Outsourcing Trends in Nonprofit Investment Management IPA/GIFT Finance & Investment Deep Dive Day November 4, 2015

Transcription

1 Outsourcing Trends in Nonprofit Investment Management IPA/GIFT Finance & Investment Deep Dive Day November 4, 2015 This document is for institutional use only and redistribution is expressly prohibited.

2 Agenda Governance Outsourcing Considerations Outsourcing Landscape and Trends Presenter William F. Jarvis Executive Director, Commonfund Institute November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 2

3 Governance

4 Nonprofit Investment Management Governance Model STAFF ROLES CEO VOLUNTEER ROLES Board CONSULTANT/MANAGER ROLES External Resources CIO CFO CDO Finance Committee Investment Committee Audit Committee Investment Consultant Auditor/ Portfolio Custodian Manager Chief Financial Officer (CFO) Report to CEO and Finance Committee Prepare and manage annual budget Recommend and manage debt policy Oversee audit of organization, including investment portfolio Optimize cash flow Chief Investment Officer (CIO) Report to CEO and Investment Committee Execute investment policy Maintain asset allocation / policy portfolio Oversee and recommend manager / security selection Oversee performance reporting and attribution Recommend and implement risk management Recommend and conduct portfolio rebalancing Conduct tactical asset allocation within policy portfolio Chief Development Officer (CDO) Report to CEO and Finance Committee Develop and oversee major and annual gift strategy Develop and oversee planned gift strategy Supervise development staff Possess knowledge of endowment management best practices Finance Committee Report to Board Develop financial strategy and oversee financial operations Review and monitor financial operations Maintain financial records Present financial information to Board Approve capital budgets and debt issuance Communicate with and educate Board on financial matters Investment Committee Report to Board Develop investment policy Develop and oversee asset allocation / Policy portfolio Develop and oversee spending policy Set risk tolerance and oversee risk management Monitor investment performance (manager / portfolio) Direct hiring / compensation of managers and consultants Audit Committee Report to Board Select and hire independent auditor Manage and oversee audit process Review audit findings and management letter with auditors Present financial statements and auditors recommendations to Board Oversee business office processes Oversee conflict-of-interest and whistleblower policy Investment Consultant Report to CIO/ Investment Committee Educate / inform Investment Committee Assist with development and review of investment policy statement and policy portfolio Conduct asset allocation studies Implement manager search process Conduct ongoing manager evaluation and reporting Provide Investment Committee with research / analysis Portfolio Manager Report to CIO / Investment Committee Conduct investment strategy as contracted Provide regular written reports and risk-adjusted performance attribution Provide educational materials and economic / market analysis Auditor/ Custodian Auditor reports to CFO / Audit Committee Custodian reports to CIO / Investment Committee Provide audit / custody services Reporting, fund accounting Transfer agent Compliance Legal counsel November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 4

5 Fiduciary Checklist Investment Management Governance Your Organization s Board of Trustees IDEA Committee (Trustee/Staff) Commonfund Strategic Solutions Annually Strategic Planning Long-term execution Oversight Quarterly Investment policy statement (IPS) Purpose of endowment fund Investment spending and asset allocation policy Risk constraints, liquidity, and other guidelines Conflicts of interest & ethics policies Roles and responsibilities Evaluation Asset allocation modeling and peer benchmarking Implement investment plan Risk management process Rebalance/Tactical analysis & trade execution Liquidity budget Report to Board: performance, analysis and recommendations Investment Teams Operations Legal & Compliance Risk Management Vet Investment process Manager selection Monitor manager to guidelines & process Monitor leverage Stress test fund portfolio Replace/Rebalance among managers Custodian/Administrator oversight Asset verification Valuation policy guidelines Proxy voting guidelines Manager advisory agreement Review and negotiation of terms: fees, liquidity, transparency, significant events notice, etc. Compliance review and check of manager policies Background checks of subadvisors Enterprise related risk monitoring Counterparty risk Manager s credit risk Collateral monitoring Risk metrics & modeling Independent due diligence November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 5

6 Outsourcing Considerations

7 Evaluation of OCIO Capabilities and Services Account Management and Analytic Resources Board of Trustees Staff Chief Investment Officer OCIO Team Relationship Management Investment Teams Account Management and Analytics Legal & Compliance Risk Management Operations Trading and Compliance Account Management Analytics Portfolio Management Analytics Financial Operations Reporting and Accounting November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 7

