Investment Oversight for Nonprofits

For nonprofit executives and investment committees, the number one priority always has been and always will be the organization’s mission. Doing good has never been more challenging. The responsibility of balancing the endowment’s growth while supporting the spending needs of the mission increases that complexity.

Nonprofits are turning to their investment committees to play a larger role in financial planning and to provide a higher level of risk analysis around the investment portfolio. But do nonprofits have the resources required to perform due diligence? Many investment managers turn to outsourcing. The thinking is that active investment shifts can be made more quickly when market conditions change.

This is why nonprofits value their investment committees and wish to provide them with better access to information, improving their education around new investment vehicles and helping them better gauge the global economic outlook so that they can perform their oversight duties. Others focus on improving spending policies for research and planning so that substantial risk analyses can be done.

With more attention to investment oversight, a priority is to increase portfolio diversification: better aligning the portfolio with organizational spending needs, better leveraging the committee in the nonprofit’s financial planning and building donor confidence in investment strategies.

Another reason for more attention to investment oversight is the increased use of alternative investments. A majority of nonprofits participate in allocating at least some of their assets in alternative investments, and the larger the investment pool, the more likely alternatives are used.

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But while alternative investments remain popular, problems that caused the 2008/2009 financial crisis remain strong in people’s memories, and lack of liquidity is chief among today’s investment committee worries, but not enough to stop investing in alternatives.

So, investment outsourcing continues to grow among nonprofits. Some organizations use a consultant or advisor to research investments and provide a selection of manager finalists while the investment committee selects and replaces managers. Other nonprofits use the outsourcer to make all or some of the manager selection and monitoring decisions.

Among the benefits of outsourcing for nonprofits, organizations point to promptly taking advantage of market changes, to improving overall risk management and to having access to better money managers. For nonprofits that continue to make manager selections in-house with or without a consultant, reasons include that they are satisfied with their current provider or process, that the investment committee prefers to select its own money managers and/or that the committee sees its fiduciary duty to include selecting managers.

Underlying everything regarding investment oversight is risk management, which needs attention in order to protect the organization’s ability to achieve its mission. Therefore, of utmost concern is managing risks that the portfolio could present to the organization at large.

Among ways that investment committees work to minimize risk are implementing risk-adjusted metrics when evaluating investment success, and stress-testing the portfolio against a variety of scenarios that would impact spending, such as how a rise in interest rates would impact the portfolio’s liquidity.

Many nonprofits see value in participating in socially responsible investing, especially as there is evidence that it provides long-term performance benefits. Adding new asset classes, aligning investments with organizational finances and implementing risk management strategies are paramount among nonprofits’ investment oversight analyses.

By operating according to the investment committee charter and investment policy statement, investment committee members can feel that they are on their way to satisfying their investment oversight responsibilities. By deepening your understanding of what your organization stands for and why you were selected to serve, you’ll have a framework to inform your decision-making and insights.

To learn more about how our firm can serve your nonprofit organization, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.

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