It’s been said “the existential attitude” is a sense of puzzlement, misperception, or anxiety in the face of an apparently empty or illogical world. Does that not sound like a perfect description of the investment climate faced by investment committees today?
Today’s investment committee member’s existential struggle is to make investment decisions that address the ongoing need to fund the nonprofit’s current and future endeavors. Given our current long bull market, it’s easy to forget 2008. Chasing higher returns when you have more “house money” is common among committees feeling the pressure of a nonprofit’s administration demands for more available capital. The time is always right to spend more than your typical four percent spend rate, especially when your investments are doing well. But chasing more money carries a higher risk that could put your organization’s mission at risk.
Let’s agree that we love the returns our growth oriented assets manager is putting in our portfolio. Right now the growth professional’s domain is certainly in vogue and those above-average returns are increasing our committee’s appetite for risk. In fact, we like to spend when times are good. As the saying goes “committees talk long term, but act short term.”
Typical investment committee members are program related or investment related. Our program-related members would like to use some of that growth income to build the new wing or initiate a new program. Our investment-related brethren want to safely grow our nest egg for the future. Of course members generally meet in the middle somewhere to accomplish both program funding needs while addressing asset protection.
The timeliness of best practices is not in question as value has always been the foundation of a long term investment strategy. But with today’s hot market headlines, are investment committees perhaps getting seduced by “easy money” and moving away from a safer value-oriented portfolio?
It’s time to get back to the basics of what constitutes an effective investment committee. Here are five tips to help guide your decisions.
Create or Update Your Existing Investment Policy Statement
A good investment policy statement (IPS) will outline goals, target returns, acceptable risk, performance measurement guidelines, and key policy requirements as set by the committee. The statement should also set the parameters for meeting agendas and decisions. The chairperson will verify the committee is working within the guidelines of the statement.
It’s important to note that goals need to be organized so that risk and return and are easily measurable. A typical goal will state a real return expected and the strategy that is expected to achieve that return. Hold true to your investment policy statement despite what the market is doing.
Build the Ideal Investment Committee
The first step is a group of committed members. As a starting point, members need to be committed not just to the organization and its mission, but to the idea of working together – not as independent entities, but through honest teamwork and consistent participation.
Let’s talk personnel. The idea is to build a diverse and skilled committee. Of course, we’ll need our organization’s committed folks who live and breathe the mission, but an ideal group is not one that primarily consists of investment professionals. Contrary to popular opinion, non-investment professionals can provide diverse viewpoints and ask questions that require investment professionals to clearly articulate their thesis.
Regular communication is key to success. On that topic, it goes without saying that all members’ opinions should be heard and no one should be bullied into a decision. The committee chairperson needs to lead by example and allow flexibility for alternate viewpoints to be vetted.
Stop Chasing Returns
Growth investing will definitely provide returns short term, but a bull market as long-in-the-tooth as we have today could easily retreat. Can an institution afford a 20 percent decline in returns and still meet the prior obligations from a time of rosier returns? So what should our strategy be?
Our goal should be to focus on the fundamentals of investing: Clear appropriate investment goals; diversified asset allocations; low costs; and perhaps most importantly, long-term discipline.
I suggest that we adhere to our most important document, our IPS. In our statement we will have addressed our portfolio rebalancing procedures that will guide us through the uncertainty that’s always present. When “groupthink” wants to chase performance, the investment consultant can provide insight and reason.
Use an OCIO or an Advisor Who’s a True Fiduciary
A fiduciary has a duty to ensure fiscal health of the organization is strong and well managed. This is best exemplified by a financial advisor or manager who is a true fiduciary, motivated by the mission, not commissions.
A true fiduciary will make recommendations based solely on what’s best for the institution and not for their own personal gain financially or otherwise.
To avoid problems of impropriety and perhaps poor performance, an investment board should have a strict rule prohibiting an investment in any product that economically benefits any committee member. This eliminates the potential for conflicts of interests and resolves many personal biases.
Sometimes an investment committee will have individual members who will react or advise on the basis of their own portfolio experience. The investment approach used for an individual is not appropriate for a nonprofit investment committee; many alternate investment approaches good for individuals are not well suited for the institution’s infinite horizon portfolio.
Again, have a clear mandate for the investment committee as outlined in the investment policy statement. Regular rebalancing of the organization’s portfolio should be done in accordance with the investment policy statement and not solely to market events.
Above all, avoid groupthink as it can lead to a team that doesn’t challenge or disagree. Contrarian thought can produce successful investment results.
Give special thought to new committee members and turnover. Properly screen new members to vet for strong-willed personalities who might seek to dominate the agenda. Once installed on the committee, new members need to be properly trained and oriented to the organization’s financial goals. Sometimes new members with the right skill set can make a world of difference.
History and the Future
Historically, value-based investment strategies have worked to effectively allow nonprofits to continue to fund their mission. Many think some previous comparisons to earlier markets are irrelevant in this age of instantaneous computer-aided trading. I agree with the quote famously attributed to Mark Twain: “History doesn’t repeat itself but it often rhymes.” Stay disciplined with your value-oriented portfolio.
No matter what the market does, by implementing these suggestions, perhaps your investment committee can answer the next existential question regarding funding with just two words: “we’re good.”
About Canterbury Consulting
Canterbury Consulting is a leading investment advisory firm overseeing more than $18.3 billion for foundations, endowments, healthcare institutions, and families. 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. Learn more about Canterbury Consulting at www.canterburyconsulting.com.