Creating and Evaluating your Nonprofits Investment Program · Operating Reserve Preservation of...

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Creating and Evaluating your Nonprofits Investment Program


Page© RAFFA WEALTH MANAGEMENT, LLC. All rights reserved. Page© RAFFA WEALTH MANAGEMENT, LLC. All rights reserved.

Questions/Concerns we hear from Staff and Board Members……

- Where do we start with our Investments? Who should make decisions?

- Where do we start in terms of policies to objectively evaluate our investment program?

- How do we think about a baseline performance expectation for our investments?

- Is our investment program effective? How do I know if we should change our approach?

- How can I make our Finance Committee meetings more engaged and effective?

Today’s Agenda:

I. Review of Key Policy Decisions

II. Why you need Asset Allocation

Targets

III. How Advisers/Consultants Add Value

– Fund selection

– Asset Allocation Strategy (the concept of

market neutral)

IV. Creating Portfolio Benchmarks

V. The ‘Every Investment Committee

Meeting Agenda’



KEY POLICY DECISIONS

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SEGMENTATION BASED ON TIMING OF VARIOUS OBJECTIVES

Portfolio Segment Objective Time Horizon Potential Investments

Operating ReservePreservation of Capital;

Smooth Cash Flows6-12 Months

Fixed Income Securities with an average maturity of <1 Year

Short-Term ReserveSavings for Non-Budgeted, One-

Time Expenses1-5 Years

Fixed Income Securities, Maximum of 10-20% Equity

Long-Term Reserve Excess Reserves 5+ Years Equity, Fixed Income Mix

What is the objective of the investments?

- To preserve capital and provide liquidity

- Maintain purchasing power of organizational reserves

- Long term growth of assets

- Optimize return while minimizing risk through diversification and asset allocation




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AN EXAMPLE

• The target of the reserve fund is to maintain a balance equal to three/six/twelve months of the annual general operating expenditures.

• The target will be achieved by contributing a minimum of 50% of unrestricted net income before depreciation at year-end.

• Target may be based on quantifying potential risk and opportunities.

RisksApproximate cost

Likelihood of occurring

Contribution to reserves

Revenue shortfall

Dues $1,000,000 10% $100,000

Meeting attendance $1,000,000 20% $200,000

Staffing change $1,000,000 50% $500,000

Legal action $1,000,000 10% $100,000

Pension plan shortfall $1,000,000 25% $250,000

Total resave needed $1,150,000

Opportunities

Technology $1,000,000 20% $200,000

Programming $1,000,000 50% $500,000

Facilities $1,000,000 10% $100,000

total reserves needed $800,000

Grand total $1,950,000




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SEGMENTATION BASED ON TIMING OF OBJECTIVES

•In February of this year, over 500 nonprofit finance executives completed a survey about their organization’s investment policies and results.

• Participants were asked how much they held in assets in the following categories: cash in checking, operating cash, short/intermediate-term investments, and long term investments

Public CharityAssociation




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DEFINE KEY ROLES & RESPONSIBILITIES

Staff

Volunteers (Committees and Boards)

Investment Advisors

Fund manager

Custodian

STAFF

• Communicating financial condition and recommended reserve levels

• Facilitating volunteer policy discussions• Reporting to make volunteer oversight easy• Verifying policy compliance




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Staff


Investment Advisors

Fund manager

Custodian

VOLUNTEERS

• Establishing reserve and investment policies• Verifying policy compliance• Assessing reasonableness of fees• Hiring consultants




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Staff


Investment Advisors

Fund manager

Custodian

INVESTMENT ADVISORS

• Portfolio management (asset allocation strategy & mutual fund or manager selection)

• Trading• Reporting (performance and policy

compliance)• Discretionary or non-discretionary




9


Staff


Investment Advisors

Fund manager

Custodian

FUND MANAGER

• Implements a fund’s investment strategy and manages its portfolio trading activities

• Always discretionary




10


Staff


Investment Advisors

Fund manager

Custodian CUSTODIAN

• Independent, safeguards assets, produces statements



AGENDA

11


II. Why you need Asset Allocation Targets


– Fund selection

– Asset Allocation Strategy (the concept of market neutral)


V. The ‘Every Investment Committee Meeting Agenda’



ASSET ALLOCATION TARGETS

WHAT’S NORMAL WITH RESPECT TO ASSET ALLOCATION

•In February of this year, over 500 nonprofit finance executives completed a survey about theirorganization’s investment policies and results. The results from this study found that:

– 95% of Associations participating in SONI maintain a formal Investment Policy Statement

– 85% of Associations specify a Target Asset Allocation

– 62% of Associations incorporate a formal rebalancing policy




HOW DO YOU DETERMINE TARGET ASSET ALLOCATION?

