As a non-profit, endowment, or foundation organization looking for the best ways to invest your assets, it is crucial to create an investment policy and outline related objectives for how the assets should be invested and monitored over time.
This is typically done with the use of an Investment Policy Statement that defines how investments should be managed to achieve financial stability of the organization, while taking into consideration risk management, returns on investments, tax implications, organization values and principles, along with any legal requirements that should be taken into consideration.
The primary goal of such a policy is to provide guidelines to ensure the investment strategy of the endowment aligns with the investment objectives and goals of the organization.
This blog post provides an overview of the major components of such a policy as well as resources available from financial professionals that can help you craft an effective Investment Policy for your organization’s investment objectives.
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Articulate Specific Parameters Reflecting the Board’s Investment Philosophy
The Board’s investment philosophy should be centered around four key parameters:
- A focus on long-term growth
- Adherence to legal and ethical guidelines
- A conviction in the decisions made
- Collaboration with other stakeholders
Investment decisions should be based on comprehensive research of the market that can pursue protection and potential growth for the organization over the long term.
Depending upon the values and principles of the organization, investment selection may need to focus on specific social impacts within the community or address specific principles held by the organization. All investment management decisions are expected to abide by all applicable laws and regulations, as well as the ethical standards established by your organization.
Board members are responsible for overseeing the proper execution of the investment policy.
Define Risk Tolerance
Risk tolerance refers to the capacity and willingness to accept greater volatility in exchange for higher expected returns. For nonprofits, the definition of risk tolerance should be fully understood by the Board of Directors, as well as the investment management consultant team overseeing the organization’s assets. Low-risk portfolios usually have a focus on safety and liquidity; meanwhile, high-risk portfolios favor capital appreciation. Generally, the higher the risk capacity of an asset allocation, the more equity instruments, such as individual stocks, may be incorporated into a portfolio.
Risk tolerance for a nonprofit should be consistent with its mission and objectives, as well as guidelines set forth by its Board of Directors.
The Relationship Between the Board and Investment Manager is Critical
The relationship between a Board and an investment manager overseeing the organization’s assets is critical for the financial health and well-being of the organization. Having open communication and understanding the investment goals, performance targets, investment strategies, and risk tolerances helps ensure that investment decisions are made with the best interests of the organization in mind.
Working together, executive board members and the investment management team overseeing the assets, can create an overall financial plan that focuses on pursuing growth opportunities for both current funding needs and future success for the organization. These objectives should be established, taking into account the time horizon, return objectives, risk tolerance, and liquidity requirements.
Maintaining a good relationship and ensuring that both the Board and investment manager’s goals are aligned is imperative to the process. Furthermore, such an approach should ensure alignment between the Board’s long-term strategic plans with that of the investment manager’s day-to-day activities resulting in higher growth opportunities for all stakeholders involved.
Bottom Line
It is essential for nonprofits, endowments, and foundations to have a set of investment policies and objectives to best manage their assets. The investment policy statement serves as the roadmap for the organization as well as the investment manager to focus efforts on pursuing the mission of their purpose, while addressing their financial needs and goals, both short and long term.
By formulating an appropriate investment strategy with clear and actionable objectives, organizations can pursue long-term sustainability. Ultimately, it is of utmost importance that your nonprofit organization take the necessary time to construct an efficient investment strategy, carefully select acceptable asset classes along with an adequate diversification level, and monitor said investments accordingly in line with the defined goals set forth in the policy statement.
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Disclaimer: This article is intended for informational purposes only, and not to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally.
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