Key reasons why non-profits should consider OCIO

Volatile markets and choppy economic conditions are pressuring non-profit organizations. With donors tightening their belts in the face of rising interest rates and inflationary forces, non-profits need to consider growing their current funding pool to guarantee their future, while maintaining enough liquidity to fund their immediate activities.

It’s no longer good enough for non-profits to build basic investment portfolios filled with a potluck mix of direct equities and cash deposits. To stay afloat, non-profits require bespoke investment programs designed and overseen by professionals. The fiduciary professionals align a non-profit’s investments with its purpose and values, therefore leaving nothing to chance when it comes to securing their future.

Outside their expertise

For most non-profits 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 non-profit’s cash flow. As a result, some non-profits carry a significant allocation to cash deposits and fixed income investments, running counter to their goal of growing their funding pool.

What time non-profit staff can dedicate to their investment portfolio is easily 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: spending policy, asset allocation, roles and responsibilities.

In some cases, those managing a non-profit’s assets will have recognized 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 non-profit organizations grow, these solutions can become particularly ill-fitting. Non-profits come in all different shapes and sizes—from university pension and endowment programs, to faith based organizations, and charitable organizations with a goal to fulfill their mission.. This realization is often cause for non-profit management teams to consider using the expertise of dedicated investment management professionals, who can manage their existing portfolio, enact best-practice governance processes, align investments with the organization’s goals and build a customized solution specifically designed for the non-profit.

From portfolio to program

There are five essential steps of a successful investment program:

  1. Objectives
  2. Governance
  3. Investment policy statement
  4. Investment strategy and implementation
  5. Ongoing management

An outsourced chief investment officer (OCIO) partner can implement a program which links a non-profit’s investing objectives with its overall mission. For example, a food bank may want to increase its exposure to riskier assets like equities in order to cover the rising costs of providing meals to those in need. This level of integration ensures risk and return targets are appropriately aligned to the non-profit’s investment goals and overall enterprise risk.

Without defining their investment objective, it’s impossible for non-profits 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 roles and responsibilities of those involved in its ongoing implementation and management. Governance is critically important to non-profit organizations. However, when managed internally, it can be unclear who is responsible for a non-profit’s investment portfolio.

With a clear investment objective and articulation of responsibilities, non-profits can then work with their OCIO partner to outline an investment policy statement which guides investment decision making. The statement  assists non-profits 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 a non-profit adopts.

In periods of market stress, a non-profit’s investment policy statement is an important reference point, akin to flags on a beach—when conditions are rough, it’s important to stay between the flags. For non-profits, in periods of market stress, an investment policy statement does the same thing by reminding them of their risk tolerance and guiding their assets toward 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 non-profits. Properly designed and implemented investment programs create diversity across asset classes by adopting a more considered approach not always possible for non-profit staff already stretched in their existing roles. This minimizes the risk that non-profits 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 non-profits and OCIO providers to assess investment management performance and consider its ongoing management, particularly in response to unexpected events. To manage the risk of the unexpected, we believe the best OCIO providers should also have the ability to run spending studies on behalf of the non-profit, via Monte Carlo simulations.

For now, and the future

Non-profits, like all organizations, are operating in uncharted waters. With funding sources not guaranteed as donors grapple with the impact of inflation and an environment of rising interest rates, it’s critical for non-profits to be financially capable of riding out waves of volatility while setting themselves up for long-term success.

Investment programs ensure non-profits 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 such as Russell Investments and adopting a holistic investment program aligned with their purpose and values, non-profits will be well positioned to change the world for the better now, and into the future.

At Russell Investments, we have almost 40 years of experience helping non-profit organizations best ensure their impact for the long-term by developing, implementing, and managing best-in-class investment programs.