Nonprofit Asset Management E-Book

Matthew Rice

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Nonprofit Authority
• Sprache: Englisch

Seitenzahl: 390

Veröffentlichungsjahr: 2012

Beschreibung

An authoritative guide for effective investment management and oversight of endowments, foundations and other nonprofit investors Nonprofit Asset Management is a timely guide for managing endowment, foundation, and other nonprofit assets. Taking you through each phase of the process to create an elegant and simple framework for the prudent oversight of assets, this book covers setting investment objectives; investment policy; asset allocation strategies; investment manager selection; alternative asset classes; and how to establish an effective oversight system to ensure the program stays on track. * Takes you through each phase of the process to create an elegant and simple framework for the prudent oversight of nonprofit assets * A practical guide for fiduciaries of endowment, foundation, and other nonprofit funds * Offers step-by-step guidance for the effective investment management of assets Created as a practical guide for fiduciaries of nonprofit funds--board members and internal business managers--Nonprofit Asset Management is a much-needed, step-by-step guide to the effective investment management of nonprofit assets.

Leseprobe

Contents

Cover

Title Page

Copyright

Preface

Acknowledgements

Chapter 1: The Three Levers and the Investment Policy

The Three Levers

Investment Policy Statement

Statement of Purpose

Statement of Objectives

Liquidity Constraints

Unique Constraints or Priorities

Investment Strategy

Duties and Responsibilities

Investment Manager Evaluation

Conclusion

Chapter 2: Asset Allocation

Modern Portfolio Theory

Capital Market Assumptions: The Building Blocks of Portfolio Construction

Shortcomings of Modern Portfolio Theory

Probabilistic Optimization Models—The Frontier Engineer™

In the Long Run . . .

Strategic, Tactical, and Integrated Asset Allocation Steering Mechanisms

The Low Volatility Tailwind

Tail Risk Hedging

Counterparty Risk

Portfolio Rebalancing

Conclusion

Notes

Chapter 3: Traditional Global Financial Asset Classes

Global Fixed-Income Asset Classes

Global Equity Asset Classes

Conclusion

Chapter 4: Traditional Asset Class Manager Selection

Manager Search and Selection

Investment Vehicles

Active versus Passive Management

When to Terminate a Manager

Conclusion

Chapter 5: Hedge Funds

The Evolution of Hedge Funds

Modern Hedge Fund Strategies

Why Invest in Hedge Funds?

Alpha-Beta Framework, Hedge Funds, and Fees

Hedge Fund Indices and Benchmarks

Hedge Fund Terms and Structures

Fund of Hedge Funds versus Direct Investment

Hedge Fund Operational Due Diligence

Hedge Funds in the Post-2008 World

Conclusion

Chapter 6: Private Equity

Private Equity Investment Strategies

Why Invest in Private Equity?

Structure and Terms

Private Equity Risks

Direct Private Equity versus Private Equity Fund of Funds

Selecting Private Equity Managers

Benchmarks

Conclusion

Notes

Chapter 7: Real Assets

Commodities

Equity Real Estate Investment Trusts and Private Real Estate

Farmland

Energy Infrastructure Master Limited Partnerships

Broad Infrastructure Investing

Timberland

Gold

Other Investible Real Asset Categories

Conclusion

Note

Chapter 8: Performance Measurement and Evaluation

Why Monitor Performance?

Performance Calculations

Benchmarks

Market Index Basics

Investment Style

Major Market Indices

Determining the Right Index

Peer Group Universes

Modern Portfolio Theory Performance Metrics

Style Analysis

Portfolio Analysis

Performance Reporting

Conclusion

Chapter 9: Structuring an Effective Investment Committee

Procedures

Committee Structure

Committee Makeup

When an Investment Committee Needs Outside Help

Effective Use of the Consultant

Conclusion

Chapter 10: Outsourced Chief Investment Officer Services

Overview

Why Outsource?

Outsourced Services

What Is Done in Conjunction with the Committee?

