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