8 Considerations Roles and Responsibilities Example Trustees/ Committee Investment Office OCIO Roles and Responsibilities Report to Board of Directors Develop Investment Objectives and Policies Establish target portfolio and strategic asset allocation Oversee risk management and report to Board Oversight of Commonfund Strategic Solutions Formal annual review of Investment Policy Statement and Asset Allocation Liaison between IC and Strategic Solutions Develop cash budget and communicate cash needs each month Monthly portfolio rebalancing varies based on level of discretion Portfolio risk measurement and monitoring Customized online reporting Manager due diligence and on-going monitoring Execute subscription documents for illiquid programs November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 8

9 Considerations Discretion Determining Committee investment discretion and control Minimal Discretion Partial Discretion Full Discretion Outsourcing provider makes formal recommendations to investment committee Asset allocation Risk budget Strategy execution Manager selection Investment committee approves all investment decisions Extensive Investment committee sets asset allocation, risk budget, and investment policy ranges Investment outsourcing provider advises on policy and implements portfolio decisions Defines strategy execution Conducts manager searches Investment instruments Flexibility to make tactical investment decisions within policy ranges Committee Time/Resources Dedicated to Portfolio Management Investment outsourcing provider responsible for investment policy decisions Asset allocation Risk budget Strategy execution Manager selection Depending on provider, may not tailor allocation/risk to individual clients Minimal Source: Casey Quirk - The New Gatekeepers: Winning Business Models for Investments Outsourcing, December 2008 November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 9

10 Reasons to Consider Outsourcing Criteria for considering differs from reasons to select outsourcer Lack of Internal Resources Better Risk Management Additional Fiduciary Oversight Faster Implementation and Decisions Cost Savings Need to Increase Returns Desire for Strategic Partnership Source: 2015 Outsourced-Chief Investment Officers Buyer s Guide, February 27, 2015, Chief Investment Officer November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 10

11 Reasons for Selecting Outsourcing Criteria for selection differs from reasons to consider outsourcing Breadth of Capabilities and Services Experience of Top Management Reputation and Peer Referral Client Service Willingness to be a Fiduciary Price Source: 2015 Outsourced-Chief Investment Officers Buyer s Guide, February 27, 2015, Chief Investment Officer November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 11

12 The Outsourcing Model What are your expectations? Ask questions to understand your needs The process for engaging an OCIO provider begins with an understanding of your expectations and reasons for change. How do you currently govern and manage the portfolio? What deficiencies or gaps exist in the current governance and management structure? How involved are Trustees in the governance and management of the portfolio? What level of control or discretion do they exercise over the management of the portfolio? What is the catalyst for change? What do you hope to gain or achieve with a change? How would you engage an OCIO as an Outsourced Chief Investment Officer or Outsourced Chief Investment Office? Why? November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 12

13 The Outsourcing Model What are the implications for staff? Ask questions to understand the partnership Once an OCIO is engaged, what does it mean for Staff? How are duties delegated? What current responsibilities of Staff will be delegated to the OCIO? What additional duties will Staff take on as a result of hiring an OCIO? What reporting is available? Do you have the ability to deliver custom performance/executive summary/audit reports? What is the timing of monthly/quarterly reports? What type of performance/financial reports are provided? What s the frequency? Customization? November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 13

14 The Outsourcing Model What are the implications for staff? Ask questions to understand the partnership (continued) Once an OCIO is engaged, what does it mean for Staff? What analytical tools are available? Who is responsible for cash flow/liquidity management? What is the staff s role? How frequently will asset allocation and investment policies be reviewed? Who undertakes special analytical requests? What other services are included in the OCIO program? What is the OCIO involvement or assistance provided during the audit process? Will there be an increase in costs as a result? Who is responsible for portfolio rebalancing and what is the frequency? What type of ongoing training is provided to staff and trustees? Does the provider offer CE credits for industry professionals (i.e., CFA s, CPA, etc.) What other services are provided under the OCIO program? November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 14

15 Outsourcing Landscape and Trends

16 OCIO Landscape and Trends Naming convention OCIO/Fiduciary Manager Few Barriers to Entry - < 45 to > 75+ Providers Little Standardization Fees, Performance and Services Pressure on Fees base plus incentives Seek similar size and objective performance results Services match the needs of the organization Cottage Industry OCIO Consultants Investor Demands Increasing Beyond Investment Management and Advice Difficult to Evaluate November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 16

17 Assessing OCIO Performance Assess means to measure, evaluate and judge What do you assess? Nominal returns, gross and net of fees Risk-adjusted returns Other, more qualitative, factors such as fit Lack of standardization among OCIO models makes assessment difficult Each institution is unique November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 17

18 Assessing Performance Defining performance, either gross or net of fees, is challenging: Nominal Returns Risk Adjusted Returns Other - Qualitative Performance is an outcome There is no one, standard portfolio Portfolio choices reflect: The purpose of the institution Objective (risk/return) guidelines These and other factors govern portfolio construction By definition then Each institution s performance will be unique November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 18

