Insights for Non-Profits

Case studies are a great way for endowments and foundations to learn about what works for similar organizations. This post focuses on a common problem many organizations face: How should an investment portfolio be managed to help achieve its goals?

Details of this particular case study could apply to many different types of organizations. In this case, we highlight how we helped a private, grant-making foundation achieve its goals and fulfill its mission.

About the Foundation

• A private, grant-making Foundation whose grants benefit a variety of regional institutions and scholarship recipients. The Foundation is chartered as a perpetual organization, meaning it is tasked with paying out grants not only today, but also well into the future.
• Key personnel include a volunteer board; people who believe in the importance of their organization’s mission, but don’t have a lot of time or resources to handle day-to-day details.
• This organization adheres to IRS requirements to spend at least 5% of their average annual value on charitable distributions and related expenses.

Problem

The organization needed to build an investment portfolio to meet its dual goals of funding charitable distributions and growing assets to fund distributions in the future. The investment markets were keeping many of the board members up at night, especially given the recent spike in volatility in equities and the potential for rates to continue to rise in the bond market. Given this concern and the goals they had, the organization needed its portfolio to effectively avoid areas of risk and take advantage of areas of opportunity in today’s market environment. Also, given that its board members are volunteers, the organization needed to leverage the board’s time to effectively meet all of its fiduciary duties.

Solution

These board members have an important fiduciary duty to the Foundation. This means acting in its best interest and prudently managing the investment portfolio. It takes time and expertise, which is why hiring a co-fiduciary to help would be best for this organization. The co-fiduciary would take on the responsibility (in this case, Manning & Napier) to allocate the portfolio’s assets, manage the day-to-day selection and trading of securities, and give the Board tools to monitor the portfolio and its progress toward its goals.

We started with a conversation to understand the Foundation’s goals and review the most prevalent risks and opportunities in the current market environment. Once we understood the risks and opportunities, we created a custom allocation focused on matching portfolio roles with different security and strategy types. For example, one of the most basic delineations is between stocks (which are generally good for long-term capital growth) and bonds (which are usually good at preserving capital and generating income). However, other roles can also be carved out for portions of the portfolio.

In this Foundation’s case, additional sources of income via dividend paying stocks and REITs could help offset lower interest rates in the bond market. Different investment processes (i.e., quantitative vs. fundamental, or top-down vs. bottom-up) could provide diversification to potentially help reduce volatility. All of these tools were implemented for the Foundation.

Multiple investment strategies only work if used alongside effective monitoring tools. To help the board members meet their fiduciary duties, we provided comprehensive reporting at the total portfolio level and the ability to track items such as distributions and progress toward goals.

Finally, to address the board’s concern about the market environment, we implemented an active risk management process, so asset allocation is flexible over time and can change over time depending on opportunities in the market or changing distribution needs at the Foundation. On a regular basis, we reaffirmed the Foundation’s investments remained properly aligned with its goals – the hallmark of a customized portfolio.

Outcome

Outsourcing various aspects of the Foundation’s investment management and fiduciary duties allowed the board to focus its attention on areas that they specialize in, such as charitable grant-making and general oversight. The customized, goal-oriented portfolio helped the Foundation toward meeting goals of funding charitable distributions and growing assets for future use.

This case study is for illustrative purposes only. Past performance or outcome does not guarantee future results. Please note, certain client circumstances may prevent all services from being rendered.