Potential Benefits

Finding a Firm

Characteristics

The RFP

Interviewing Finalists

Fees

The Contract

Reporting

Conclusion

Chapter 11: Environmental, Social, and Corporate Governance-Focused Investing

History and Evolution

Negative Screening

Positive Screening

Shareholder Advocacy

Community Investing

Strategy Considerations

Investment Selection

Separate Accounts

Mutual Funds

Commingled Funds

Exchange-Traded Funds

Alternative Investments

Performance Impact of ESG

Incorporating ESG into Investment Policy

Conclusion

Notes

Chapter 12: Selecting Vendors

Custodians

Record Keepers and Administrators

Broker/Dealers

Transition Managers

Conclusion

Chapter 13: Hiring an Investment Consultant

The Investment Consultant

Identifying a Qualified Investment Consultant

Effective Use of a Consultant

Conclusion

Chapter 14: Behavioral Finance

Trying to Break Even

Snake Bitten

Biased Expectations and Overconfidence

Herd Mentality

Asset Segregation or Mental Accounting

Cognitive Dissonance

Anchors

Fear of Regret and Seeking Pride

Representativeness

Familiarity

Investor Personality Types

Risk-Seeking Behavior

Naturally Occurring Ponzi Schemes and Market Bubbles

Conclusion

Note

Chapter 15: Legal Aspects of Investing Charitable Endowment, Restricted, and Other Donor Funds

Nature of Endowment or Restricted Funds

Endowments Created by the Board

Donor-Created Endowment Funds

Donor-Created Restricted Gifts or Funds

GAAP Accounting Treatment

General Statement about Investing Endowment

Context: The Historical Prudent Man Rule

Trusts: The Prudent Investor Act

Uniform Prudent Management of Institutional Funds Act

Private Foundation Rules

Conclusion

Final Thoughts

Takeaways

Conclusion

Appendix: Case Study: Developing Capital Market Assumptions

About the Authors

About the Contributing Authors

Index

Copyright©2012 by Matthew Rice, Robert DiMeo, and Matthew Porter. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone], or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Rice, Matthew, 1974-

Nonprofit asset management : effective investment strategies and oversight / Matthew Rice,

Robert A. DiMeo, Matthew Porter.

p. cm. – (Wiley nonprofit authority ; 3)

Includes index.

ISBN 978-1-118-00452-4 (cloth); ISBN 978-1-118-19919-0 (ebk);

ISBN 978-1-118-19917-6 (ebk); ISBN 978-1-118-19914-5 (ebk)

1. Nonprofit organizations–Finance. 2. Nonprofit organizations–Management. I. DiMeo, Robert A. II. Porter, Matthew, 1971- III. Title.

HG4027.65.R53 2012

658.15'2–dc23

Preface

“May you live in interesting times!” The ancient Chinese curse has never seemed more apropos. There are some positives for this tired old world, but no shortage of challenges!

On the one hand, scientific advances have increased life expectancies, enhanced global food production, and hold the promise of eradicating diseases that have plagued mankind for thousands of years. The fall of Communism promised to usher in an era of greater peace and stability. Increased computing power and new industrial production methods have led to a geometric increase in productivity. New forms of energy production such as wind and solar power are just beginning to have an impact.

On the other hand, there are more threats than ever before. First of all, global demographics work against us. While our technology has enabled food production to stay ahead of population growth, we may be approaching a tipping point. We can almost feed seven billion people if we could only solve the distribution problems. But how will we feed the nine billion expected before the middle of the century? What will be the impact on other resources or on the planet itself?

Secondly, there is a plethora of other problems. Worldwide religious intolerance is increasing. Fanatical terrorists welcome the chance to die if it means that they can simultaneously kill their perceived enemy (mostly innocent men, women, and children).

Disasters, natural and otherwise, somehow seem more numerous. From the devastation of Hurricane Katrina to unprecedented numbers of earthquakes, to massive oil spills, there seems to be no shortage of crises. New diseases, from AIDS to antibiotic-resistant strains of old scourges like tuberculosis, threaten to overwhelm the medical advances mentioned above.

Trade globalization is a double-edged sword. As a society we enjoy cheaper goods and services, but some workers find their jobs outsourced. Likewise, the Internet gives us instant connectivity and facilitates the flow of information around the planet but it also allows cyber-criminals to steal identities from half a world away. The 30-year war on drugs has been a monumental failure. Despite uncounted billions of dollars, and prisons filled to overflowing, a high school student in any town in the United States can buy pot by firing off a text message to one of his classmates.

If one were to count a dollar a second, working day and night with no breaks or days off, it would take 31 years to count out a billion dollars. Yet, our elected “servants” spend thousands of billions, seemingly with no other goal than rewarding their supporters and punishing their opponents. It's no surprise that the country has become more polarized than at any time in recent memory.

In short, there is a crying need for all of the services provided by nonprofit organizations.

Money Is Tight

Whatever the mission, there is undoubtedly more need than money. So far the twenty-first century has been a difficult financial environment. The 2000 to 2002 bear market was just a warm-up for the financial meltdown of 2007 to 2009. Fiduciaries for nonprofit funds have understandably become gun-shy. Many threw in the towel in early 2009 and abandoned equities for fixed income only to kick themselves for missing the run up of the next two years.

