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Managing and Pursuing Your Investment Program's Long-Term Goals

Posted by Lisa Schneider, CFA on Nov 8, 2017 3:04:00 PM

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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 market and regulatory environment. Moreover, if your organization relies heavily on your investment program to meet your spending needs, it is essential that your board understands how to effectively manage that program.

 Professional market forecasters expect the inflation-adjusted growth of a passive portfolio of 60% stocks and 40% bonds to fall to 2.8% over the coming 10 years—a level of return that would make supporting a 5% spending rate unsustainable.[1] What this means is that nonprofit fiduciaries are going to have to think differently about how they go about meeting their return objectives. While the outlook for market returns has declined, there are still ways to improve portfolio returns and, ultimately, the likelihood of meeting your long-term goals.

Here are five strategies my colleagues and I suggest nonprofit fiduciaries should embrace going forward.

  1. Dynamically manage your portfolio. Dynamic management is the process of monitoring the movements in your portfolio every day, and opportunistically adjusting your exposures to capture short-term market opportunities and help mitigate risks. Dynamic management is important in today’s low-return environment are designed to help ensure that short-term movements don’t derail your long-term return goals. In this type of environment, investors should consider all the tools at their disposal to ensure they can meet their spending goals. This means incorporating investment strategies that may offer incremental returns, avoiding risks for which you don’t expect to get paid, and ensuring that your portfolios are implemented efficiently.
  2. Be mindful of your spending policy. How you calculate your spending policy, and how you decide to balance the needs of today’s beneficiaries with those of future beneficiaries, can significantly impact the amount of returns you need to generate in your investment program.
  3. Manage your liquidity. Many nonprofits found that liquidity had a major impact on their ability to meet their spending goals during the 2008-2009 global financial crisis. While we believe illiquid assets can help you achieve your spending goals over time, they must be managed to ensure that they align with your broader organizational goals and objectives.
  4. Manage your risks holistically. Investment risk is just one of many risks faced by nonprofit organizations. Looking at risks across your total organization, rather than within individual silos, can better position your organization to manage any potential surprises. It’s important to have a risk management plan that incorporates broad organizational risks, including investment risk, fiduciary or governance risk, operational risk, structural risk, and market risk.
  5. Determine your organization’s time horizon. Whether or not your organization’s wishes to exist in perpetuity affects how you approach the other strategies and, ultimately, how you manage your investment program. You may wish to exist for as long as possible, or prioritize spending today and focus on how long you want to exist later. Or you may prefer to make a point of spending down your assets over time. Either way, your board, investment committee, and staff should all be aligned on this front. And remember, this decision isn’t static—it should be adjusted based on your organization’s evolving situation and goals.

Having a firm understanding of these strategies and how your board wants to prioritize them is essential to effectively managing your investment program. It’s important to discuss these strategies at the fiduciary level, and also to capture any high-level decisions you make in your investment policy statement (IPS). The IPS is the guiding document for your organization’s investment program, providing long-term, strategic guidance on how to align your non-profit’s mission, objectives, and policies. It also outlines the responsibilities of the various players involved in managing your investment program. Further, it helps sustain your nonprofit’s vision over the long term.

Does all of this sound complicated? It can be, but 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 helps nonprofit fiduciaries set up a governance framework designed to ensure that they’re able to effectively manage their investment program and designed to meet their spending needs in this complex market environment. The handbook discusses each of the above strategies in more detail and includes worksheets you can complete with your investment team, along with questions you can ask to prompt discussion. To request a copy of The Non-profit Fiduciaries’ Handbook, click here. 

[1] Source: Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters. Data as of January 2017.

The traditional 60% equity and 40% fixed income portfolio is linked, respectively, to the S&P 500 Index and Bloomberg Barclays U.S. Aggregate Bond Index. 

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. Although steps can be taken to help reduce risk, it cannot be completely removed. Investments typically do not grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

These views are subject to change at any time based upon market or other conditions and are current as of the date at the beginning of the document.

Diversification does not assure a profit and does not protect against loss in declining markets.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand. 

Copyright © 2017 Russell Investments Group, LLC. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

First used: November 2017

Topics: financial oversight, investments

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