Nonprofit Investing Survey: Asset allocation trends in 2021

In an effort to exist in perpetuity, nonprofit boards and investment committees have always had a great emphasis on investment performance and overall returns. While the stewards of the assets don’t necessarily have to answer to shareholders, their constituents are many, ranging from staff to donors to benefactors. Their challenge is to leverage donor and organizational assets to generate investment returns that can cover expenses, exceed inflation, meet the overall missions they serve and preserve as much of the overall corpus as possible. This is usually done with a disciplined approach focused on strategic asset allocation; however, many organizations appear to be pursuing returns somewhat aggressively. Of all of the nonprofits surveyed, the average allocation to non-fixed income or short-term securities was 71%.

Nonprofits continue to maintain an aggressive investment approach in search of long-term returns.

How are nonprofits building their current portfolios to potentially provide the needed returns?

Mean Asset Allocations:

• Domestic Equities – 36%
• International Equities – 14%
• Alternative Strategies – 21%
• Fixed Income – 21%
• Short-term securities / Cash – 8%

The asset allocations discussed above are designed to drive expected investment returns. As nonprofit organizations face extreme pressure to do more with less, investment returns and funding the organization’s mission continues to be paramount to the organization’s success. While equity market performance over the past three years should have provided gains for many nonprofits, return objectives have remained stable and reasonable.

Return objectives for nonprofits surveyed ranged from as low as 2% to as high as 10%.

In which of the following alternative asset classes does your organization invest?

What are your inflation expectations for 2021?

• 8% – 0.0-0.5% increase
• 14% – 0.5-1.0% increase
• 27% – 1.0-1.5% increase
• 31% – 1.5-2.0% increase
• 17% – 2.0-2.5% increase
• 3% – more than a 2.5% increase

What types of global strategies are nonprofit organizations invested in?

• Developed international equity – 63%
• Emerging markets equity – 72%
• Global private equity – 24%
• Global public equity – 40%
• Global hedge funds – 20%
• Global fixed income – 35%
• Sovereign wealth funds – 1%
• Emerging markets debt – 18%
• Global real estate – 11%
• Frontier markets – 6%
• Other – 5%

Alternatives and global strategies are viewed as the preferred vehicles to increase diversification

Since the alternatives’ origin of risk is less correlated with public markets, the intention of these investments is to provide returns more insulated from market fluctuations, while increasing potential for returns in an otherwise low return environment for traditional stocks and bonds.

• In an effort to increase returns and diversify portfolios, nearly three-quarters of nonprofits surveyed (74%) have assets invested in alternative asset classes.
• Of those with an allocation to alternatives, on average they invest nearly a quarter (24%) of their portfolio in these products.  
• There does not appear to be a near-term catalyst for reversing this trend, as a staggering 94% of respondents said they plan to either increase their allocation to alternatives or keep it the same in 2021.

Use of a discretionary investment partner continues to expand in nonprofit sector

Nonprofit trustees continue to look for the most effective ways to be the best stewards of their organization’s assets and make sure those assets support the overall mission. For many, the time and resources needed to track the enormous array of investment products and managers is too much for investment committees that often meet only on a quarterly basis.  As a result, almost a third (31%) of all nonprofits surveyed saying the investment committee is concerned about the resources required to perform the necessary due diligence around
investment managers.

• Investment committees continue to rely on external partners as more than three quarters (83%) of those surveyed, said they used an outside expert to support their investment management efforts.
• Nearly half (49%) of those nonprofits using an external partner for support with investment management use a discretionary provider meaning they have delegated full or partial discretion for selecting investment managers to that partner.

Where does your discretionary investment partner provide the most value?

• 90% – Rebalancing the portfolio’s asset allocation as the most value provided.
• 90% – Asset allocation changes within ranges established in the IPS.
• 83% – Risk management/portfolio stress-testing 
• 78% – Providing committee education.
• 50% – The value was in money manager hiring/firing
• 23% – Support donor communications/initiatives
• 13% – Marketing support

How do you currently measure or plan to measure the value of delegating discretion over asset allocation changes?

• 46% – Floating benchmark
• 36% – Static benchmark
• 15% – Set to strategic weight

When does your organization plan your next formal review of your current provider?

• Only 20% said it will definitively be after 2024
• Nearly half (47%) said they don’t know when
• A third (33%) said their next formal review of their current provider will be between now and the end of 2023
• 54% said they will consider a discretionary provider – full or partial discretion – during their next review

More results from the Nonprofit Investing Survey:

• Governance and investment oversight results
• ESG, SRI and sustainable investing results
• Fundraising results
• Spending policy

The SEI Nonprofit Management Research Panel completed a comprehensive survey of executives and investment committee members in North America to gauge their views on a numbers of critical components of their organization. The poll was completed by 102 participants, representing nonprofits with endowments ranging in size from $25 million to more than $1 billion. The poll was conducted in January 2021 and will be released in a series of chapters. No clients of SEI were polled.