Persistently high unemployment is a near-term deflationary force that has politicians and central bankers running scared. No one wants a repeat of the Great Depression and its misbegotten offspring, World War II!

Unprecedented government spending (part “stimulus” and part social engineering) and our entitlement system have resulted in unsustainable budget deficits. There are only four possible solutions: default; raise taxes dramatically; severely cut discretionary spending and entitlement programs; or monetize the debt (e.g., let inflation reduce the real value of the debt). History provides no comfort, given that a current dollar is only worth four cents compared to a 1913 dollar (the year the Fed was created).

To add to the litany of woes, donating is down. Appreciated securities are in short supply. Tax and financial uncertainty may make even the wealthy clutch their purse strings a little tighter.

Topics

While we cannot solve the world's ills, we can help fiduciaries become better stewards for their funds. We will explore wide-ranging challenges for nonprofit funds of all kinds and provide the reader with practical solutions.

We will outline a systematic approach to fund oversight that includes determining the fund's Three Levers (inflows, outflows, and required returns) and the corresponding Ability and Willingness to Tolerate Risk. We will show how these important inputs are reflected in well-written Investment Policy Statements for nonprofit funds with varied objectives and risk constraints.

We will share our best ideas for optimizing Asset Allocation Strategy, which is the single most important step in the investment process. This includes a review of Traditional Global Financial Asset Classes and Alternative Asset Classes like Hedge Funds, Real Assets, and Private Equity, and the role each plays in well-diversified portfolios.

We will outline a systematic multi-step approach to improve success when Selecting Traditional and Alternative Investment Managers. We will also share a framework for evaluating the fund's investment managers on an ongoing basis and how to make the critical Manager Retention and Termination Decisions. We will also identify where Active and Passive management makes the most sense in a portfolio.

We will show investment committee members how they can identify and avoid traps set by our human Behavioral Finance quirks, and how they can save a nonprofit fund millions of dollars in opportunity costs.

We will also discuss Fiduciary and Legal Issues for nonprofits and provide a framework for evaluating and selecting Investment Consultants, Brokers, Vendors, Record Keepers, and Other Resources for the fund.

How to Use This Book

One can read it cover to cover. Alternately, each chapter is modular, and can be used as a how-to guide for a specific project or task. Wherever practical, this book includes charts, graphs, and case studies designed to make explanations as straightforward as possible.

Who Should Use This Book?

The primary audience for this book is fund fiduciaries. Included in this group are investment committee members, trustees, officers, board members, and internal staff should find it a helpful resource. Advisors to nonprofits should also find it useful. This group includes accountants, auditors, consultants, and attorneys who advise the fund. Vendors to nonprofit funds may also find it useful. This group includes money managers, brokers, custodians, and others who provide services for a fee. Finally, legislators, teachers, students, reporters, and any other interested parties may find useful information in this book.

Acknowledgments

In addition to our many terrific contributing authors, we want to thank all of the other talented individuals at DiMeo Schneider & Associates, L.L.C., whose valuable contributions to our firm and this book are far too numerous to count. We would also like to thank Richard Gallagher, who authored Chapter 15.

We also want to thank our wonderful clients who have given us the honor of making us trusted partners. We are grateful for your trust and friendship.

Chapter 1

The Three Levers and the Investment Policy

The investment policy statement (IPS) articulates the nonprofit fund's purpose, objectives, and constraints. It also articulates the time horizon(s) and the fund's ability and willingness to assume risk. A well-designed IPS also acts as an investment committee's guide for procedures, principles, and strategies.

The Three Levers

A well-written IPS is an invaluable resource for an investment committee. However, in order to be effective, it must be written and periodically revised to accommodate the fund's three levers. The three levers are inflows, outflows, and required investment returns. The balance among these three components is unique to each investor. Whether the fund's purpose is to finance a perpetual spending need, a project over a finite period, act as a reserve for a “rainy day,” or for any other purpose, its three levers will determine the appropriate objective (see Exhibit 1.1.).

Exhibit 1.1 The Three Levers

The three levers exercise is arguably a nonprofit investment committee's most important task when developing investment policy. If this crucial step is skipped, or done in haste, it is just a matter of time before painful symptoms emerge. Symptoms may include investment losses greater than the institution can afford during a bear market, or insufficient long-term investment earnings to fund spending needs. One needs to understand the size, volatility, and rigidity (or flexibility) of each lever, as well as how each interacts with the others in order to make effective investment objective, risk budgeting, and asset allocation strategy decisions.

You need to start by asking the right questions. Investment committees and nonprofit boards typically consist of smart people accustomed to making decisions, but they do not always focus on the right questions. Answers to the following questions should be instructive: