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Nonprofit Stewards Can Do This Instead of Worrying about the Markets

By: Bob DiMeo, Managing Partner

To say stock and bond markets appear volatile and uncertain is an understatement. However, you are responsible for your nonprofits investments and whether you oversee an endowment, foundation or reserve fund, your objective is to advance the mission. Once you’ve acknowledged that it’s impossible to control the broad markets, it makes sense to focus on what you can influence that will positively impact your portfolio and your nonprofit.

Control your Three Levers. Nearly all our clients participate in an exercise we refer to as the Three Levers. As the graphic below depicts, the levers include your organization’s financial Inflows and Outflows as well as your Required Return. I’ll go so far as to state that it’s irresponsible for nonprofit boards or committees to focus on investment selection or even asset allocation before first engaging in a systematic approach to identifying the returns required to achieve the organization’s financial goals. Operating budgets, fundraising, capital projects and more must be incorporated. This is a constructive, somewhat clinical approach which provides nonprofit stewards not only sound reason for establishing a particular investment return and risk level, but also acts a useful roadmap during both calm and turbulent times.

Trouble is that no matter how prudent your investment committee, they simply cannot control how stocks and bonds will behave. What can you influence? The inflows and the outflows of your organization. Market volatility has increased and we may be in a lower return environment for the coming years - now is an excellent time to examine your nonprofit’s inflows and outflows. Does it make sense to ratchet up fundraising efforts? Are there expenditures that could or should be eliminated? Modifying your levers before the next recession or bear market might result in lowering portfolio risk and return targets, potentially producing better results in the next downturn.

Reduce investment expenses. Regulators and compliance officers are rightly concerned when guarantees are mentioned in the investment world. But, here is one absolute guarantee: lower portfolio expenses directly improve your portfolio’s performance… and therefore the advancement of your nonprofit’s mission. How long has it been since you and your fellow stewards answered these important questions:

1. Even if we’re pleased with our asset allocation and investments, are we accessing the lowest cost option or share class?
Investment managers frequently introduce lower cost options - it may be possible to reduce expenses, even without changing portfolio managers.

2. Should we be indexing a greater portion of our nonprofit’s investment portfolio?
DiMeo Schneider strongly believes in utilizing both active and passive strategies for most portfolios. However when examining prospective client portfolios, it’s common to see underexposure to low-cost index funds. Yes, some asset classes are difficult to index but others are logical candidates for a passive approach. To see our Active versus Passive Debate and other timely research visit DiMeo Schneider Insights

3. Are we confident that consultant, custody, trading and related costs are competitive?
While investment management costs account for the lion’s share of portfolio management expenses, good stewards examine all costs. Periodically evaluating your total cost structure is not only prudent, it might produce savings that only help further advance your mission.

Improve governance and oversight. When I coached my sons in basketball, I’d always tell them some days you make your shots and some days you don’t. But, you can always play good defense! In this same sense, none of us can predict how the markets will perform in the near term, but there is no reason why a nonprofit shouldn’t have sound governance in place for their investment program. Does your committee consist of knowledgeable individuals who are intent on advancing the organization’s mission? Are committee charters and investment policy statements current and functional? Are you in step with timely subjects such as environmental and socially responsible investing?

While it’s a fact that you cannot control how stocks and bonds perform, there is plenty that you – as a good steward - can do right now to help advance the mission of your nonprofit. And acting before the next recession or bear market certainly seems prudent.

As always, please feel free to contact me or any of the professionals at DiMeo Schneider & Associates, L.L.C. for assistance.

This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate.Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.

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