davies says. “There are organizations, institutions, individuals who will continue that progress, and there are those who won’t. Those that are committed to staying on the pathway will continue to see the benefits of staying on that path, because there really is growth that way. I don’t see how else you see growth without the full participation of society.”