19 It s Your Money Ask Your Advisors About Performance Are they comparing equivalent structures? Discretion Size Objectives How are the performance benchmarks determined? Is the performance a measure of a model portfolio or composite? Can the OCIO provide both asset class and client portfolio level performance? How can you compare their performance with that of other providers? November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 19

20 Assessing OCIO Fees What are you assessing? Total costs Impact on recommendations Components Lack of standardization and regulation among OCIO models makes assessment difficult Components OCIO advisory fee Other expenses > Direct expenses > Performance fees > Base asset manager fees > Other What resources and services are included? Each institution is unique, services to be provided should be as well November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 20

21 It s Your Money Ask Your Advisors About Fees Again, are they comparing equivalent structures? Discretion Size Objectives Are there additional charges? For what purposes? Are all similar clients treated the same for fee purposes? Does the OCIO provider share fees with underlying managers or through proprietary management? How can you compare their fees with those of other providers? November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 21

22 Select Competitor Data and Models Little consistency among providers Strategic Solutions OCIO Provider of Large Asset Manager Minimum Investment Client Base US/non-US non-profits US and non-us individual and institutional clients Fees Performance Fee Investment Vehicles Consultant/ OCIO provider OCIO Provider Single Fund Provider $25 million None noted $250 million $50 million $200 million 0.50% up to $100 million; 0.35% $100m to $500 million; negotiable thereafter No Commingled (manager and CF) funds and separate accounts 0.60% up to $100 million 0.50% + 5% over an agreed upon index Commingled funds and separate accounts US non-profits 0.40% on assets up to $500 million; 0.15% on assets over $500m 3.0% annually of net profits in excess of 10% return Third party investment managers and pooled funds US and non-us individual and institutional clients 0.75% on 1st $100 million; negotiable thereafter Yes - negotiated individually Commingled funds and separate accounts US and non-us individual and institutional clients 0.75% up to $100 million; 0.675% > $100 million and < $250 million; 0.60% > or equal to $250 million. Yes - negotiated individually Single fund or funds NOTE: All fees reflected are indicative of direct fees charged by Provider; and are not indicative of fees charged by underlying investments or sub-advisors which may be higher. Source: 2015 Outsourced-Chief Investment Officers Buyer s Guide, February 27, 2015, Chief Investment Officer ; OCIO ADV Brochures November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 22

23 OCIO Landscape and Trends The Future No standardization = difficult to evaluate Will remain so for foreseeable future Importance of references Define your circumstances and expectations (allow for relationship matching or fit ) Investors continue to demand more beyond investment management and advice Fees will compress greater standardization Larger institutions to consider outsourcing Staff turnover Technology Institutions seek a partner not a provider Market providers will contract survivors will be strategic partners and guide clients to understand what is needed to generate strong performance November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 23

24 Appendix

25 Important Notes Outsourced Investment Solutions ADVISORY SERVICES Advisory services described under the trade names Commonfund Strategic Solutions and Commonfund Custom Investment Office in this presentation are provided by Commonfund Asset Management Company, Inc., a SECregistered investment adviser that is a controlled subsidiary of The Common Fund for Nonprofit Organizations ( Commonfund ; Commonfund and its controlled affiliates are collectively referred to as Commonfund Group ). Investors in these services enter investment advisory agreements with Commonfund Asset Management Company, and are provided with copies of Part II of its filing with the SEC on Form ADV (copies of this document are available to prospective investors on request to your Commonfund Relationship Officer). COMMONFUND MULTI-ASSET PROGRAM The Commonfund Multi-Asset Program described in this presentation provides to qualifying investors who invest significant portions of their assets in Commonfund Group commingled funds the described web portal and associated reporting services, as well as incidental consulting from investors relationship officers (who are affiliated with Commonfund Securities, Inc., a broker-dealer member of FINRA). These services do not include direct investment advisory services (although the Commonfund Group funds in which such investors place their assets do receive advisory services from Commonfund Asset Management Company). In particular, investors in the Commonfund Multi-Asset Program should be aware that Commonfund Group has no obligation, as well as no authorization from such investors, to engage in ongoing continuous management with respect to such investors overall portfolios or asset allocations, or specifically to rebalance such investors allocations among Commonfund Group funds without specific directions from such investors delivered in accordance with the underlying funds current procedures. NO OFFERING This presentation is not an offer to sell or a solicitation of an offer to buy securities. The Commonfund Group funds are offered only by means of disclosure documents, prospectuses or similar materials made available to investors for consideration at the time of investment. Prospective investors are encouraged to review these materials with care prior to investing or sending money. Commonfund Group funds offered by means of private placement will be offered only to qualified and eligible investors. All interests in Commonfund Group Funds are offered through Commonfund Securities, Inc., a member of FINRA INVESTMENT PERFORMANCE Unless otherwise noted, any investment performance of funds maintained by Commonfund Group included in this presentation reflects net total returns. Returns for periods of one year or more are annualized. It is possible that investors may lose money on investments in any investments in Commonfund Group funds, or in any investments in stocks, bonds, or other instruments to which this presentation may relate, directly or indirectly. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. Securities offered through Commonfund Securities, Inc., a member of the FINRA November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 25

