How Nonprofits Are Addressing Current Investment Challenges in Ongoing Volatility

The Nonprofit Management Research Panel recently conducted a Quick Poll of nonprofit executives and investment committee members responsible for overseeing endowments and foundations. The poll was completed by 177 executives overseeing asset pools ranging in size from US $25 million to more than $1 billion. None of the participating organizations were institutional clients of SEI. The key findings are summarized in this report.

Nonprofit finance executives and investment committees face numerous investment challenges in today’s economy. These include liquidity and cash management concerns, increased due-diligence requirements, changing regulations, and continued volatile investment markets. All of these concerns exist at a time when these organizations still need to meet spending requirements to support their overall missions. This poll looked into the current investment management practices of nonprofits, the challenges they are facing, and how these organizations are prioritizing and addressing these concerns throughout this year.  

SECTION I – DEMOGRAPHICS

Organizations Polled

Depending on the type and size of the organization, the challenges can differ greatly. Below are breakdowns of participating organizations based on the type of organization and by the size of the asset pool:

• 27% educational institutions 
• 22% private foundations 
• 14% community foundations 
• 10% educational (non-college or university) 
• 8% human services 
• 8% hospital or healthcare system 
• 4% faith-based 
• 4% cultural or arts 
• 3% health and human services

 

SECTION II – SPENDING POLICIES

How much are nonprofits spending?

Per the organization’s spending policy, what percentage of endowment funds is withdrawn annually to support the organization’s mission?

The majority (86%) of those with a formal spending policy require annual spending of either 4% or 5%

 

Fast Fact: More than nine out of ten (91 percent) nonprofits in the poll said their organization has a formal spending policy.

 

How do spending policies differ based on the type of nonprofit?

 A breakdown of average spending policy based on type of organization:

 

Fast Fact: Of those polled without a formal spending policy, the average percentage of endowment funds withdrawn annually to support the rganization’s mission is 5.4 percent.

 

Avoiding Liquidity Challenges When It Comes to Supporting Spending Policies

Poll participants were asked to best describe their organization’s strategy around immunizing a portion of the portfolio to better support spending policies and avoid liquidity challenges.

More than half (51 percent) of those polled said the organization has either already implemented an immunization strategy (28 percent) or are considering one (23 percent).

 

SECTION III – USE OF ALTERNATIVE INVESTMENTS

How much of nonprofit portfolios are being allocated to alternatives? 

• Nearly three-quarters (70 percent) of those polled said the organization does currently invest in alternatives
• Nearly one-third (29 percent) of those organizations investing in alternatives said the current allocation was more than 31 percent of the entire portfolio
• Nearly one-half (46 percent) said the allocation was at least 20 percent of the entire portfolio

FAST FACT: More than three quarters (83 percent) of poll participants said that in the first half of this year the organization has NOT reduced the allocation to cash reserves it had at the end of 2009.

 

Size matters when investing in alternatives

• 89 percent of those nonprofits with more than $300M in assets are currently investing at least 11 percent of the overall portfolio in alternatives. More than half (52 percent) of that group is investing at least 20 percent and one-third (33 percent) is investing 31 percent or more.
• In contrast, nearly half (48 percent) of the poll participants with less than $300M in assets are currently investing 15 percent or less of the overall portfolio in alternatives.

 A breakdown of the percentage of each nonprofit sector currently using alternative investments 

 

 

SECTION IV – COLLEGES AND UNIVERSITIES ISSUING DEBT

 The colleges and universities participating in this poll were asked if their organization issues floating-rate debt:

 

 Of the 41 percent that said the organization does issue floating-rate debt:

• More than two-thirds (68 percent) said that the organization does not consider floating-rate debt during portfolio construction of the endowment
• Nearly three quarters (74 percent) have $300M or less in endowment assets

 

SECTION V – CURRENT CONCERNS AND CHALLENGES

What Is Contributing to an Increased Level of Complexity for Investment Committees?

Nonprofit investment committees have seen an environment that has continued to grow more challenging to navigate. As these committees try to construct investment portfolios that are best aligned with the overall goals and mission of the organization, what are some of the challenges they face? Below is a breakdown of the highest-ranking challenges identified by the most participants:

  

Outsourced CIO Model is Being Considered

Poll participants were asked to identify their current model for investment management of the endowment. They were provided the following definitions as options:

• INTERNAL MODEL - The organization does NOT use any outside investment consultants and handles all investment management decisions internally, including manager research, evaluation, selection, and monitoring.
• CONSULTANT MODEL - The organization uses a consultant who researches managers and then provides a selection of manager finalists, but organizational resources ultimately select and monitor managers.
• OUTSOURCED MODEL - The organization outsources all manager research, evaluation, selection, and monitoring decisions to an external fiduciary partner such as a Manager of Managers.

Included is a breakdown of the models currently being used by poll participants.

Recently, a number of high-profile firms have begun offering investment outsourcing services, specifically to the nonprofit community as an alternative to the traditional consultant approach. To accurately determine if there is a trend towards this approach, the poll asked each organization that said it currently uses an investment consultant about its attitude towards an outsourced model as defined above.

 

FAST FACTS: More than half (54 percent) of those currently using an investment consultant said the investment committee has at least a moderate level of interest in better understanding the benefits of an outsourced approach.  

 

The reasons for considering this type of approach vary, yet the poll results identified some factors that could be contributing towards an increased openness towards outsourcing.

Of the group currently using a consultant for investment management, the following concerns were identified:

• Nearly half (43 percent) said that the increased due-diligence requirements in monitoring managers is a concern
• More than half (52 percent) said investment vehicles have increased in complexity
• One-fifth (20 percent) said the lack of internal resources is an issue
• One-quarter (25 percent) said the need to research an increasing number of new asset classes is a concern 

 

FAST FACT: More than one-quarter (26 percent) of those polled said that defining investment management fiduciary responsibilities for trustees and the investment consultant is a concern to the organization. 

 

Concerns Moving Forward

Poll participants were asked about some of the challenges they need to address when it comes to managing the endowment. Here is the ranking of the top four issues based on the percentage of overall poll respondents that identified it as such:

 

The above issues were the most prevalent across all nonprofits that participated in this poll. In addition, the following concerns were expressed by specific types of nonprofits:

• More than three-quarters (80 percent) of the organizations that identified protecting the organization’s credit rating as an issue were either higher education (colleges/universities) or healthcare systems/hospitals
• Maintaining appropriate liquidity in the investment portfolio, ongoing cash management and inflation hedging were identified as concerns by the most community foundations
• Private foundations were also concerned with ongoing cash management (21 percent)
• Colleges and universities were most concerned with maintaining the appropriate liquidity in the investment portfolio (37 percent)

Conclusion

Nonprofits are especially sensitive to volatile investment markets because of the correlation between organizational spending needs and investment performance. The past two years have placed nonprofit finance executives and investment committees in an environment of increased complexity.

The poll results point to a significant trend where the impact the endowment has on overall finances continues to increase. That being the case, there is little surprise that the single greatest challenge identified moving forward is finding ways to make asset allocation decisions in conjunction with organizational finance decisions. Additionally, the poll suggests that investment committees are considering other options for investment management as a way to alleviate some of the challenges they face today. Poll participants confirmed being more open to learning about an outsourced model and how it can benefit their organizations moving forward.

This information is for educational purposes only. Not intended to be legal and/or tax advice. Please consult your financial/tax advisor for more information. Information provided by SEI Investments Management Corp., a wholly owned subsidiary of SEI Investments Company. ©2010 SEI

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