securing your organization’s future: best practices in nonprofit endowment management
TRANSCRIPT
Securing Your Organization’s Future: Best
Practices in Nonprofit Endowment Management
David Goldner, CPA, CVA, CFP®
IntroductionsDavid Goldner, CPA, CVA, CFP®
Managing partner at Gross Mendelsohn
30 years of experience providing tax, investment management and consulting services
Today we’ll cover
1. What an endowment is and why have one2. Determining the objectives of an endowment3. Determining an optimal asset allocation strategy for
your endowment4. Selecting a day to day financial manager for an
endowment5. Reviewing an endowment’s performance and risks
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What is an endowmentand why have one?
“A grant to provide continuing support or maintenance for a non-profit organization.” Source: Merriam Webster
Needs of today
Needs of the future
5 Reasons to Have an Endowment
Source: United Methodist Foundation
Source: United Methodist Foundation
5 Reasons to Have an Endowment
Source: United Methodist Foundation
5 Reasons to Have an Endowment
Source: United Methodist Foundation
5 Reasons to Have an Endowment
Source: United Methodist Foundation
5 Reasons to Have an Endowment
Commonfund’s Principles of Endowment Management
1. Determine the objectives of the endowment
Commonfund’s Principles of Endowment Management
1. Determine the objectives of the endowment
2. Set up a payout policy from the endowment
Commonfund’s Principles of Endowment Management
1. Determine the objectives of the endowment
2. Set up a payout policy from the endowment
3. Determine an optimum asset allocation
4. Select managers to implement your allocation
Commonfund’s Principles of Endowment Management
4. Select managers to implement your allocation
5. Provide for systematic review of risks and monitor costs
Commonfund’s Principles of Endowment Management
4. Select managers to implement your allocation
5. Provide for systematic review of risks and monitor costs
6. Determine the forum for review and oversight
Commonfund’s Principles of Endowment Management
Best Practice #1Determine the objectives of your endowment
Objectives should be defined in a written document called a board or investment policy statement
Objectives should be defined in a written document called a board or investment policy statement
This statement provides guidance to ensure compliance
This statement provides guidance to ensure compliance and makes leadership accountable to specific rules and regulations
Policy statements should provide direction to the fund
Goals
Objectives
6 Things Your Policy Statement Should Address
The role of the endowment in supporting the mission of the organization
1
The role of the endowment in fortifying the finances of the organization
2
How much of the endowment will be used to support the organization’s current activities
3
How much in giftsreceived by the organization will be used to fortify the endowment
4
Overall investment strategy and asset allocations
5
Who is responsible for investment decisions
6
Best Practice #2Set up a pay out policy from the endowment
Needs of today
Needs of the future
Endowment = an objective
The bigger the current distribution
The smaller the future distribution
What’s the ideal percentage?
12 %
5 %
What’s the ideal percentage?
4 %
What’s the ideal percentage?
Minimum Spending Requirements
The real issue related to spending is the expected
return on the portfolio
1972
Uniform Management of Institutional Funds Act
Distinguished endowment investment rules from trust accounting rules
UMIFA
1972
Uniform Management of Institutional Funds Act
UPMIFA
2006
Adds Prudent to UMIFA
Distinguished endowment investment rules from trust accounting rules
UMIFA
Prudent investor rule
A guideline that requires a fiduciary to invest trust assets as if they were his own
Source: Investopedia
7 UPMIFA factors for use in determining a spending policy
Duration and desire for preservation of the fund
Purposes of the institution and the endowment
General economic conditions
1
1
2
Duration and desire for preservation of the fund
Purposes of the institution and the endowment
General economic conditions
1
2
3
Duration and desire for preservation of the fund
Purposes of the institution and the endowment
General economic conditions
4 Effect of inflation or deflation
Expected total return from both income and appreciation of the investments
Resources of the organization
4
5
Effect of inflation or deflation
Expected total return from both income and appreciation of the investments
Resources of the organization
Effect of inflation or deflation
Expected total return from both income and appreciation of the investments
Resources of the organization
4
5
6
Investment policy of the organization
Purposes of the institution and the endowment
General economic conditions
7
Best Practice #3Determine an optimum asset allocation
UMIFA (1972) and UPMIFA (2006) broadened prudent investor rules and allowed the consideration of a greater mix of assets
8% on a government bond
reinvest 3% to keep up with 3% inflation
pay out 5% in support
60%40%Bonds Stocks
Modern Portfolio TheoryEncourages the use of a number of different asset classes with different standard deviations of risk
Modern Portfolio TheoryThe result of an analysis of risk and return of potential investment alternatives will lead to an acceptable mix in the asset allocation
Modern Portfolio Theory
Asset ClassHistorical Mix
Greenwich Associates - IMF
2000 Study of Large
Endowments
NACUBO-Commonfund
Study of Institutions Equal
Weighted
Gross Mendelsohn’s
Current Recommendation
Cash 5.0% 2.5% 5.0% 5.0%
Bonds 30.0% 20.0% 21.0% 0.0%
US Equities 40.0% 50.0% 30.0% 40.0%
International Equities 15.0% 15.0% 16.0% 20.0%
Alternative, Real Estate & Total Return
Managers10.0% 12.5% 28.0% 35.0%
Total Mix 100.0% 100.0% 100.0% 100%
Important factors to consider when deciding on an investment mix
Interest rates are at historic lows, and expected return on bonds is, at best, minimal.
U.S. and international equities are generally considered reasonably valued today.
Alternative investments provide the key to risk management and taking advantage of opportunities.
Best Practice #4Select a manager to implement your asset allocation
Finding a manager
Follow the guidance of an independent
consultant
3 Things Your Investment Consultant Should Be Doing
1Within each area of the asset allocation policy, provide recommendations for the specific allocation:
Bonds
Domestic equities
International equity investments
Alternate investment areas
1Within each area of the asset allocation policy, provide recommendations for the specific allocation:
Bonds
Domestic equities
International equity investments
Alternate investment areas
1Within each area of the asset allocation policy, provide recommendations for the specific allocation:
Bonds
Domestic equities
International equity investments
Alternate investment areas
1Within each area of the asset allocation policy, provide recommendations for the specific allocation:
Bonds
Domestic equities
International equity investments
Alternate investment areas
Within each area of the asset allocation policy, provide recommendations for the specific allocation:
1
Bonds
Domestic equities
International equity investments
Alternate investment areas
Report on the background economic conditions and how they impact the particular strategic recommendations for the asset allocation
2
Report on the background economic conditions and how they impact the particular strategic recommendations for the asset allocation
2
Report on the returns of the investment managers and make recommendations for changes and new areas of investment
3
Case studyA mismanaged endowment fund got
turned around and grew by 20%
Best Practice #5s
Provide for systematic review of risks, monitor the costs and determine the forum for oversight
The final and most important job
Oversight of the asset allocation
Monitoring the costs of management
Reviewing manager selection
Investment Policy StatementShould include the target asset allocation and list any restrictions on the various types of assets that could be invested in
Investment Policy StatementIncludes the mission, goals, asset allocation and spending objectives for the fund
Investment Policy StatementShould also include the benchmarks for determining whether management is performing as expected
Forming an investment committee
The committee should meet quarterly
The committee should challenge the investment consultant
In conclusionManaging an endowment fund is one the most critical tasks for any nonprofit board
In conclusionEndowment management can be a daunting responsibility
In conclusionBoard members have big responsibilities when it comes to how the endowment fund is to be managed
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www.gma-cpa.com
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