Study: Nonprofit Investment Returns Lagged Market Benchmarks in 2013

There’s plenty of good news in a new report on nonprofit investing, but it’s clear associations can boost their portfolios’ performance. The bottom line about your bottom line: You need awareness, smart policies, and discipline to get the best results.

Here’s a quick quiz for all the CFOs and other association finance professionals out there: Do you know how much you pay in investment management fees?

According to the 2014 “Study on Nonprofit Investing” (SONI) [PDF], more than half of you (if you’re being honest) are probably answering no. And that makes a difference in your bottom-line results.

Findings released Wednesday from the second annual study by Raffa Wealth Management—based on a survey of 261 finance executives from trade associations, professional societies, public charities, foundations, and other nonprofit organizations—had plenty of encouraging news, including that nonprofits saw healthy investment returns in 2013 ranging from 8.5 percent to 13.5 percent, exceeding historical expectations. And more respondents in the study added to their reserves than withdrew funds.

The most worrisome finding by far was the significant number of nonprofits that don’t know what they pay for investment management.

Behind Benchmarks

Even so, the performance of nonprofit investment portfolios lagged behind their relevant benchmarks—by as much as 6.7 percent for organizations with more aggressive, growth-oriented strategies. Regardless of portfolio type, a lack of awareness of fees was a big factor.

“The most worrisome finding by far was the significant number of nonprofits that don’t know what they pay for investment management,” said Raffa Wealth Management President Dennis Gogarty, a coauthor of the study.  “There is a lot of emphasis on transparency in the nonprofit sector, and nowhere is it more evident that a lack of transparency is harmful than in investment fees. Investment fees have notoriously lacked transparency, and we strongly believe that there is a direct correlation between investment fees and bottom-line results. “

Underperformance was also linked to nonprofits’ investment in alternative assets like commodities or real estate. “Any way you sliced it in 2013, nonprofits would likely have been better off sticking with a 60/40 mix of traditional stocks and bonds,” according to an executive summary of the results.

A third factor was discipline—whether or not the organization had a clear investment strategy and stuck to it. About 75 percent of respondents said their organization had a written investment policy statement, and 57 percent of those outlined specific allocations for how the organization’s money should be invested.

“Those with specific allocation targets fared better for the second year in a row, suggesting there is value in adding formality or discipline to the investment process,” Gogarty said. Associations were more likely than other nonprofits to have allocation targets.

Gogarty said nonprofits can improve investment performance by measuring their boards’ tolerance for risk (through a survey, for example) and documenting how leadership decided to allocate the organization’s investments.

“The key is documentation of the process they undertook to arrive at whatever decision they make,” he said. Documentation “will allay donor or member concerns and make sure certain strong personalities don’t drive unnecessary and potentially damaging changes in the future.”

What To Do?

Gogarty offered three tips to help nonprofits improve how they manage their investments and boost returns:

Set clear, specific asset allocation targets and rebalance them based on a predetermined range.  “Anything you can do to remove emotion and market-timing tendencies from the process is likely to add value,” he said.

Develop a simple, clear overall portfolio benchmark made up of the traditional broad market benchmarks that correspond to your asset-allocation targets. (An example is available on the SONI website.)

Know the fees you pay for the three levels of portfolio management (investment advisor, separate account manager or mutual fund, and custodian), and ask for gross return and net after fees so you can see their impact.

“When it comes to investing, simple is good,” Gogarty said. “This is great news for nonprofits because anything they can do to simplify the investing process is likely to make a positive impact on their bottom-line results.”



Julie Shoop

By Julie Shoop

Julie Shoop is the Editor-in-Chief of Associations Now. MORE

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