Why investment programs offer more than investment portfolios
Volatile markets and choppy economic conditions are placing pressure on not-for-profit organisations (NFPs). With donors likely to tighten their belts in the face of rising interest rates and inflationary forces, not-for-profits need to consider how they grow their current funding pool to guarantee their future, while maintaining enough liquidity to fund their immediate activities. It’s no longer good enough for NFP’s to build basic investment portfolios filled with a potluck mix of direct equities and term deposits. To stay afloat, NFPs require bespoke investment programs designed and overseen by professionals with the ability to align an NFP's investments with its purpose and values, and experience in challenging market conditions, leaving nothing to chance when it comes to securing their future.
Outside their expertise
For most NFPs and the dedicated people who work within them, managing an investment portfolio is the last thing on their mind. Often, the responsibility falls to those in the finance department who manage a NFP’s cash flow. As a result, NFPs regularly carry a significant allocation to term deposits and cash-like investments, running counter to their goal of growing their funding pool.
What time NFP staff are able to dedicate to their investment portfolio can easily be eaten up selecting securities or portfolio managers. This means higher order decisions with a greater impact on the probability of success can often be overlooked.
In some cases, those managing an NFPs assets will have recognised this over-reliance on low-risk investments and seek to then make an adjustment by adding an allocation to growth assets in the form of an off-the-shelf equity component or simple diversified fund.
As NFP organisations grow, these solutions can become particularly ill-fitting. NFPs come in all different shapes and sizes – from regional churches to capital city universities, and charitable organisations with a single purpose. This realisation is often cause for NFP management teams to consider using the expertise of a dedicated investment management professional, who can manage their existing portfolio, enact best-practice governance processes, align investments with the organisation’s goals, and build a customised solution specifically designed for the NFP, rather than a generic solution that doesn’t directly meet any individual organisation’s need.
From portfolio to program
There are five essential steps of a successful investment program:
- Investment Philosophy
- Investment Strategy and Implementation
- Ongoing Management
By using an outsourced CIO (OCIO) partner such as Russell Investments, not-for-profit organisations can implement an investment program which links the objectives of their investments with their entire organisation. This level of integration ensures risk and return targets are appropriately aligned to the NFP’s investment goals.
Without defining their investment objective, it’s impossible for NFPs to accurately assess the level of investment risk they should take. When market conditions are challenging, understanding the objective allows OCIO providers to adjust or maintain an appropriate level of risk, so that target outcomes can be met.
Part of the appeal of a professionally managed investment program is in how it clearly defines the rules and responsibilities of those involved in its ongoing implementation and management. Governance is critically important to NFP organisations. However, when managed internally, it can be unclear who is responsible for an NFP’s investment portfolio.
With a clear investment objective and articulation of responsibilities, NFPs can then work with their OCIO provider to outline an investment philosophy which guides investment decision making. The philosophy assists NFP’s in understanding their risk tolerance, liquidity constraints – including the level of liquidity required to underpin current activities – and investment horizon. These factors all contribute to the eventual strategic asset allocation an NFP adopts.
In periods of market stress, an NFP’s investment philosophy is an important reference point, akin to flags on a beach – when conditions are rough, it’s important to stay between the flags. For NFP’s, in periods of market stress an investment philosophy does the same thing by reminding NFP’s of their risk tolerance and guiding their assets towards safety by ensuring they aren’t suddenly exposed to an unacceptable level of risk.
The development of an investment strategy and its ongoing implementation are areas where OCIO providers can offer acute relief to NFPs. Properly designed and implemented investment programs guarantee diversity across asset classes by adopting a more considered approach not always possible for NFP staff already stretched in their existing roles. This minimises the risk that NFPs are overexposed to certain markets and asset classes, while maintaining the capability to achieve desired investment outcomes.
It's relatively straightforward to take a top-down view of a portfolio on a regular cadence and conclude that it is performing. Where investment programs excel, is in providing a framework for NFPs and OCIO providers to assess investment management performance and consider its ongoing management, particularly in response to unexpected events. For NFPs, constantly reviewing the performance of the investment managers appointed to manage their portfolio is demanding and requires a time and resource investment that often does not exist.
For now, and the future
NFPs, like all organisations, are operating in uncharted waters. However, with funding sources not guaranteed as donors grapple the impact of inflation and an environment of rising interest rates, it’s critical for NFPs to be financially capable of riding out waves of volatility while setting themselves up for long-term success.
Investment programs ensure NFPs are guided by the right investment objectives, have clear responsibilities for the different investment decisions required, and help to inform the right portfolio trade-offs, giving them the very best likelihood of reaching their goals and leaving nothing to chance in their quest to make a positive impact.
By seeking the help of an OCIO provider such as Russell Investments and adopting a holistic investment program aligned with their purpose and values, NFPs will be well positioned to change the world for the better now, and into the future.
At Russell Investments, we have more than 30 years of experience helping Australian not-for-profit organisations best ensure their impact for the long-term by developing, implementing and managing best-in-class investment programs.