The 2022 List Issue, Part 5: 4 steps for non-profit fiduciaries to consider this year

Editor's note: This is part 5 in a five-part series on 2022 investment insights. Part 1 can be viewed herePart 2 can be viewed here, Part 3 can be viewed here and Part 4 can be viewed here.


Rougher seas lie ahead for non-profit fiduciaries as the COVID-19 pandemic stretches into 2022 and refuses to retreat quietly into the night. Empty university lecture halls, shuttered libraries and museums, canceled concerts and shows, tightened budgets, slimmer staff resources and mounting demands on community support have become all-too familiar yet unsustainable fixtures for non-profits in recent years. Non-profit fiduciaries continue to wrestle with difficult decisions when it comes to building and managing their investment programs as a lever to support their spending needs and their communities, while faced with dwindling resources and a potentially challenging future market environment. Record-high equity markets, rising interest rates and the threat of higher inflation mean non-profits also need to balance spending plans with lower forecasted investment returns.

With these challenges in mind, here are four key themes and action items that we believe non-profit fiduciaries should discuss at the board and investment committee level this year, in order to position their portfolios for investment success.

1. Reassess—and, if possible, revise—your spending policy

The economic consequences of the COVID-19 pandemic, including revenue shortfalls, inflationary pressures, staff shortages and high unemployment have impacted spending for many non-profits, many of whom need to spend a minimum amount in order to meet their communities’ needs both in the present and future.

Public charities, endowments and foundations may have more flexibility when it comes to adjusting their spending budgets, which means they could adopt lower spending rates that would shore up support for future beneficiaries but also allow them to support current beneficiaries sufficiently. However, there are organizations that don’t have flexibility in their spending, such as private foundations that have to adhere to the IRS’ minimum spending requirement of 5% or community foundations whose very mission is to help those impacted by economic hardships. We recommend that these organizations review their investment strategy to determine whether it supports their spending goals, and if so, decide whether they’re comfortable with the risk required to achieve the return goals. If they are comfortable with the illiquidity risk, they may consider increasing the allocation to strategies such as private markets, to help ensure the portfolio generates a return that supports a higher level of spending.

2. Consider the impact of inflation on your organizational spending, and whether changes to the investment strategy need to be made

Non-profits are not immune to the tide of inflation seeping into all corners of the economy, for inflation can put pressure on how far donations go as well as strain a non-profit’s operating model. Fiduciaries are wise to assess their portfolios’ sensitivity to inflation based on their risk tolerance, strategic asset allocation and spending policy. There are ways to cope, and fiduciaries should consider whether they need to adjust their asset allocation in light of inflationary pressures. For instance, certain asset classes serve as more effective hedges against inflation than others; the ownership of real estate and other real, tangible assets can lower inflation sensitivity, whereas a higher allocation to bonds means greater sensitivity to inflation. Incorporating an inflation hedge is especially important for smaller institutions, who generally have lower allocations to real assets and marketable alternatives which weather inflation well. For those organizations that need to spend at a higher level, the sensitivity to inflation could also be higher, making an evaluation of the spending policy even more critical.

3. Understand key drivers of risk in the portfolio, and assess, adjust and diversify strategic asset allocation as appropriate

While many non-profit fiduciaries may have a high-level view of their portfolio allocation, they should also take a closer look at their asset mix to understand key drivers of risk in their investment strategy. These might include equity style factors such as growth versus value, country exposure (such as U.S. versus non-U.S. equities), or duration, credit, risk, etc. Fiduciaries should determine whether their portfolio has any biases that could limit exposure to upside opportunities—for example, a bias for growth equities or a home-country bias for U.S. equities—and consider if the portfolio has factored in the potential rotation in the markets toward value equities, or a future shift away from U.S. equities to non-U.S. equities. Fiduciaries should also be aware of the duration of their fixed income assets, and the relative weights between Treasuries, government bonds and corporate credit. Having a full understanding of all portfolio risk exposures helps fiduciaries determine whether they are truly comfortable with their risk exposures and ensure these fall within the confines of their risk tolerance.

Fiduciaries should also consider mining additional return sources to help improve the risk-adjusted return profile of the overall portfolio. For instance, diversifying assets in the alternatives space, such as private equity, credit, real estate, infrastructure and commodities, are rich sources of income and growth. They can also serve the dual purpose of an inflation hedge, as these assets are generally less sensitive to changes in inflation.

4. Consider sustainability applications in your portfolio

According to the Global Sustainable Investment Review 2020, sustainable investing assets reached a staggering $35 trillion, or 36% of all managed assets in the U.S.¹ There is little doubt that it is critical for fiduciaries to think seriously about sustainability and what it means for their organizations’ investment portfolios. In recent years, more and more institutional investors have been adopting ESG-themed strategies or considerations in the pursuit of superior, risk-adjusted returns. We believe that the integration of ESG factors, which can be achieved by focusing on investment managers that include ESG integration as part of their process, is an effective strategy for many investors. However, the beauty of ESG investing lies in its diversity of applications, which can also include exclusion strategies, thematic strategies such as low-carbon equity, or shareholder engagement strategies to make your voice heard and effect change in how a corporation operates.

In short, there’s a variety of ways to integrate ESG considerations into the investment program. While getting started often seems like a daunting task, it doesn’t have to be. We believe the first step along the journey to ESG investing is educating investment committee members and other key stakeholders on important ESG definitions, as well as aligning your beliefs, goals and objectives around ESG investing. Fiduciaries also need to remember to capture their ESG beliefs and goals in their investment policy statements. Having a clear reporting system in place is also critical to any successful responsible investing framework, so that fiduciaries can monitor and measure how well ESG policies are being implemented. Additionally, fiduciaries should have a solid plan to effectively communicate efforts and results to stakeholders and maintain stakeholder confidence. Spreading the word to key stakeholder groups and participating in industry collaborations, such as the UN-backed Principles for Responsible Investment, can help your organization stand out, demonstrate your efforts to the wider world and build lasting stakeholder confidence.

The wrap

The problems that have been dogging non-profits in recent years aren’t going away soon, and non-profit fiduciaries have their work cut out for them in 2022. However, we believe that carefully considering the strategic issues and action items we’ve outlined above, and keeping one’s eyes on the prize, will serve fiduciaries well as they navigate the troubled waters ahead.

The good news is, you don’t have to go it alone. Let us know how we can help.

¹ Global Sustainable Investment Review 2020, Global Sustainable Investment Alliance. 2021.