Endowments, Foundations Struggle to Self-Govern

(October 15, 2013) — Nonprofit foundations and endowments are facing significant investment governance challenges, according to a survey.

SEI reported that from a survey of 165 US not-for-profit endowments and foundations with $16.4 billion in total assets, many reported difficulties with changing managers and asset allocation, as well as focusing on strategic initiatives.

“Not only are [nonprofit investors] managing spending policies, volatile markets, long time horizons, and complex investment line-ups in support of the core mission, but they are often limited in time and resources, and sometimes investment expertise,” Mary Jane Bobyock, director of nonprofit advice at SEI, said.

According to the poll, three-quarters of surveyed portfolios was managed by an investment committee that met only four times a year on average. More than a third said they hired consultants and 18% reported to have used an outsourced partner.

Only about a quarter of those surveyed said they work with an in-house investment team, but the average of the staff was less than one person.

Nonprofit portfolios were largely governed by an average of seven people on an investment committee, the report said. However, only three of the seven members had any investment experience.

More than half of the organizations admitted to not having a concrete term limit for their investment chair.

Although a large majority, 98%, said they employed a formal investment policy statement, defining asset allocation, rebalancing, goals, and performance measurements, these formal policies were mostly overlooked, without reviews or changes. 

“Having a well-defined investment policy statement and investment governance process can help streamline decision-making and create a uniform investment strategy, which are fundamental to executing important portfolio decisions in a timely and nimble manner,” Bobyock said.

SEI identified major necessary components for good governance that many nonprofit investors found challenging.

More than two-thirds of participants found difficulty making timely manager changes, with almost 50% saying it took three months to more than a year to fire a manager.

“This can greatly impact portfolio returns and spending, as the under-performing manager continues to manage the organization’s assets during that time,” SEI said.

Altering allocations also was a long and enduring process for nonprofit investors, the report found.

About half of those surveyed reported that it takes three months to more than a year to agree on an asset allocation change to their portfolios while only 17% were able to make “nimble portfolio changes.”

Quarterly investment committee meetings were largely ineffective as 67% of participants said they had difficulty focusing meetings on strategic investment initiatives due to distractions from “tactical issues,” SEI said.

And lastly, the survey concluded a majority of nonprofit organizations, 77%, were not well equipped to keep committee members educated on complex investment topics.

SEI said hiring an outside partner could help resolve such governance issues.

“An outsourcing provider can be a crucial partner in the investment governance strategy for a nonprofit, providing timely manager and asset allocation changes, assistance in creating an effective investment policy statement, access to committee education materials, and comprehensive reporting towards goals,” the report said.

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