- Document a Prudent Decision Making Process, including:

- Reviewing Financials

- Aligning objectives with strategic planning

- Understanding the timing of expected cash flows

- Assessing the risk tolerance of the organization

- Based on these factors ▲ determine the percentages allocated to:

- US Equity Stocks

- International Equity Stocks

- Bonds

- Alternatives

An example….




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1. Start with a Policy Allocation Target Stocks Bonds

30%70%

2. Dive deeper with a Blended Policy Allocation Target

US

International

Short Term

Intermediate Term35%

35%

10%

20%

3. Look to add value above the market through a Strategy Allocation Target

Large Cap Growth

Small Cap Value

Developed International

Emerging Markets

20%

15%

30%

5%

1-5 Yr US Corp

High Yield

US/Corp & Govt

7%

3%

20%

n

Set policies around Deviation from these percentages.

Percentage drift fro target or set Minimum & Maximum



THE MARKET NEUTRAL CONCEPT

Getting a B+ on a test might seem great……

B + A-

Your Grade

AB

Until you realize everyone else got A’s!



THE MARKET NEUTRAL CONCEPT

Your Performance

Benchmark Performance

PeerPerformance

2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Similar to a grading curve, how performance stacks up against a benchmark indicates if it was good, bad or average




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KEY TAKEAWAYS:

- Target Asset Allocation reflects the organizations financial condition and risk tolerance

- Allows for the portfolio to have an objective, expected return based on the organization’s policy amid constantly changing market conditions

- It may be ideal to have one broad neutral policy target and one that is more detailed reflecting some strategic judgements or decisions

- Investment Committees or Boards can set policies that allow advisers to deviate widely from targets, or create narrow bands



AGENDA

18




– Fund selection






HOW ADVISERS/CONSULTANTS ADD VALUEFUND SELECTION

US Equity

Mutual Fund A Mutual Fund B



Slide uses Russell 3000 Index data. For illustrative purposes only. See appendix for additional disclosures. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. As of 12/2017

AAPL – Apple Inc.3.23% of Russell 3000$867.85 B Market Cap

FIZZ – National Beverage Corp. 0.01% of Russell 3000$4.667 B Market Cap

Total US Stock Index

HOW ADVISERS/CONSULTANTS ADD VALUETHE MARKET NEUTRAL RUSSELL 3000



Slide uses Russell 3000 Index data. For illustrative purposes only. See appendix for additional disclosures. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

- You could equal weight your portfolio as a chosen Investment Strategy

- FIZZ & AAPL would now both be 0.03% of your portfolio

- But how would you know if this strategy decision added value?

HOW ADVISERS/CONSULTANTS ADD VALUETHE EQUAL WEIGHTED RUSSELL 3000



US Stock Market

Small Cap Stocks Large Cap Stocks

Russell 3000 Index

Russell 2000 Index

Russell 1000 Index

Small Cap Value

Small Cap Growth

Large Cap Value

Large Cap Growth

Russell 2000 Value Index

Russell 2000 Growth Index

Russell 1000 Value Index

Russell 1000 Growth Index

HOW ADVISERS/CONSULTANTS ADD VALUETHE MARKET NEUTRAL CONCEPT



Utilities Telecom

Consumer Staples

Industrials

Healthcare Energy

TechnologyConsumer

Discretionary

Materials Financials

How does your Adviser and/or

Committee create value?

Benchmark against what is neutral

HOW ADVISERS/CONSULTANTS ADD VALUEADDING VALUE WITH ASSET ALLOCATION



Market weight neutral allocations

Asset Class Benchmark

US Equity

International Equity

Fixed Income

Hedge Funds

Rusell 3000

MSCI AW ex US

BBG Barclays Aggregate Bond

HFRI Fund-of-Funds???

If allocating to Alternative investments is a professional or investment committee strategy, intended to add value beyond investing in traditional

stocks and bonds, it may be best to compare the alternative allocation to the mix of Market Neutral benchmark’s that the allocation is replacing.

Alternatives

MSCI ACWI ex US

HOW ADVISERS/CONSULTANTS ADD VALUETHE MARKET NEUTRAL CONCEPT



Mankoff, Bob. “On Wall Street today, the stock market corrected its previous correction…" The New Yorker, https://www.newyorker.com/cartoons/daily-cartoon/. 15 August 2018.

“On Wall Street today, the stock market corrected its previous correction and is pretty sure it’s got it

right this time.”



AGENDA

26




– Fund selection




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1-5 YR US Corporate

1-5 YR US Government

US Credit

Non-Investment Grade

5-10 YR US Corporate


Hedge Fund (Conservative)

BBG 1-5 YR US Corporate

BBG 1-5 YR US Government

BBG US Credit

BBG Non-Investment Grade



HFRI Conservative Index

Blended Policy Allocation Target

Strategy Allocation Target Strategy Benchmark Blended Policy BenchmarkPolicy Target

Equity

Fixed Income

US___40%___

International___10%____

Alternatives__________

Large Cap Growth

Large Cap Value

Mid Cap

Small Cap Growth

Small Cap Value

Public Real Estate Inv Trust


Emerging Markets

Commodities

Private Investment/VC

Hedge Fund (Equity Like)

Russell 1000 Growth

Russell 1000 Value

Russell Mid Cap

Russell 2000 Growth

Russell 2000 Value

NAREIT All Equity REITs Index

MSCI World ex US

MSCI Emerging Markets

Bloomberg Commodity Index

HFRI Private Equity Composite

HFRI Macro (Total) Index

Russell 3000___40%__

MSCI ACWI___10%___

Short Term___25%___

Intermediate____25%___


BBG USAggregate

___50%____

50%

50%

20%

10%

10%

5%

5%

20%

10%

10%

5%

5%

10%

15%

10%

15%

10%

15%

10%

15%

Performance:

For Illustration purposes only. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results.

Net Performance Return: 8.00% 7.00%10.00%

Fund Selection: -2%Asset Allocation: 3%

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1-5 YR US Corporate


US Credit

Non-Investment Grade

5-10 YR US Corporate


Hedge Fund (Conservative)



BBG US Credit

BBG Non-Investment Grade



HFRI Conservative Index

Blended Policy Allocation Target

Strategy Allocation Target Strategy Benchmark Blended Policy BenchmarkPolicy Target

Equity

Fixed Income

US___40%___

International___10%____


Large Cap Growth

Large Cap Value

Mid Cap

Small Cap Growth

Small Cap Value

Public Real Estate Inv Trust


Emerging Markets

Commodities

Private Investment/VC

Hedge Fund (Equity Like)

Russell 1000 Growth

Russell 1000 Value

Russell Mid Cap

Russell 2000 Growth

Russell 2000 Value

NAREIT All Equity REITs Index

MSCI World ex US

MSCI Emerging Markets

Bloomberg Commodity Index

HFRI Private Equity Composite

HFRI Macro (Total) Index

Russell 3000___40%__

MSCI ACWI___10%___

Short Term___20%___

Intermediate____30%___


BBG USAggregate

___50%____

50%

50%

25%

15%

3%

7%

25%

15%

3%

7%

10%

10%

10%

20%

10%

10%

10%

20%

Performance:


Net Performance Return 16.55% 14.55%15.55%

Value Added: 2%



Return

Risk (Standard Deviation)

2% -

4% -

6% -

8% -

10% -

12% -

14% -

16% -

18% -

20% -

-2%

-4%

-6%

-8%

-10%

-12

%

-14%

-16%

-18%

Blended Policy Benchmark

Strategy Benchmark

Net Portfolio Return


CREATING PORTFOLIO BENCHMARKSRISK ADJUSTED RETURN

Asset Allocation

Fund Selection



CREATING PORTFOLIO BENCHMARKS

OTHER SAMPLE BLENDED POLICY BENCHMARKS (BPB)

Not every organization’s Blended Policy Benchmark will or should be the same. Consult your investment adviser about the most appropriate construction of your organization’s Blended

Policy Benchmark.



CREATING PORTFOLIO BENCHMARKS

WHY AN OVERALL BLENDED POLICY BENCHMARKING HELPS BOARDS EVALUATE ADVISERS

1. Provides context to performance results

2. Establishes a “control” performance expectation based on market conditions and your organization’s risk tolerance (target mix of stocks/bonds)

3. Reflects the absence of professional judgement – and therefore enables the value of professional judgement to become clear

4. Removes emotion from decision-making, allows for objective evaluation of an adviser or investment committee

5. Makes oversight straight-forward, allows Boards to focus on strategic planning



AGENDA

32




– Fund selection






THE ‘EVERY INVESTMENT COMMITTEE MEETING AGENDA’

INVESTMENT COMMITTEE MEETING AGENDA:

Review of Key Investment Policies

Verify that Investments comply with Investment Policies

Verify that Performance is in-line with expectations

Discuss potential policy changes

Q&A including market commentary and forecast



THE ‘EVERY INVESTMENT COMMITTEE MEETING AGENDA’

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REPORTING REQUIREMENTS

• Is your Asset Allocation in line with the Target (based on targets and rebalancing policy)?

• Stock Holdings – Compliant with policy?

• Bond Holdings – Compliant with policy?

