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Is Your Spending Rate Sustainable?

Posted by BoardSource on Apr 16, 2015 4:03:50 PM

boards_blog_imageBy Heather Myers, managing director, non-profits, Russell Investments

As a board member, you have a difficult job. You need to ensure that your organization has the money, talent, experience, and resources to fund your mission. And you need to do this in an ever-changing environment. Additionally, if your organization relies heavily on your investment program to meet your spending needs, it has become essential that your board fully understands how to effectively manage that program.

Forecasters expect the inflation-adjusted growth of a passive portfolio of stocks and bonds to fall to 3.3% over the coming 10 years — a level that would make supporting even a 5% spending rate unsustainable. What this means is that nonprofit fiduciaries are going to have to think differently about how they go about meeting their return objective. The good news is that while the outlook for market returns has declined, there are still ways to improve portfolio returns.

Here are five strategies my Russell Investments colleagues and I suggest nonprofit fiduciaries embrace going forward:

  1. Be nimble. Gone are the days when you can set and forget your strategic asset allocation (your long-term policy allocation to all asset classes and sub-asset classes). Markets are fast moving and increasingly complex; you need to be fleet of foot to capture evolving market opportunities.
  2. Be mindful of your spending policy and evaluate it annually. Know how much your organization draws from your investment portfolio to meet your spending requirements and, unless you have a legal requirement to spend 5% annually, ensure that you don’t overspend and evaluate the planned spend at least annually.
  3. Manage your liquidity. Spending policy and liquidity go hand in hand. A sound liquidity program means aligning the liquidity profile of your investment portfolio with your time horizon and cash-flow demands. If you do that, it can help you meet your spending obligations as they come due, while reducing the risk of mission-threatening investment losses.
  4. Manage risks holistically and assess your risk tolerance. Focus not just on investment risk, but also on governance issues and other aspects of risks. Ultimately, you need an investment approach that can deliver the returns you need at a level of risk you can survive.
  5. Take an organization-wide perspective. Be aware of the impact your investment program has on your organization’s ability to achieve its broader goals.

It’s important to realize that these strategies don’t operate separately; prioritizing one will have an impact on the others. At some point, you will need to decide which of these is most important to your organization, and then manage the rest accordingly. For example, if your spending target is high, and you do not have a high tolerance for risk, you may need to rethink your spending target. Having a firm understanding of these strategies and how your board wants to prioritize them is essential to effectively managing your investment program.

Does all of this sound complicated? While it wouldn’t be fair to say that it is not, Russell Investments has a new resource that we think will help, and that is available free of charge to the BoardSource community. The Non-profit Fiduciaries’ Handbook is a step-by-step guide to investment strategy for nonprofit investors. It discusses each of the above strategies and includes worksheets you can complete with your investment team or questions you can ask to prompt discussion. To request a copy of The Non-profit Fiduciaries’ Handbook, click here or visit www.russell.com/nphandbook

The opinions expressed in this material are not necessarily those held by Russell Investments, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

USI-21652 03-16



Topics: Board Best Practices

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