Nonprofit Investment and Development Solutions E-Book

Roger Matloff

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

Seitenzahl: 340

Veröffentlichungsjahr: 2013

Beschreibung

Solid guidance for managers and trustees to better position their nonprofits now and in the future The Great Recession has left a paradigm shift for nonprofit leadership and their board members as fiduciaries. It has changed how boards make, evaluate and document investment decisions, the risks they are willing to take and the way these details are communicated to donors. Nonprofit Investment and Development Solutions + Website will provide solid guidance for nonprofit leadership, staff and volunteers to better position their nonprofits to thrive now and in the future. This guide will provide: * Sophisticated investment and development principles that are easily understandable and adaptable * Specific steps to take in order to avoid unnecessary investment risk and secure financial stability * Solutions and techniques for capitalizing on opportunities created by funding shifts and evolving donor expectations * Principles and practices of fiduciary responsibility, behavioral finance, socially responsible investing, strategic development planning and charity efficiency In addition, Nonprofit Investment and Development Solutions + Website offers a web site resource with a variety of online tools and templates to help readers implement key concepts discussed in this book.

Leseprobe

Contents

Cover

Title Page

Copyright

Preface: Here We Are

Background: Where We Have Been

Multiple Factors

This Book's Setup

Acknowledgments

Chapter 1: Philanthropy History and Statistics

American Philanthropy

Examining the Statistics

Summary

Chapter 2: Fiduciary Responsibility

What Is a Fiduciary?

What Are the Duties of the Fiduciary?

Pressure on Fiduciaries from Increased Volatility

Protecting the Assets—The Prudent Investor

Training and Education of Fiduciaries

Increasing Government Regulation

Protecting the Mission

Effective Use of Professional Consultants

Valuable Resources

Summary

Chapter 3: New Roles for the “New Reality”

The Investment Consultant

The Investment Committee

Fundraising and Finance

Investment Policy Statement

Summary

Chapter 4: Behavioral Finance

The Psychology of Investing

Behavioral Factors and Investing

Psychology and Decision Making

The Psychology of Group Decisions

Behavioral Finance and Investment Consulting

Summary

Chapter 5: Understanding Risk

The Individual and Risk

Biases

Investment Committee Psychology

Risk and the Fiduciary

Group Dynamics and the Nonprofit

The Theory of Groupthink

The Blind Risk Model

Understanding Individuals—Gathering Information

Assessing the Power on the Investment Committee

Completing the Process

Summary

Chapter 6: Asset Allocation

Asset Allocation Analysis

Types of Risk in Asset Allocation

Risk and Portfolio Performance

Preparing for Asset Allocation Analysis

Summary

Chapter 7: The Investment Policy Statement

The Elements of an Investment Policy Statement

The IPS Provides Essential Discipline

UMIFA and UPMIFA

IPS and Investments

The IPS and Asset Allocation

The IPS and Risk, Return, and Money Manager Retention

The IPS and Major Donors

Summary

Chapter 8: Money Manager Selection

The Goal

Outlining the Process

Step 1: The Search

Step 2: The Evaluation

Step 3: The Analysis

Step 4: Selection

Summary

Chapter 9: Dynamic Portfolio Optimization

Before Modern Portfolio Theory (MPT)

Modern Portfolio Theory

The Efficient Portfolio

The Mean-Variance Model

Dynamic Asset Allocation and Market Timing

Summary

Chapter 10: Investment Program Analysis

Monitoring Accounts

The Procedure

Assessing Money Managers

The Evaluation

Summary

Chapter 11: Socially Responsible Investing

The Roots of Socially Responsible Investing

What Exactly Is Socially Responsible Investing?

How Do We Accomplish Socially Responsible Investing?

The Risks of Socially Responsible Investing

Additional Means of Accomplishing SRI

Why Does a Nonprofit Implement an SRI Portfolio?

