Raffa Wealth Management recently completed the 2014 Study on Nonprofit Investing (SONI) and the results will
be available shortly at www.npinvesting.org. With close to 400 participants, it sheds light on how nonprofits performed in 2014 as well as best practices for investment policies from which institutional and individual investors alike may benefit. The following are some key takeaways from the results.
- Fees impact returns. The survey results illustrated that as fees increased the average portfolio performance decreased. Organizations that paid total fees of under 0.75% posted the best performance while organizations with total fees of 1.5% or greater posted the lowest performance.
- The majority of organizations had formal asset allocation targets in their Investment Policy Statement (IPS). We believe this is definitely a best practice. It clearly defines the portfolio towards a specific goal, conservative, balanced growth oriented, etc. If no targets are included the portfolio can ebb and flow based on future expectations and trying to time the market has proven time and again to be a losing proposition.
- The majority of organizations also had formal benchmarks in their IPS. This holds the investment advisor accountable and provides the Finance Committee or individual with a clear metric to judge how their portfolio has done. The survey also found that non profits that had formal benchmarks in their policy had a significantly higher rate of return than those that did not.
- Another best practice that we recommend is having a specific rebalancing policy and stating it in the IPS. This eliminates emotion and provides discipline for the management of a portfolio. The results of the survey supported this view as organizations that had a specific rebalancing policy in their IPS typically saw better performance in 2014.
- A key issue many organizations face is who maintains decision making authority over the investments or who has discretion. The survey showed that larger organizations tended to give discretion to the investment advisor while smaller organizations tended to keep discretion. We believe that typically it is a best practice to give discretion to the advisor assuming the organization has a well designed IPS. They are hired because they are experts on investing and managing a portfolio, while Finance Committees typically are not. Thus it stands to reason that advisors would know best and the Finance Committee would focus on their oversight responsibility. In addition, the advisor can act quickly to rebalance the portfolio or replace a manager whereas a Finance Committee may not meet for weeks, thus delaying action in the portfolio.
These are just a few of the key issues that come from the 2014 SONI survey. We recommend that you compare your organization or your personal portfolio to the SONI 2014 performance as well as your investment polices vs. the results to see where you stand.
Index Performance April YTD Trl 1Yr
US Stock (Russell 3000) 0.45% 2.26% 12.74%
Foreign Stock (FTSE AW ex US) 5.12% 9.11% 3.82%
Total US Bond Mkt. (BarCap Aggregate) -0.36% 1.24% 4.46%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) 0.03% 0.90% 1.60%
Municipal Bonds (BarCap 1-10yr Muni) -0.25% 0.58% 2.74%
Cash (ML 3Month T-Bill) 0.00% 0.01% 0.02%