Study on Nonprofit Investing (SONI) | Nonprofit Investment Statistics

Reserve Segmentation

Segmenting, or splitting, your overall reserve based on the timing of various objectives may help your organization make best use of your cash assets. Outside of cash held in a checking account, we often see organizations use a three-bucket system for segmenting their overall cash reserves into an operating (cash) reserve, short-term investments, and long-term investments. Collectively, these three buckets are an organization’s “reserves”.

Operating (cash) reserve. While cash in your checking account is yielding 0.00% it may be prudent to segment funds that may be spent in the current budget year, but not within the next three, six, or nine months, in a separate cash reserve. This cash reserve may be invested in CD’s, higher yielding money market funds, or an ultra-short term bond mutual funds. The objective of these funds is to maximize yield while preserving the capital and providing liquidity to meet immediate expense needs.
Short-term investments. Funds that are not needed in the current budget year but may cover a future non-budgeted expense or strategic investment, may be segmented into a short-term investment bucket. We suggest targeting a certain short-term average maturity that is in line with the potential timing of an expense. The average credit quality should be very high (AA or higher) so it is less likely that the portfolio would be down notably when funds are needed for withdrawal. As the time frame expands beyond two or three years, having a small allocation (10 – 20%) to equity could provide additional diversification for the portfolio.

Long-term investments. Funds not needed in either of the first two buckets may be segmented into a long-term investment bucket. Long-term portfolios are typically balanced between stocks and bonds in a manner that reflects the organization’s willingness and ability to withstand volatility in the value of the portfolio.

Safeguarding Cash and Short-Term Investments

There’s more than one way to safeguard cash and short-term investments. Organizations looking to make the best use of short-term assets can mitigate risk in three different ways:

Using FDIC insured products or accounts (CDs and bank money market or savings accounts)
Buying bonds backed by the U.S. Treasury or other U.S. government agencies
Having diversified funds that invest in high quality government or corporate bonds (fixed income mutual funds)

If the timing is clear that cash will be spent several years out, it is highly efficient to use individual CDs or government bonds that mature near when the funds are needed. If there is no specific timing for withdrawals, we recommend using low-cost bond mutual funds that will exist in perpetuity. Given that the purpose of cash and short-term investments is to cover a future cash outflow, we recommend that these investments be very liquid so that they can be quickly exited when it becomes necessary to make an outlay.

Alternative Investments

Alternative investments span a wide variety of investment vehicles. It’s important to understand the risk involved when choosing to invest in alternatives.

Nonprofits face a very difficult choice when deciding whether to invest in alternative investments— particularly hedge funds. Nonprofits that rely on investments for current spending require a high level of return to maintain their impact. They may also be risk averse. It’s no wonder that investments that seek to earn “equity-like” returns while experiencing “fixed income-like” risk are appealing.

In our professional judgment, since the 2008–2009 financial market collapse, such alternative strategies have largely disappointed. As a result, nonprofits may reasonably question the wisdom of investing in speculative markets with little transparency, liquidity constraints, and high fees. At RWM, we believe that risk and return are directly related. As such, greater-than-market returns are only available by assuming greater-than-market risk. Larger organizations with the willingness and ability to take on greater risk and whose leadership maintains the sophistication necessary to understand non-traditional market risks may reasonably decide to allocate to alternatives.

In our opinion, however, any nonprofit—regardless of size or sophistication level—that reasonably decides to forgo allocating to alternatives is not doomed to suffer lower return expectation.

2022 SONI Results

This report summarizes an informal study compiled by analyzing the survey results of nonprofit finance executives. The views expressed herein are opinions reflecting the best professional judgment of Raffa Investment Advisers (RIA). This report is for informational purposes only. Participant responses have not been verified or audited. The information contained has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information. Data analysis was performed by RIA. Nonprofits from our internal marketing database and a national external nonprofit database were solicited by direct email to participate in the SONI survey. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from RIA. Every participant did not answer every question in the survey. Percentages are based on number of participants that responded to each question, not total number of participants, unless otherwise indicated.