• Performance performing as expected relative to…

–The Overall Portfolio Benchmark

–Broad Asset Class Benchmark

–Individual Positions



KEY TAKEAWAYS

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1. Identify the target mix of stocks and bonds that reflects your organization’s ability and willingness to accept market risk

2. Develop a corresponding blended policy benchmark based on the target mix and neutral allocations

3. Allow advisers to reasonably deviate from the targets, knowing that such deviation will cause the portfolio’s performance to deviate (positively or negatively) from the blended portfolio benchmark policy

4. Require the reports shared with your volunteer oversight committee include a comparison of the net portfolio performance and your blended policy benchmark

5. Focus committee meeting on policy compliance and potential policy changes before discussing market forecasts

6. Outline all of the above in your IPS



IMPORTANT NOTICE

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referenced directly or indirectly in this report, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your nonprofit’s portfolio. Moreover, you should not assume that any discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your nonprofit’s unique situation, you are encouraged to consult with Raffa Wealth Management, LLC or the professional adviser of your choosing.

This assessment reflects the best professional judgment of Raffa Wealth Management, LLC. The conclusions expressed herein are opinions and are not statements of fact. While we believe the opinions expressed here are fair, accurate, and reasonable we respect that other professionals may disagree and reasonably arrive at materially different conclusions. Past performance is not an indication of future results and any investment can lose value.



DISCLAIMER

This presentation summarizes the results of an informal, non-scientific study compiled by analyzing the results of 702 surveys completed by nonprofit finance executives. This presentation is for information purposes only. Participant responses have not been verified. Data analysis was performed by Raffa Wealth Management. When stating “nonprofit responses” it should be noted that all responses are limited to the nonprofits that participated in the survey. No broader implications should be assumed.

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referenced directly or indirectly in this report, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your nonprofit’s portfolio. Moreover, you should not assume that any discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed above to your nonprofit’s unique situation, you are encouraged to consult with Raffa Wealth Management, LLC or the professional adviser of your choosing.

This assessment reflects the best professional judgment of Raffa Wealth Management, LLC. The conclusions expressed herein are opinions and are not statements of fact. While we believe the opinions expressed here are fair, accurate, and reasonable we respect that other professionals may disagree and reasonably arrive at materially different conclusions. Past performance is not an indication of future results and any investment can lose value.



DISCLOSURE

THIS INFORMATION WAS GATHERED FROM RELIABLE SOURCES BUT WE CANNOT GUARANTEE ACCURACY. ANY PERFORMANCE RELATED INFORMATION IS BASED ON PARTICIPANT RESPONSES AND HAVE NOT BEEN VERIFIED. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS AND ANY INVESTMENT CAN LOSE VALUE.

PERFORMANCE RESULTS HAVE BEEN COMPARED TO BALANCED BENCHMARK PORTFOLIOS COMPRISED OF BROAD MARKET INDEXES. THE BENCHMARKS WERE SELECTED BECAUSE WE FEEL THEY ARE THE BROADEST MARKET BENCHMARK AVAILABLE IN EACH BROAD CATEGORY. THEY MAY OR MAY NOT BE SUITABLE BENCHMARKS FOR COMPARISON TO ANY PARTICULAR INVESTOR’S PORTFOLIO OR FOR THE AVERAGE RESULTS REFLECTED IN THIS STUDY. YOU SHOULD CONSULT WITH YOUR INVESTMENT PROFESSIONAL TO DETERMINE SUITABLE BENCHMARKS FOR YOUR PORTFOLIO.

THE RUSSELL 3000 STOCK INDEX SEEKS TO REPRESENT THE TOTAL RETURN OF US STOCKS – INCLUDING LARGE, MID, AND SMALL CAP AS WELL AS VALUE AND GROWTH STYLES. THE MSCI ACW EX US STOCK INDEX SEEKS TO REPRESENT THE TOTAL INTERNATIONAL STOCK MARKET INCLUDING DEVELOPED AND EMERGING MARKETS. THE BARCAP AGG BOND INDEX SEEKS TO REPRESENT THE TOTAL US INVESTMENT GRADE BOND MARKET. THE 3 MONTH US T-BILL SEEKS TO REPRESENT CASH. THESE INDEXES WERE SELECTED BECAUSE WE BELIEVE THEY ARE THE MOST BROADLY DIVERSIFIED AND/OR MOST WELL KNOWN IN EACH BROAD CATEGORY. INDEXES DO NOT REFLECT THE FEES ASSOCIATED WITH ACTUAL INVESTMENTS AND SUCH FEES WOULD REDUCE THE PERFORMANCE ILLUSTRATED.

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. ANY INVESTMENT CAN LOSE VALUE.

Creating and Evaluating your Nonprofits Investment Program · Operating Reserve Preservation of...

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