How Nonprofits and Foundations Should Invest—Development of the Investment Policy Statement

Nonprofit and foundation board members owe the same fiduciary responsibilities to the management of assets as their for-profit counterparts. While outsourcing asset management to an independent, full-time fiduciary advisor can assist with the process, it is critical for nonprofit organizations to develop an appropriate Investment Policy Statement (IPS) to ensure that the limited resources of the nonprofit are invested consistent with the organization’s mission and the board of directors’ fiduciary duty.

 

 

Here are five tips for the development of a nonprofit’s guiding investment strategy within its IPS.

1. Form an Investment Committee

Priority one should be putting together a small group of board members with some experience in IPS development. This group should consist of members with investment experience, and depending on the relative experience of your volunteer board, you may want to consider retaining an experienced fiduciary investment advisor to consult with the organization on IPS development.

Obviously, should the board retain an outside investment manager to oversee the nonprofit’s investments, assisting with the development of an IPS will be the outside manager’s first responsibility. Once the IPS is implemented, the Investment Committee should have ongoing oversight of the IPS as well as the performance of the nonprofit’s portfolio.

2. Align Investment Risk with the Mission of the Nonprofit

While all investment involves risk, nonprofits, particularly those with relatively small endowments (generally less than $25 million), must balance the risk for long-term returns with the need to fund current operations on a day-to-day basis.

Depending on the mission and needs of the nonprofit organization, the Board of Directors should align the investment strategy clearly in the IPS, identifying the minimum and maximum risk tolerance, balanced against the annual income needs of the agency.

3. Define the Scope and Boundaries of Your Asset Allocation

No single decision for portfolio management is more important than asset style and allocation. An agency that needs to regularly access cash from the endowment or foundation to fund operations will likely shy away from investments that tie up cash (hedge fund and private equity) in favor of more traditional liquid investments like stocks, bonds, and mutual and exchange-traded funds. Within those investments, the IPS sets the boundaries for permissible investing (i.e., maximum and minimum percentages for equities versus fixed income).

4. Develop a Spending Policy

All nonprofits should state the expected spending policy on an annual basis, including policies and procedures for any IRS requirements or restricted gifts requiring annual spending. These policies should identify specific cash needs of the nonprofit in anticipation of the ups and downs of the nonprofit’s revenues.

5. Develop Benchmarks to Evaluate Goals and Performance on a Regular Basis

Constant and consistent evaluation of portfolio performance is critical to any IPS. Development of proper benchmarks to measure either an investment committee or outside manager’s performance is part of any board’s fiduciary oversight of the nonprofit’s assets.

The benchmarks should be consistent with the stated investment goals and objectives of the nonprofit. Investment performance can be fairly measured only in comparison with investment strategies of similar style and allocation.

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Clint Patty, J.D.

As Executive Vice President and General Counsel, Clint serves on the management team providing leadership, supporting business development efforts and providing client consultation.