INVESTMENT POLICIES AS STRATEGY FOR LONG-TERM INVESTMENTS

Long-term endowments and pension funds represent an important stream of income for many nonprofit organizations. The decision to develop such investments and their success or failure can have significant consequences on the financial sustainability of a nonprofit organization. A well-developed investment policy can make all the difference. A well-developed investment policy provides guidelines that can anticipate avoidable risks and direct investment decisions on paths with more potential for success. As indicated earlier, investment policies should set the purpose, management structures, asset allocation and rebalancing guidelines, permissible instruments, consultant, custodian, manager selection and evaluation, reporting requirements, and policy review (Box 14.2).

Members of the governing board who came of age in the private sector may tend to think of ultimate objectives in terms of net profit, return on investment, and shareowner value—all of which are measurable. In their nonprofit roles, however, they had to cope with more subjective goals. What can create confusion is that the terms employed resemble those used in business. Profit and growth certainly have relevance to the management of a nonprofit investment. Success has very different applications.

Further, it is difficult for some board members to reconcile payout policy with the social purpose of nonprofit organizations. Payout is the total amount of money distributed from the nonprofit investment fund to support current programs. Educational institutions have a significant degree of latitude in setting their own payout policies, as there are no statutory mandates that dictate minimum payout levels. However, there are certain

Box 14.2 Principles of Endowment Management

Purpose: Objectives of the endowment and statement of investment policies

Responsibilities: Roles of the board members, staff, and consultants

Payout: Amount of the endowment to transfer each year to the operating budget

Asset allocation: Optimum balance of the portfolio to achieve the targeted level of return while limiting risk

Costs: Link performance with cost-effectiveness

Manager: Select the right investment manager based on portfolio diversification Risk management: Proactively search for risks in every facet of the investment process

practical considerations that affect payout policies, as these institutions are generally dedicated to fulfilling their education mission in perpetuity. Foundations tend to have very special legal requirements concerning their minimum payout level, currently a minimum of 5% of the endowment value. Further, there are fairly technical requirements as to what types of spending may be counted against the 5% minimum. Health care organizations differ from endowments both in how assets are obtained and how funds are spent. Health care organizations maintain fee-based services. The fees are generated from insurance companies, government programs, and patients. Despite the data and analytic tools available to inform decisions, it is challenging to make asset allocation decisions in nonprofit organizations. This is due in part to the not-for-profit mission of nonprofit organizations.

A nonprofit investment will run unavoidable risks that may cause the investment to fail. Failures can occur in any part of the investment process, internal or external in operations, in the safekeeping and accounting of assets, in legal or regulatory issues, or in outright fraud.

Cost increases can be a critical issue in investment management. In addition to investment manager fees, sometimes organizations can be charged for other custodial, legal, accounting, consulting, or overhead fees that are excessive or even abusive. The investment policy should spell out its policy regarding cost increases to avoid being surprised.

INVESTMENT AND FINANCIAL SUSTAINABILITY

Nonprofit organizations can make strategic decisions to invest in companies that contribute to sustainability and thus contribute to their own sustainability. By making strategic decisions to contribute to the sustainability of its environment, nonprofit organizations contribute to their own sustainability.

Investment is one of the key financial sustainability strategies available to nonprofit organizations. Investment helps maintain assets and regular income that contribute to the profitability of a nonprofit organization. If an organization is not in a position to report profits, investment income will contribute to reduce loss or deficits. Investment contributes to improve the liquidity of a nonprofit organization. By providing regular income, investment makes an organization more likely to have the ability to pay its bills on time. Further, investment can help improve the solvency of a nonprofit organization through the contributions to total assets and regular income it provides. Finally, investment contributes to diversifying the revenue streams of a nonprofit organization, and makes such organizations less likely to dissolve if one source of funding disappears.

 
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