investment best practices for non-profit fiduciaries bert w. feuss, vp, investments, silicon valley...

INVESTMENT BEST PRACTICES FOR NON-PROFIT FIDUCIARIES

Bert W. Feuss, VP, Investments,

Silicon Valley Community Foundation

Investment Best Practices forNonprofit Fiduciaries

June 19, 2015

Agenda

1. Fiduciary Duty & Prudent Investment Standards

2. Aligning Investments with Organizational Goals

3. Investment Governance & Policy

4. Investment Options for Nonprofits

Q&A

Investment Best Practices forNonprofit Fiduciaries

Silicon Valley Community Foundation advances innovative

philanthropic solutions to challenging problems, engaging donors to make our region and

world a better place for all.

Audience Poll

What is your role?

1. CEO / Executive director2. CFO / Finance director3. CDO / Fund raising officer4. Board member

Audience Poll

What is the size of your investment assets?

1. Less than $250,0002. $250,000 to $1 million3. Over $1 million

Investment assets = reserves and endowment

Audience Poll

Do you have an Endowment?

Do you have an investment policy in place?

1. Fiduciary Duty & Prudent Investment Standards

2. Aligning Investments with Organizational Goals

3. Investment Governance & Policy

4. Investment Options for Nonprofits

Agenda

The primary duty of a fiduciary is to manage

a prudent investment process without which

the components of an investment plan

cannot be defined, implemented or

evaluated.

Fiduciary Duty

Fiduciary Duties

• Apply same degree of care, skill and diligence that a prudent person would use in handling corporate affairs.

Care

•Act in best interest of nonprofit•Act in good faith•Avoid conflicts of interest

Loyalty

•Comply with fiduciary law•Maintain the nonprofit’s missionObedience

Being a good fiduciary means applying personal experience, judgment and knowledge in concert with understanding the legal framework for prudent investment and endowments.

Evolution of Fiduciary Laws

Key events in fiduciary history

1720

South Sea

Company

1830

Harvard v. Amory

1869

King v. Talbot

1952

Modern Portfolio Theory

1969

Ford Foundation

Studies

1972

UMIFA

1994

UPIA

2006

UPMIFA

Source: The Vanguard Group

UPMIFA

UPMIFA defines Standard of Care:

• Duty to act in good faith and with the care of an ordinary

prudent person

• Duty to diversify investments

• Duty to incur only appropriate and reasonable costs

• Duty to analyze investments in the context of the total portfolio

and overall risk-reward objectives

• Duty to verify facts relevant to the management and investment

of the fund

• Allows investment of any kind that is not inconsistent with the

standard of care

Endowments

What is an Endowment?

Donor: a gift of money to a charity with only the “income” being spent and “principal” being preserved

Nonprofit: an aggregation of endowment gifts that comprises the organization’s “endowment”

Accountant: a fund which is “permanently restricted” Lawyer: an institutional fund not wholly expendable on a current basis under the terms of the gift instrument

Endowments

What is a “True” Endowment?

True endowment: established or created by a donor.Also know as a donor-restricted endowment.

Quasi-endowment: funds that the charity designates as endowment. Also known as a board-designated endowment.

Gift instrument includes: Any record or records from donor Institutional solicitation or documents So long as donor/charity were, or should have been,

aware of its terms

Endowment Gifts

Which gifts are subject to UPMIFA?

General endowment Donor restricted endowmentspending restrictions: Subject to UPMIFA

No spending restrictions:Board designated endowmentNot subject to UPMIFA

Specific spending Donor restricted endowment

restrictions: Not subject to UPMIFA

e.g., spending formula

Endowment Spending

How much of an Endowment can a charity spend?