Summary

Chapter 12: The Changing Landscape for Fundraising

Our New Reality

Donor Motivations

Communication Strategies

Revenue Source Diversification

The Strategic Development Plan

Understanding Donors

Effective Communication Tools

The Case for Support

Measuring Programmatic Impact

The Strategic Development Planning Process

The Importance of Planned Giving As a Strategic Development Tool: Building Endowment with Planned Gifts

Donor Values That Affect Their Legacy Giving

Summary

Chapter 13: The Evolution of Donors—Trends and Truths

The Modern Donor

Transformations in Giving Patterns

Growing the Donor Pool

Summary

Chapter 14: Growing Expectations

Resources

Two Key Measures of Financial Health

Financial Ratios

Integrity and Credibility

Summary

Conclusion

About the Companion Website

About the Authors

Index

Cover image: © Alexandre Fundone/Getty Images

Cover design: Wendy Mount

Copyright © 2013 by Roger Matloff, Joy Hunter Chaillou. All rights reserved.

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

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Matloff, Roger, 1959-

Nonprofit investment and development: a guide to strategies and solutions for thriving in today's economy / Roger Matloff and Joy Hunter Chaillou.

p. cm. — (Wiley nonprofit authority series)

Includes index.

ISBN 978-1-118-30477-8 (cloth); ISBN 978-1-118-33416-4 (ebk);

ISBN 978-1-118-33527-7 (ebk); ISBN 978-1-118-33197-2 (ebk)

1. Nonprofit organizations—United States—Finance—Management. 2. Investments—United States. I. Chaillou, Joy Hunter, 1969- II. Title. III. Title: Nonprofit investment and development.

HG4027.65.M338 2013

332.67′253—dc23

2012038550

Preface: Here We Are

What our economy has recently experienced is more than just a crisis. The wake of the Great Recession has left a paradigm shift for nonprofit leadership and their Boards as Fiduciaries. This shift has changed how Boards evaluate and document investment decisions, the risks they are willing to take, and the way these details are communicated to donors. There has been a significant transference in donor behaviors and motivations and consequently the emergence of an increased need for precise development strategy and measurement techniques for communicating impact. Nonprofit competition for philanthropic dollars is fierce, and all organizations—big and small—need to conform to new standards of accountability and transparency. This book has been designed to be read by anyone who is involved with a nonprofit at the leadership level. We attempt to provide a balanced perspective around the priorities of investment and development strategy, and bridge the gap between those with backgrounds in investment management, nonprofit management, administration, and fundraising. Whether the reader's role is that of volunteer or staff leadership, he or she will be able to learn something new from taking the time to read this guide.

We will introduce investment and development strategies, tools, and techniques in hopes of providing some keys to success in this post-Great Recession environment, and provide answers to the following questions:

What are the lessons we can learn from this crisis, to protect nonprofits from unnecessary investment risks and funding shifts in the future?

What steps can be taken by nonprofit leadership and advisors to ensure that Boards and investment committees are prepared to make prudent decisions to protect the organization's financial resources and ultimately its mission and impact?

What steps should be taken now to secure financial stability in order to ensure sustainability so that the good work and critical missions can have impact now and perpetuate for future generations?

What steps should nonprofits be taking in order to ensure a donor will continue to support their cause? How are donors making their philanthropic decisions? What information are they seeking? What tools are they using and to whom are they turning for advice?

Background: Where We Have Been

Our country recently has been through devastating economic experiences, the effects of which have been and continue to be felt around the world. Essentially, the reverberation of decisions made across the biggest firms in the financial industry—taking on immeasurable amounts of risk—resulted in the obliteration of well-known multi-billion dollar investment companies and created a world of uncertainty for corporations, individuals, governments, and nonprofit organizations across the globe.

The walls of Wall Street came tumbling down in 2008. Lehman Brothers, Bear Stearns, and Washington Mutual filed for bankruptcy and fell off the map; others, like AIG, were crippled. The government concerns about bank stability encouraged mergers between powerhouse companies like Wachovia and Wells Fargo, and Merrill Lynch and Bank of America. Countless other investment companies experienced dramatic upheavals, limiting the extension of credit to other businesses. Who would have believed that in one year, both Chrysler and General Motors, symbols of preeminent American industrial strength and prestige, would both file for reorganization under bankruptcy laws?

So severe was the financial crisis, so close were the capital markets to unraveling, that the United States government took unprecedented steps as enforcer to the financial industry, to end the crisis and minimize the collateral damage. The Department of the Treasury was involved in shepherding the process of J.P. Morgan purchasing the remaining assets of Bear Stearns. The Federal government took further drastic action by investing in large national banks, insurance companies, and the auto industry, with those leaders navigating through the crisis, speaking sotto voce, that these corporations were “too big to fail.” The Federal Reserve Bank, Department of the Treasury, and, at their urging, Congress, took dramatic action in the form of a stimulus package, to inoculate the economy from plunging into another Great Depression.

