The market crash exposed weakness in the long-heralded “Endowment Model.”What did
we learn about it? And how do we think about structuring portfolios for uncertain times?
Nonprofits, foundations, and endowments are unique in investment management due to the fiduciary role their trustees or selected individuals must fulfill on behalf of their organizations. Their key task is to balance the risk and return profile of an institution’s investment assets, consistent with the overall mission of that institution, including its leadership, donors (and their various intents), and beneficiaries.
Our asset management roles have varied from fulfilling specific equity mandates as part of a larger team of managers to implementing multi-asset class strategies via our Outsourced CIO service, which is specifically designed to help Trustees and Investment Committees manage investment assets to meet their institution’s goals.
In addition, CornerCap’s senior executives hold or have held board-level positions with major nonprofits, advising them on investment policies and board structure. Including our board positions, CornerCap has worked as manager or in an advisory capacity with over 40 nonprofits in our history.
We are comfortable guiding nonprofits, foundations and endowments in investment strategy, asset management and spending plans, and board development under the highest ethical and fiduciary requirements.
Outsourced CIO Service
Many smaller nonprofits, foundations, and endowments do not have the staff, time or expertise to build an investment strategy to match their goals and then to manage the investments to achieve those objectives. For this group, we offer our Outsourced CIO service.
The Outsourced CIO service allows an institution to hire one advisor to guide its leaders in setting investment objectives, deriving spending plans, building and managing a multi-asset class portfolio, and recognizing Board leadership and development issues. It also provides a consistent approach during periods of inevitable Board changes.
Our Outsourced CIO approach is built on the tools and principles we have used and developed over the past 20 years:
When we assist an institution as investment advisor, we spend our initial time getting to know the entity’s leadership, operating environment, strategic plans, and assumptions about the future. From these, we can better help it evaluate its financial goals and spending requirements. Developing the formal investment policy statement (“IPS”) and the format for ongoing communication, both formal and informal, follows naturally from there.
A formal investment policy statement (“IPS”) is clearly vital, but in our experience, the process of creating this document is as important as the document itself, for it forces both the institution and us as advisors to systematically and jointly consider the characteristics that will define long term success. The final written document is unique to each client and will define essential elements like investment objectives, roles and responsibilities, investment strategies and performance benchmarks, and manner and timing of reviews.
In setting spending plans, we spend time understanding an organization’s annual operating budget and capital spending intentions, and then gauge that level relative to assets and investment strategies. We seek an appropriate risk/reward balance to support annual spending needs with long term growth of the institution. An important step in this evaluation is stress-testing spending under various “worst case” scenarios through financial modeling. We also review spending plans periodically—usually annually but as often as necessary—with the institution’s investment committee, to make adjustments to investment strategies or spending patterns as necessary.
See our January 2010 Newsletter “The Irresistible Melody of the Pied Piper” for further thoughts on the suitability of the “endowment model” for many institutions. Our experience is that volatility is inevitable and cannot be “diversified away” by asset allocation strategy. We have long argued that most institutions should not blindly follow the strategies of endowments like Yale or Princeton.
Our core philosophy is that adhering to a strict and independent investment discipline, regardless of market conditions, helps to minimize human emotion and should yield favorable long-term results. We further believe that transparency, liquidity, simplicity, and reasonable cost are vital to long-term performance in portfolio construction and management. Across asset classes, we seek investments that meet these criteria.