Chronicling the quiet revolution in non-profit investment
A new Russell Investments handbook sets out a step-by-step guide to investment strategy for non-profit investors. What strikes me as I read it is the extent to which nonprofit investment has quietly transformed itself in the past couple of decades.
A diverse community of investors
Non-profit investors tend to have more in common with each other than they do with other large institutions such as pension plans or insurance companies. That does not, however, mean that they are all the same. Far from it: organizations differ in their risk tolerance; they differ in their beliefs; and they have different organizational considerations. So we should not expect every non-profit to have the same investment strategy.
The changes of recent years have made it easier for non-profits to step away from the herd when necessary, with a growing emphasis on a well-thought-out investment policy and hence a decline in the reliance on league tables and peer comparisons as the primary objective of an investment program.
Change led by some bellwether programs
High profile programs such as the Yale University endowment have been the leaders of change, the bellwethers of the herd. Wether is an old (Middle English) word for a castrated ram, and shepherds traditionally equipped those who led the flock with bells, to make them easy to find. Hence bellwethers as leaders, indicators of where others will follow.
Pioneering Portfolio Management, by Yale’s Chief Investment Officer, David Swenson, was published in 2000 and to this day remains one of the most influential books in investment. Because of where Yale and others have led, the term “the endowment model” today usually refers to a wide-ranging approach to investment, with material allocations to alternative assets such as private equity, oil and gas partnerships, hedge funds, forestry and more. But it was not always this way; even in the 1980s, non-profit investment was dominated by legal restrictions and a strict avoidance of anything that might be considered speculative.
That restrictive attitude can be traced all the way back to the damage done by the South Sea bubble of 1720. Later legislative actions—from the emergence of the Prudent Man standard to the passage of landmark laws such as UMIFA, UPIA and, in 2006, UPMIFA¹—enabled a broadening of investment programs. The legislation was, however, as much a result of changing perceptions of how non-profit funds ought to be invested as it was a cause of those changing perceptions: UMIFA, for example, can be traced at least in part to the influence of studies commissioned by the Ford Foundation in the 1960s.
If the most significant change of the past few decades was the transformation of the breadth of non-profit investment programs, the most notable shift underway today is probably the change in how these programs are run. The increasing complexity of every aspect of running an investment program has led to a change in attitudes to, and in the extent of, outsourcing. Most organizations do not have the depth of resources or access to expertise that the largest programs enjoy, and hence can find it difficult to replicate their approaches cost-effectively. Outsourcing of certain functions is increasingly seen as an answer to that challenge.