26 Important Notes ELIGIBLE INVESTORS ONLY The Common Fund for Nonprofit Organizations ( Commonfund ) was established in 1971 and manages investment funds primarily for nonprofit institutions and other qualified investors. The following Commonfund affiliate organizations are registered with the Securities and Exchange Commission ( SEC ) as investment advisers: Commonfund Asset Management Company, Inc. ( Comanco ), Commonfund Capital, Inc. ( CCI ), and Commonfund Realty, Inc. ( CRI ) Additional information regarding Commonfund and its affiliates policies and procedures for calculating and reporting performance is available upon request. This document is intended only for qualified, pre-existing investors in CCI, CRI, and Comanco programs, Members of The Common Fund For Nonprofit Organizations ( Commonfund ), or other eligible institutional investors approved by Commonfund Securities, Inc. (a broker-dealer affiliate of CCI, CRI and Comanco). It is not intended to constitute an offer to sell, nor the solicitation of an offer to buy, securities. Any such offerings will be made only by means of information memoranda and related subscription documents that will be made available by Commonfund Securities, Inc. only at the time an offering is in progress and only to investors qualified and eligible to invest. When soliciting transactions, Commonfund Group employees may be acting as registered representatives of Commonfund Securities, Inc. Past performance is not indicative of future results. All investments have the potential for profit and the possibility of loss. Similarly, our access to particular managers may vary in the future and cannot be guaranteed. Prospective investors should review with care the confidential offering memorandum or other disclosure documents for each fund; these pamphlets contain a fuller discussion of applicable risks. performance of the partnership as disclosed in the Information Memorandum for the partnership, the Annual Reports of Commonfund Capital, Inc. and the partnership and the Quarterly Reports of the partnership. Commonfund Capital, Inc. presents return information for its partnerships on a dollar-weighted (e.g., internal rate of return) rather than the time-weighted (e.g., annual or other period rate of return) basis, which is used principally to report performance of publicly-traded securities. The internal rate of return since inception is the most commonly used calculation methodology used for presentation of performance in the private capital business. Comparison of returns calculated on an IRR basis with returns on a time-weighted basis is not appropriate. For a description of the two return calculation methods see Measuring Investment Returns, Time vs. Dollar-Weighted What s the Difference?, a copy is available from Commonfund Capital. Gross performance results do not reflect the deduction of investment advisory fees and other fees as disclosed in Form ADV on file with the SEC. The information provided in this presentation is confidential, and is presented solely for the use of the recipient. Commonfund requests that the recipient not copy or make any further use of this material without its prior written consent. Important Information About Procedures for Opening a New Account: To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each customer who opens an account. What this means for you: When you open an account, we may ask for documents or information related to: your principal place of business, local office or other physical location; taxpayer identification number; and other documents demonstrating your lawful existence such as certified articles of incorporation, a government-issued business license, a partnership agreement, or a trust instrument, and other identifying documents. Returns on funds are presented net of all fees. Performance includes reinvestment of dividends. Internal Rates of Return should be evaluated in light of information on the investment program of the partnership, the risks associated therewith, and November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 26

27 Important Notes MARKET COMMENTARY Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund managers. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. and risk tolerances of each individual investor. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund Group. Commonfund Group disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. INVESTMENT PROCESS Any descriptions involving investment process, portfolio characteristics, investment strategies, goals or risk management are provided for illustration purposes only, are not complete, will not apply in all situations, may not be fully indicative of any present or future investments and may be changed in the discretion of the investment manager. No representation is made that the investment manager s or an investment product s investment process, investment strategies, goals or risk management techniques will or are likely to be achieved or successful. Securities offered through Commonfund Securities, Inc., a member of FINRA. Statements concerning Commonfund Group s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund Group fund. Such statements are also not intended as recommendations by any Commonfund Group entity or employee to the recipient of the presentation. It is Commonfund Group s policy that investment recommendations to investors must be based on the investment objectives November 4, 2015 Outsourcing Trends in Nonprofit Investment Management 27