However, despite the stimulus legislation, which mandated the infusion of $787 billion, the aftershocks of the crises have been devastating and felt by all. Hundreds if not thousands of businesses shut their doors; individuals invested in the stock market saw no gain after a decade of investment; retirement savings vanished; and unemployment has been at an all-time high.

Multiple Factors

Some may have clear recollections of the relentless daily news featuring countless market declines. As the Dow Jones Industrial Average plunged below 7,000, even stalwart believers in the equity market were taking a reality check—how far down could the markets go? As it happened, the year 2008 was the most volatile year in the securities markets since 1929. Two of the best and two of the worst days on record occurred in 2008; on October 13 and 28, the market gained 11.6 percent and 10.8 percent, respectively. And we witnessed September 29 and October 15, with the market sustaining stunning losses of 8.8 percent and 9.0 percent, respectively.

Looking back you may recall living through the media discussions in late 2008, recounting how the origins of the financial collapse had been seeded years before, when federal and banking policies shifted, loosening residential credit, allowing those Americans who had high credit risk to purchase homes. The easing of regulations during the Clinton era was well intended, to enable middle to low-income earners finally to enjoy the pride of home ownership. Their mortgages were bundled with others in complex financial packages and securitized as collateral debt obligations (CDOs). The purchasers of those packages fully believed that the mortgages underlying the securities would be paid to the underlying lenders and that the value of those CDOs would appreciate over time. It is when the CDOs on their books became devalued that the situation became worse.

As borrowers were unable to pay their mortgages en masse the value of the CDOs dropped, those insurance companies holding the financial portfolios that carried the insured value of the CDOs were called upon to pony up. But, what they had not expected was the cascading of failed CDOs, putting pressure on their balance sheets. Much of what occurred has been evocatively told in such books as House of Cards by William Cohan (Anchor, 2010; describes the collapse of Bear Stearns) and Andrew Ross Sorkin's book, Too Big to Fail: How Wall Street and Washington Fought to Save the Financial System—And Themselves (Penugin Books, 2010; the story of the decline of Lehman Brothers) that have focused on tracking, on an almost daily basis, the unfolding of events that led to the Great Recession.

What is most striking is the trail of destruction this crisis left in its wake. For all of 2008, the S&P 500, a standard measure of the strength of the U.S. stock market, declined by 38.5 percent (37.0 percent including dividends). From the market's apex to its lowest point, the market declined more than 51 percent (October 9, 2008 to November 20, 2008). Oil peaked in July of 2008 at $147 per barrel only to plummet to $35 per barrel near the end of December 2008, a sign that business and consumer demand had all but dried up.

During this crisis, the market declined more than 51.9 percent. Only three times since 1939, including this latest crisis, has the market declined by more than 40 percent. While a recovery during each recession took time, perhaps years, the average market increase after the two worst recessions was 84.2 percent. This leads us to believe that we will experience positive growth in our future.

As if the declining markets weren't enough to cause fear and suffering, simultaneously a number of Ponzi schemes were exposed beginning with investment manager Bernard Madoff pleading guilty to defrauding more than 1,000 individuals, families, and charities of $60 billion dollars. The Madoff scheme was coined the largest in American history. Families were devastated, some victims committed suicide, and some nonprofits shut their doors, while others shed staff and programs. Nonprofit organizations across the country had major donors whose wealth disappeared instantly and endowments were depleted as a result of Madoff's fraudulent activity. Subsequent to the Madoff scheme, many more Ponzi schemes were exposed when their culprits were unable to continue to fuel their confidence games with new money.