• Does away with the concept of “historic dollar value”

• Allows charity to spend or accumulate an amount determined to be prudent for the purposes for which the fund was established

• Trustees must consider:

1. Duration and preservation of fund

2. Purposes of institution and the fund

3. General economic conditions

4. Possible effect of inflation or deflation

5. Expected total return from income or appreciation

6. Other resources of the institution

7. Investment policy of the institution

• Rebuttable presumption of imprudence for spending > 7%

1. Fiduciary Duty & Prudent Investment Standards

2. Aligning Investments with Organizational Goals

3. Investment Governance & Policy

4. Investment Options for Nonprofits

Agenda

The goal of all governing boards and administrative

directors is a well-financed organization with

good fiscal management policies and procedures

with the capability of generating the necessary

funds for short and long-range objectives.

Organizational Goals

The Well-Financed OrganizationRequires Appropriate Capitalization

Liquidity Adaptability Durability

Source: Nonprofit Finance Fund

Adequate cash to meet short-

term operating

needs.

Flexible funds to allow for

intermediate-term

adjustments.

Access to funds to

address long-term future

needs.

Different Pools of Capital Have Different Investment Objectives

Capital Type Function

Addresses

Spending Horizon

Investment Objective

Working Allows the organization to bridge revenue timing gaps

Liquidity6+

monthsPreservation

Short Term Reserves

Absorbs unforeseen funding losses or unexpected, extraordinary expenses

Adaptability 1-3 years Preservation and Income

Long-Term Reserves

Fund changes in business model or deficits until programs and operations can support themselves

Adaptability&

Durability3-7 years Conservative

Growth

Facilities & Equipment

Supports acquisitions, upgrades or future facility and equipment needs

Durability3-15 years

Moderate Growth

Endowment Provides ongoing operating funds through investment gains

Durability Perpetuit

y

Growth to maintain purchasing power of distributions

Adapted from Nonprofit Finance Fund

Risk Assessment Tool

Discourages Investment Risk

Portfolio:Long-Term Reserves

Allows Investment Risk

Portfolio

Considerations

Portfolio

Considerations

Finite time horizon

High spending needs

High liquidity needs

No future contributions

Perpetual time horizon

Low spending needs

Low liquidity needs

Ongoing contributions

Organizational Profile Organizational Profile

Low risk tolerance

Few income sources

Low inflation rate

Limited resources

High risk tolerance

Multiple income sources

High inflation rate

Significant resources

Source: The Vanguard Group

1. Fiduciary Duty & Prudent Investment Standards

2. Aligning Investments with Organizational Goals

3. Investment Governance & Policy

4. Investment Options for Nonprofits

Agenda

Investment Governance

Key Documents:

1. Investment committee charter

2. Decision making matrix

3. Conflict of interest policy

4. Investment committee diversity matrix

5. Annual assessment survey

6. Investment policy statement

Investment Policy Statement

Essential Elements

• Purpose of portfolio

• Responsibilities of committee, consultant, staff and investment managers

• Investment objectives and spending policy

• Target asset allocation and rebalancing

• Performance objectives

• Asset class guidelines or restrictions

Investment Policy SummaryPart 1

Investment ObjectivesPortfolio Name: Long-Term Reserves

Assets: $250,000

Purpose: Absorb shocks, finance change or growth

Time Horizon: 5-7 years

Annual Spending: 0%

Contributions: Unlikely

Risk Tolerance: Moderate

Liquidity: 100% readily redeemable

Primary Objective:Moderate growth to preserve purchasing power over time

Investment Policy SummaryPart 2

Investment Strategy

Investment Vehicle: Balanced Portfolio

Asset Allocation: 50% equity, 50% fixed income

Performance Benchmark: 50% S&P 500, 50% Barclays Aggreg.

Return Objective: 6% average over full market cycles

Portfolio Cost: .64%

Management Fee: 1%

Total Expenses: 1.64%

1. Fiduciary Duty & Prudent Investment Standards

2. Aligning Investments with Organizational Goals

3. Investment Governance & Policy

4. Investment Options for Nonprofits

Agenda

Investment Options

There are many options for investing your

organizations assets. The right approach depends

on your asset size, staff capacity, board expertise,

and requires knowing your organization’s unique

goals and specific needs.

