LONG-TERM INVESTMENT STRATEGIES
Contrary to short-term investments, long-term investments are made with funds that are not needed for use in a period of less than a year. The long-term or fixed-income securities are based on a fixed return either for a specified period of time or indefinitely. Examples of long-term investments are pension funds, self-insurance funds, and endowment funds.
Pension funds are funds that an employer establishes as a means to manage the employees' retirement funds, which encompass contributions from both the employee and the employer. As the name indicates, pension funds are used to provide pensions for employees on retirement. Pension funds are invested in various activities in order to make them generate more income. Usually, pension funds are managed by a financial institution on behalf of the employer and employees. Some companies manage their pension funds without the involvement of an intermediary party.
Self-insurance funds are money that an organization or an entity sets aside to use for future insurance needs. An entity develops a self-insurance fund if a particular coverage is not available from insurance companies or is too costly compared to self-insurance. Some companies create a subsidiary entity to manage their self-insurance funds. The self-insurance funds are invested in other activities to generate more income.
Endowments started in medieval times as farmland donated to churches, which would then be rented out to farmers, and consequently generated income to support various church activities. In the United States, endowment funds include various financial instruments, such as real estate and partnerships in the forms of capital appreciation, interests, dividends, rents, and royalties. In most U.S. states, the investment of endowment funds is governed by the 1972 Uniform Management of Institutional Funds Act (UMIFA). Educational institutions (e.g., colleges and universities) call their long-term investment funds endowments. Health care organizations call them long-term operating funds.
Federal and state laws recognize the board of directors as the structure with fiduciary responsibility to ensure that the resources of a nonprofit organization are being properly managed to further the vision and mission of a nonprofit organization. When a nonprofit organization decides to make long-term investments, this implies automatically that a structure other than the board of directors will manage a part of the assets of an organization. Therefore, if the investment decision is not adequately made, the board may exert a fiduciary responsibility without any real responsibility. To prevent such a situation, nonprofit organizations establish or must establish policies and guidelines, select key qualified officers and mangers to oversee the implementation of investment decisions, and set benchmarks to evaluate outcomes that will make it possible to take appropriate corrective actions when necessary. The structures differ in various nonprofit organizations. Some organizations create a committee to manage their investment funds. Other organizations hire external professional consultants supervised by a committee or internal staff. The best strategy is for the board to explore and discuss options, and make the decision that best suits the interests of the organization in accordance with objective criteria accepted by a majority of directors.
INVESTMENT POLICY STATEMENT
An investment policy statement is a document that acknowledges and defines the terms under which the board of directors delegates its fiduciary responsibility to a third party that will manage specific assets of a nonprofit organization.
Best practices suggest that a nonprofit organization should create an investment committee, which will be responsible for developing investment policy to be approved by the board of directors. An investment policy statement is developed by a nonprofit organization to set guidelines for the investable assets.
The investment policy should specify the purpose of investments to be made by the organization and the constraints attached to investments. In most cases investments are overseen by the investment committee, and managed by the investment manager with the support of the investment consultant. The investment statement outlines the responsibilities of the investment committee, as well as the investment consultant and investment manager.
The investment committee has fiduciary responsibilities to:
- Exercise reasonable care, skill, and caution regarding the overall investment strategy, which should incorporate reasonable risks and return objectives
- Diversify the portfolio, unless there are reasons to the contrary
- Analyze and make considered decisions concerning the levels of risk appropriate to the organization's purposes
- Conform to fundamental fiduciary duties of loyalty and impartiality
- Act with prudence in deciding whether and how to delegate authority and in the selection and supervision of agents (i.e., investment consultants and/or investment managers)
- Incur only costs that are reasonable in amount and appropriate to the management of the portfolio
A statement about conflict of interest should be unequivocal concerning any person or organization involved in the oversight or management of the portfolio. In addition, the
Box 14.1 Items for Investment Policy Statement
- Overall investment environment of a nonprofit organization
- Objective and strategies for asset investment
- Roles of organizational structures involved in managing investments
- Level of acceptable risks
- Allocation guidelines
- Prohibited investment vehicles
- Selection of consultants, managers, and custodians
- Reporting procedures
- Methods and benchmarks for performance measurement
- Procedures to initiate changes
statement of investment policy should define classes of assets, guidelines for each asset, strategic and tactical allocation strategies, procedures to monitor investment and performance, red lines for the asset manager, and review procedures (Box 14.1).