To complicate matters further, as unemployment rose in response to the economic downfall, so did the demand for social services. Homeless shelters, food banks, and social service agencies had to increase their services and enhance their programs. The need in communities around the country rose at a rapid pace as the resources funding those organizations declined or even dried up completely. Individual donors, feeling their own personal economic crises, began to reduce or stop their funding. Government agencies revisited budgets, and funding allocations changed or were cut entirely. With resources retracting and individuals feeling less wealthy, donors began to evaluate their choices and be more selective in their charitable planning strategies. High net worth individuals became more strategic in their charitable plans. Decisions about which organizations to continue supporting were made with great care and guidance from outside advisors—accountants, attorneys, and financial advisors. More than 67.5 percent of high net worth households consulted their accountant when making a charitable giving decision, 40.8 percent consulted their attorney and 38.8 percent their financial/wealth advisor.1 Additionally, the list of charities was slashed in some cases from 10 or 12 to 2 or 3. Therefore, as the financial needs of nonprofits rose and the need for services increased, the dollars available retracted and the allocation of those dollars, and the selectivity with which donors were making donations was building as well. Enter the growing accountability and transparency standards. In 2008, the government unveiled the new Form 990 (Return of Organizations Exempt from Income Tax), fiduciary responsibilities of board members were emphasized and many smaller nonprofits were eliminated based on their inability to comply with the new reporting standards. The tone had officially changed as the business of running a nonprofit efficiently and effectively became more relevant both for obtaining funding and complying with regulatory requirements.

There is no question that the challenging economic and investment climate and scarce funding resources have left us all, individuals, for-profit corporations, governments, and nonprofits alike, with a new reality. Specifically for the nonprofits, there is more competition than ever before, and boards and nonprofit leadership are forced to reexamine themselves as leaders, stewards, and fiduciaries. Leadership must have a keen awareness around risk, sound policies, and practices to make prudent decisions to preserve the mission and impact goals of the organization. Our theory is that sound policies and prudent practices, from investment consultant selection to donor communication and collaborative Board and staff practices, are essential in coping with consistent volatility, heightened need for governance and oversight, and generally growing expectations around accountability and transparency. Focusing on these issues will provide leadership with an opportunity for self-examination and empower them with tools to be effective stewards of donors' dollars and help them to attain and maintain a fit and healthy existence along with the kind of focus for-profit companies are compelled to have by the nature of competition in the marketplace.

For discussions in this book relating to nonprofit investments, we assume that the board of the nonprofit delegates these responsibilities to an investment committee. We recognize that in some nonprofits, the board acts as the investment committee, although we see an increasing trend for nonprofits to use a separate investment committee, given both the level of work and time required to manage nonprofit assets and the increased regulation of endowment management

This Book's Setup

This book is intended to provide insight and easily adoptable principals for sound investment and development practices. Some of the topics are more technical than others. We have attempted to provide clear and basic definitions and examples throughout to facilitate comprehension of the more technical applications.

There is certainly more to managing a nonprofit's investment and development strategies than can be laid out in a couple hundred pages. However, by the end of this guided journey, regardless of a readers experience level in either strategy, he or she will have a strong basic understanding of the relationship between the two and the necessity for prudent practice around both. We hope you enjoy taking these lessons as much as we enjoyed learning them ourselves through practice over the years and putting our experience to paper through this process.

Each chapter is organized by key themes based on the broad chapter topic. The end of chapter questions are designed to help readers come up with one or two actionable ideas by leading them through the process of thinking about where their nonprofit stands relative to the strategies, solutions, and techniques. The questions are meant as a guide for readers to discover which issues are most relevant to their organization and help them begin to formulate ideas based on the suggestions in the material. Readers may discover that their organization has many challenges to overcome. It is important not to get discouraged by this, as identifying the issues and challenges is the first step to finding solutions and realizing the opportunities that will ultimately lead to success. Let us get started by reviewing history and its effects on the evolution of philanthropy and charitable giving.

Roger MatloffJoy Hunter Chaillou

Note

1. The 2010 Study of High Net Worth Philanthropy, sponsored by Bank of America Merrill Lynch.

Acknowledgments

To my family and friends who I consider the greatest gift of my life. Thank you for your support, love, and encouragement. You each provide me with unique inspiration for which I am deeply grateful.

Joy

To Erica, the foundation of my life, who has taught me that giving is important, but caring is essential...

To my children, Adam and Breanne, who have endowed me with much pride and joy...

Roger

Chapter 1

Philanthropy History and Statistics

The fragile state of our economy has had a severe effect on nonprofit organizations and how they operate. However, it has also provided us the opportunity to witness and reaffirm the deep philanthropic values of individuals in our country. Understanding a bit about the history and recognizing how our philanthropic culture is evolving will be very useful information as we begin to dive into the strategies and solutions for success in today's economy.