Finding the right fit is most important.

Finding The Right Fit

1. Do It YourselfBoard or committee defines asset allocation, selects investments, monitors performance.

2. Outsource: Non-discretionaryHire investment advisor or consultant to recommend strategy and investments.

3. Outsource: DiscretionaryHire investment advisor to manage portfolio and transact within portfolio on your behalf.

Investment Providers

Provider Advantages for Small to Mid-Size Nonprofits

Discount Broker • Low cost, broad product choice

Mutual Fund Company • Choice and low cost options

Bank • Convenience, Relationship

Investment Advisor • Personalized relationship

Community Foundation • Access, Oversight, Alignment

All-in-one, Multi-Asset Solutions

Provider All-in-One Portfolios

The Vanguard Group

• Target Retirement funds

• LifeStrategy funds

• 4% Managed Payout Fund

Silicon Valley Community Foundation

• Long-Term Growth Pool

• Social Impact Pool

• Balanced Pool

• Short-Term Pool

The Investment Fund for Foundations

• TIFF Multi-Asset Fund

• TIFF Short-Term Fund

Conducting a Search

Best practice: Full RFP every 5 to 10 years.

Define your selection criteria: What are your top priorities?

• Investment philosophy• Proven performance• Competitive fees• Relationship / Cultural fit• Nonprofit expertise / Community involvement• Alignment of interests

Define your process: RFI or full RFP or combination? • Use RFI for market scan and to cull down options• Use RFP to compare and contrast a few serious

contenders• Use phone call and/or meeting to narrow to two

finalists• Have finalist(s) present to the board/committee

Investment RFP Scorecard

CriteriaCandidat

eA

CandidateB

CandidateC

CandidateD

Investment philosophy 3 1 2 4

Proven performance 1 3 2 4

Competitive fees 2 4 1 3

Relationship/cultural fit 2 3 1 4

Nonprofit expertise 1 4 2 3

Aligned interests 2 0 1 0

Community involvement 2 4 3 1

Total Score 15 22 13 23

Summary

1. Your primary duty as a nonprofit fiduciary is to manage a prudent investment process with care, skill and diligence

2. A well-financed organization requires clear objectives and alignment of capital with organizational goals

3. A prudent investment process includes proper governance and policy documents

4. The right investment approach will be unique to each organization’s size, capacity, needs and objectives

The safest way to double your money is to fold it over once and put it in your pocket.

- Frank Hubbard

U.S. humorist, journalist

Q & A

Resources

UPMIFA – The Law of Endowments• An Introduction to the Law of Endowments, Erik

Dryburgh, Adler & Colvin, www.adlercolvin.com

• Californian Uniform Prudent Management of Institutional Funds Act (UPMIFA), California Probate Code §18500

Nonprofit Finance Fund• Financial training and publications• Financial advisory services• Nonprofit lending

Resources

Community Foundations• Access to investment pools through agency fund relationship• May provide sample endowment and investment policies• May provide workshops and trainings for nonprofit

Vanguard Nonprofit Resource Center• Fiduciary roles & laws• Committee charter• Investment & spending policies• Governance best practices • Fiduciary toolkit

Contact Information

Bert FeussVice President, InvestmentsSilicon Valley Community Foundationbwfeuss@siliconvalleycf.org650.450.5414

SVCF Investment Options

SVCF Nonprofit Fund Options

Nonprofit Investment Fund

Nonprofit Endowment Fund

Asset Ownership Nonprofit SVCF

Relationship to SVCF

Agency relationship

Irrevocable giftto SVCF

Distributions At discretion of Nonprofit

Annually per SVCF spending policy

Minimum $10,000 $10,000

Support Fees1.00% funds < $1M0.75% funds > $1M 0.50% funds > $5M

0.50%