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Managing Your Not-for-Profit’s Endowment – How to Ensure Present and Future Success

Does your organization have a sound, carefully managed and board-approved Investment Policy Statement? Do you have a firm grasp on how much of your endowment’s return should be spent vs. reinvested based on the current and future needs of your non-profit?  These are just two of countless endowment-related questions that board members need to contemplate…and take seriously. We asked Madelyn Miller, a Financial Advisor at J.P. Morgan Securities, to weigh in and pass on a bit of carefully curated knowledge, gathered from decades of experience in the field.  We hope you enjoy this week’s guest post and would like to thank Madelyn for her thoughtful advice!

 

Managing Your Not-for-Profit’s Endowment – How to Ensure Present and Future Success

1)      Do you have a well thought out Investment Policy Statement, approved by the board?

The investment objectives of the board, through its investment committee, should prepare and approve an investment policy statement which is used as guide for its investment managers and decision making.  The investment policy statement should reflect the organization’s mission to insure the non-profit has the financial resources to support their programs.  The answers to the questions below will help define the key terms of the investment policy statement.

In the US, investment of endowment funds is generally governed by the Uniform Management of Institutional Funds Act (UMIFA), so it is important to have someone, on the investment committee or an outside advisor who is knowledgeable about it.

 

2)      Does the investment committee understand the organization’s spending pattern and if/how the endowment needs to fund the ongoing operations and programming?

The board and the executive team of the non-profit should outline the budget for the next several years and understand how much money will be needed to support ongoing operations.  Will the funds come from annual donations, revenue created by the non-profit or from returns generated from the endowment?

 

3)      What level of risk can the board members tolerate in order to generate the needed returns, given the level of risk assumed in the portfolio?

The risk profile of the trustees and investment committee must be considered in developing an investment strategy. A higher risk profile will enable the endowment to achieve greater returns during up markets, but will also cause greater volatility during down markets. If the members of the committee and board cannot tolerate large swings in portfolio values, then the risk of the portfolio should be adjusted to reflect the appropriate risk tolerance.

 

4)      Who has responsibility for investing endowment assets? Consider whether it is appropriate to engage an outside Financial Advisor if the members of the investment committee do not wish to take on the day-to-day responsibility for managing the endowment’s investment portfolio.

Are the members of the investment committee professionals in investment management and, if so, do they wish to take on the day-to-day responsibility of managing the portfolio?  If not, the committee must determine which outside professionals should be engaged, such as a Financial Advisor or other type of consultant. The size and complexity of the portfolio usually determine the kind of outside resources engaged.

 

5)      Does the nonprofit’s governance requirements place any special limitations on the investment portfolio, such as by donors or particular constituencies?

Do donors have specific objections to certain kinds of investments?  Alternatively, does the mission of the organization state that certain investments should be excluded or others included?  The investment committee should insure that the investment strategy does not violate the mission of the organization or any of its largest donors.

 

6)      How much of the endowment’s return should be spent and how much reinvested, based on the ongoing and future needs of the non-profit?

Depending on the ongoing spending needs of the organization and the intended longevity of the organization, a payout policy should be agreed upon.  Sometimes short term cash needs take precedence over the long term objectives of maintaining and growing an endowment.  However, the board trustees should be aware and in agreement about how the returns on the investment portfolio are deployed.

 

7)      After answering all the questions above, what is the appropriate asset allocation for the portfolio?

After all the questions are answered above, an appropriate asset allocation should be determined which takes into account ongoing support of operational needs, risk tolerance of the board, time horizon of the endowment, and the payout policy agreed upon. Risk/return tradeoffs must be made to insure that funds are available when needed.  The most important investment strategy decision made by the investment committee is the allocation among the principal asset classes.

UMIFA suggests using the “prudent investor rule” where fiduciaries are permitted to take into account the expected total return of the investment portfolio. The payout rate is determined as a percentage of the investment fund’s total net asset value.  One should consider the volatility of various asset classes and their correlation with one another.  For example, volatility can be offset by holding investments that perform differently to the other asset classes held in the portfolio.

 

8)      Are the roles and responsibilities of the board trustees, investment committee members and staff properly articulated?

In order to insure smooth operations of the non-profit, it is important to specify the roles and responsibilities, in written form, of each of the parties above. As is the case with any human interactions, excellent communications foster greater understanding and harmony among all parties involved to insure the long-term success of the endowment and its not-for-profit entity.

 

With over 20 years of financial services industry experience, Madelyn Miller is a Managing Director and Financial Advisor at J.P. Morgan Securities. Madelyn specializes in providing wealth management strategies to her clients, which include high net worth individuals and their families, foundations and endowments, and privately held companies. In the community, Madelyn is the President and Board Trustee of the Harvard Business School Women’s Association, Chair of the New York State Society of CPA’s Entertainment, Arts and Sports Committee and Co-Chair of the Family Office Committee’s Annual Conference for the last three years.  Madelyn earned a B.S.E. from The Wharton School of the University of Pennsylvania and an M.B.A. from Harvard Business School. She resides in Manhattan with her husband of 34 years and two teenage daughters.  She can be reached at madelyn.miller@jpmorgan.com.