Investment return expectations are lower today that in the past, challenging many non-profit organizations to meet near-term spending commitments and long-term real asset growth. Many non-profits are taking steps to better balance long- and short-term goals, including adjusting shorter term spending expectations, reducing the expected growth rate of the investment portfolio for planning purposes, increasing fundraising efforts and/or increasing risks in pursuit of higher returns.

The best response to the challenge of a low return environment is not a simple one-size-fits-all answer—it will depend on each organization's circumstances.

The size and flexibility of spending commitments are important considerations. For example, a university endowment with substantial obligations to support the university's annual operating budget may be highly challenged as a result of significant market downturns reducing endowment assets. They may need to distribute a larger percentage of assets to fund existing budgets, or seek to reduce programs to maintain desired endowment spending levels in order to preserve the endowment's long-term real growth potential. In contrast, while health care organizations' long-term investment pools have typically been a subordinate source of funding for operating budgets, they are important contributors to the organization's bond rating and cost of capital, as well as funding needed capital investments to remain competitive.

Likewise, the availability of cash from other non-investment sources should be considered. In the two scenarios above, if the university endowment is largely dependent on donors and capital campaigns for new cash flows, those donations may ary dramatically and also be linked with broader market conditions. Endowments with stable or growing contributions will have increased flexibilities to cover near-term spending or investment fund shortfalls. Conversely, healthcare organizations receive income from multiple sources (e.g., private/public reimbursements), and can access debt markets for capital investment. Donor contributions are desired but are generally not the primary source of contributions.

Other differentiating factors may include inflation-sensitivity of obligations or liquidity needs. The university endowment might not seek to limit allocations to longer-term illiquid assets, preferring to seek returns through intermediate and highly liquid investments. The hospital with annual net cash inflows may be willing to invest higher allocations to longer-term illiquid investments.

Nobody knows what their investment returns will actually be over the next few years. If real returns deliver at the high end of expectations, a greater number of non-profit organizations will benefit from their investment funds supporting near-term obligations and longer-term asset growth. But given low interest rates, and uncertain economic outlooks, organizations should have clear plans for adapting and responding to moderate, or worse, investment returns. This includes identifying key risks and adapting inestments and cash flow requirements based on the organization's specific circumstances and objectives.

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

These views are subject to change at any time without notice based upon market or other conditions and are current as of the date at the top of the page. It is made available on an "as is" basis. Russell Investments does not make any warranty or representation regarding the information. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for anyindividual or entity.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.