When is it time to outsource your nonprofit’s investment management?
In the same way that a nonprofit’s size does not dictate its need for legal assistance, a portfolio’s size alone does not dictate the need for investment assistance.
The key role of a nonprofit organization’s trustees is to ensure that investment assets are protected and properly managed so that they can serve the organization’s mission. Regardless of the size of the investment assets, the investment committee seeks to balance the objectives of both long-term growth and ongoing funding of the organization’s grant-making activities. To fulfill their roles, trustees can and do seek guidance from objective third parties, whether for legal or investment advice.
At what point does the trustee determine if they should manage the assets on their own or hire an outsourced chief investment officer? The size of the investment portfolio may not provide a clear indication, but there are recognizable triggers that may require a closer look.
Here are five common situations when an Outsourced Chief Investment Officer (OCIO) can be the smart choice for an organization of any size.
Increased Complexity Overburdens Committees
Even savvy, well-intentioned professionals can feel overwhelmed by the number of decisions involved in maintaining complex investment portfolios — especially if they meet no more than once or twice a quarter, which is common. The growing number of managers in portfolios, complex alternative strategies, and increasingly volatile markets make it difficult for committee members to both keep pace and make thoughtful portfolio decisions.
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) provides trustees with the ability to delegate certain aspects of their responsibilities to an outside entity, if that can help them better meet their obligations as a governing fiduciary. Trustees retain responsibility for overseeing the OCIO service provider, who then acts as managing fiduciary and takes over the day-to-day responsibilities of managing the portfolio. The investment committee regains the time needed to focus on larger strategic decisions, while the OCIO becomes a co-fiduciary and shares the risk and responsibility.
Challenges in Continuity
Most nonprofit organizations have enjoyed strong investment returns over the last ten years. Yet memories of the 2008 crisis’s impact on investment-portfolio values and spending levels are vivid. In many cases, committee members have rotated since the last market downturn, and today’s members have not worked as a team through a similar market environment.
When committee membership faces regular turnover, each change introduces new perspectives, and new biases. Whether swayed by the dominance of a single member or by memories anchored to a single historic event, committees can become susceptible to difficult dynamics during periods of market volatility, when it is crucial to maintain a disciplined approach to investing.
An OCIO provides continuous institutional memory to the portfolio’s management and has the experience and perspective to adhere to a strategy appropriate for the long term.
Scale Impedes Growth
Smaller aspirational nonprofits with limited resources often find themselves at a disadvantage when competing with larger organizations for donor capital, whether for capital campaigns or ongoing fund drives.
With an OCIO managing their assets, small nonprofits can stand on par with larger charities by showing they have the resources of a large, professional entity, thus gaining the confidence of donors who are empathetic with their charitable mission. The larger the donation, the more sophisticated the donor, and having an OCIO is an advantage in these negotiations. When a large donor feels confident that their donation will be well-managed, the donor may even see an advantage in being a more meaningful contributor for a smaller charity. With an OCIO, even a small nonprofit gains the advantages of scale and expertise that are typically thought to benefit only large organizations.
Time Constraints Limit Strategic Focus
With limited resources, smaller charities often struggle just to meet day-to-day objectives and don’t get to spend the time needed to focus on larger organizational goals. Outsourcing the day-to-day workings of human resources, payroll, and accounting makes it possible for these organizations to develop and maintain a level of professionalism on limited budgets. Further, they can focus their resources on meeting larger strategic goals, such as growth, and on developing their missions.
With an OCIO taking care of day-to-day investment management responsibilities, boards and investment committees with responsibilities for endowment or foundation assets can free their time; instead of discussing individual investments and portfolio line items, they can focus on more strategic matters, such as reviewing their endowments’ broad strategic frameworks and aligning investments with funding and campaign goals.
In-house Costs Exceed OCIO Costs
The larger and more complex an investment portfolio, the larger the amount of resources needed to manage the investments internally. Whether that translates to additional people in the finance department or the development of people and systems for an entire investment office, the costs of an OCIO can be assessed both in dollars and in the additional organizational complexity that would be required to maintain these resources internally.
For a nonprofit to continue its mission today and in perpetuity, it must weigh the long-term value of important financial decisions, from capital expenditures to whether and when to leverage external resources to enhance the organization. The cost-versus-reward calculation of an OCIO is as important as the calculation for new computers or a more effective donor-communication and -marketing system that helps professionalize and streamline operations. Most investment advisors should be able to share several return-on-investment scenarios, based on the risk tolerance of the charitable organization, to aid in this decision.
With the number of nonprofits growing and with all of them competing for the same donor dollars, it is beneficial to step back and review the needs, limitations, and aspirations of your organization. It may be that in developing internal best practices and long-range goals for your investments, there could be room for another form of contribution — one an OCIO can make.
About Canterbury Consulting
Canterbury Consulting is a leading investment advisory firm overseeing $20.2 billion for foundations, endowments, healthcare institutions, and families, as of December 31, 2018. Founded in 1988, the company designs and manages custom investment programs aligned with each client’s goals. Canterbury acts as the investment office for its diverse clients and provides objective investment advice, asset allocation, manager selection, risk management, implementation, and performance measurement. Canterbury Consulting strives to deliver performance and service that exceeds the needs and expectations of its clients.
 The Uniform Prudent Management of Institutional Funds Act is a uniform act that provides guidance on investment decisions and endowment expenditures for nonprofit and charitable organizations. UPMIFA and its predecessor acts were first approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1972.
Ms. Parekh is a member of the Board of Directors, a shareholder of Canterbury, and directs the Canterbury Outsourced CIO platform, which caters to institutions and private clients who wish to outsource day-to-day management of their portfolios to Canterbury. In that role, Ms. Parekh is the chair of the Canterbury Outsourced CIO Committee and a member of each of the firm’s five Manager Research Committees. She joined Canterbury in 1996 as the manager of analytics with responsibility for directing the firm’s account analysts and client services group. In that role, Ms. Parekh secured many of the asset allocation modeling and research software tools we use today. In 2001, she became the director of manager research, responsible for oversight of all manager, fund, and product research; maintenance of Canterbury’s proprietary research database; and chairing the Investment Manager Research Committee. Ms. Parekh graduated from the University of Hong Kong with a Bachelor of Arts in economics. She completed her Master of Business Administration at Shenandoah University.