Study on Nonprofit Investing Survey Analysis

Transcription

1 Study on Nonprofit Investing Survey Analysis Produced: May 2014 By Dennis Gogarty, AIF, CFP Mark Murphy, CFA Chase Deters, CFP, ChFC A Peer Benchmarking Study on Nonprofit Investment Policies and ROI Transparency, Accountability, Impact This report summarizes the results of an informal, non-scientific study compiled by analyzing the results of 261 surveys completed by nonprofit finance executives. This presentation is for information purposes only. Participant responses have not been verified. Data analysis was performed by Raffa Wealth Management. When stating nonprofit responses it should be noted that all responses are limited to the nonprofits that participated in the survey. No broader indications should be assumed. Copyright 2014 Raffa Wealth Management, LLC all rights reserved.

2 PURPOSE OF THE STUDY The Study on Nonprofit Investing (SONI) creates a community where nonprofits of various sizes and types can learn from each other about how to best manage their nonprofits investments. In 2014, approximately 300 nonprofit finance executives participated in a survey about their investment polices and portfolio management practices. The results are segmented into several cohorts separated by size and/or nonprofit type. This report details the findings unique to each cohort. Our goal was to obtain best practices in several key areas that will help nonprofits fulfill their oversight responsibilities and hold accountable all those involved in the management of their organization s investments. Who Participated in SONI A variety of nonprofit organizations were included in this study, including trade associations, professional associations, public charities, foundations, and other types of organizations. The study indicates results for all organizations combined and segmented by type and size. Excluding Raffa Wealth Management s nonprofit clients 264 nonprofit finance executives participated in the 2014 SONI survey. The following chart is a breakdown of these participants by budget type and size: Budget Of: Association Public Charity Foundation Other $0-5M $5-25M $25+M Total Format of the Report The report is structured so that you can go directly to the meaningful cohort based on the type and size of your nonprofit. For example, the results unique to Associations with budgets less than $5 million begins on page 7 and 8. The table of contents that follows this page will direct you to each cohort. You will see that an overall executive summary precedes the specific cohort pages. At the back of this report beginning on page 25, there is an appendix where you ll find a complete outline of all of the areas addressed in the study with results for each type and size of nonprofit. For each of the cohorts in the study, the following core areas are examined: Segmentation of total cash assets Decision making authority Long term portfolio asset allocation policy Investment fees Long term portfolio 2013 investment performance Additional best practices are sited at the overall level. They include guidelines and restrictions contained in investment policies, maintaining asset allocation targets, and the potential impact of not knowing investment fees.

3 TABLE OF CONTENTS Executive Summary PAGE 4 Association Analysis PAGE 7 Associations with Budgets of less than $5 million PAGE 8 Associations with Budgets between $5 - $25 million PAGE 10 Public Charity Analysis PAGE 12 Charities with Budgets of less than $5 million PAGE 13 Charities with Budgets between $5 - $25 million PAGE 15 All Nonprofits with Budgets greater than $25 million PAGE 17 Private or Community Foundation Analysis PAGE 20 Conclusion PAGE 23 Disclosure PAGE 23 Appendix ALL SONI SURVEY DATA PAGE 24

4 EXECUTIVE SUMMARY Stock market returns in 2013 were better than historical expectations and bonds fell just 2% despite dire predictions. While the performance of the nonprofits participating in the survey lagged traditional benchmarks they still gained between 8.5% and 13.5% on average. Another positive sign is that far more respondents added to reserves than withdrew in 2013 by a measure of almost 4:1. Prudent Use of Assets Close to half of the nonprofits participating held close to 50% of their cash assets in long term investments. This is a great reference point for nonprofits seeking to gauge how much of their assets it might be prudent to invest. Nonprofits face pressure to make the best use of all of their assets yet they may be discouraged from putting cash at risk. Balancing these competing priorities is difficult. Knowing how you compare to your peers helps. The range varies widely with larger organizations deploying 50-60% of their assets in longer term investments with smaller nonprofits being more cautious only investing 20-45% of their assets. Decision Making Authority Half of the respondents give discretion to advisors to operate within the guidelines of the IPS. It s reassuring to see that most nonprofit executives know whether or not they have granted investment authority to advisors to act with discretion. Advisors with discretion aren t required to seek trading approval so long as they adhere to policy guidelines. In most cases, a finance committee is charged with verifying that the portfolio stays invested in compliance with the policy. Discipline Prevails The majority of associations have formal IPSs with asset allocation targets. Having a policy with asset allocation targets, and not making changes to them, improved ROI in Some investment policies call for specific asset allocation targets such as 50% to US stocks or 50% to fixed income. Other policies allow investment advisors or internal Board and Finance Committee members broad leeway in determining how the portfolio is invested. In 2013, respondents with specific asset allocation targets performed far better (12.7% vs. 6.34%) than those with ad-hoc allocations, suggesting a disciplined approach prevailed. Not only was having target allocations helpful not making changes to those targets boosted performance further. Nearly 30% of the respondents with target allocations made a change to them in Most of the changes involved either a move to a more aggressive approach or adding a new classification of investments. Regardless of the nature of the change, those that remained disciplined to their targets performed materially better (13.8% vs. 11.0%). Size Matters The larger the organization and the more aggressive the asset allocation policy, the better the performance results in In a year in which stocks rose by over 30%, and bond returns were negative it s obvious that the more aggressive (stock heavy) the strategy the better it did. Larger organizations are typically in a position to take more risk and they certainly did in 2013 with ~60% or more of their investments in stocks. This more growth oriented position led larger organizations to outperform in Page 4

5 Having a riskier posture won t always lead to outperformance. It wasn t too long ago (2008) when stocks fell by more than 30% and bond values rose. So, we caution against moving to a more risky posture in an effort to boost returns. Rather, understand if your cash flow expectations are such that shifting more into longer term buckets is prudent. Having more cash invested may be more prudent than taking more risk with less cash. Questioning Alternative Investments Allocating to alternative assets likely detracted from performance results in Investing in alternatives means different things to different organizations. To smaller nonprofits it means investing in commodities or real estate. Larger organizations and Private Foundations invest more in hedge funds and private equity. Any way you sliced it in 2013; nonprofits would likely have been better off sticking with a balanced mix of traditional stocks and bonds. Alternative investments may certainly prove to be helpful portfolio diversifiers eventually. But their high fees, opaque risks, and recent underperformance may legitimately cause nonprofits to question if alternatives play a productive role in nonprofit investing. Relative Performance Problems In relation to traditional broad market stock and bond benchmarks, participant returns trailed significantly. The most meaningful way to compare investment returns is to first segment respondents based on their investment strategy (conservative, moderate, aggressive, etc.). The next step to a meaningful comparison is to develop portfolio benchmarks using different mixes of broad market indexes (US stock, Intl stock, Bond, and Cash) that reflect these different strategies. When comparing respondent s reported returns to the appropriate portfolio benchmark, the underperformance is significant particularly among those with more growth oriented strategies. (See important disclosures at the end of this report for construction of these benchmarks and their limitations) 2013 Results Nonprofit Investment Allocation Conservative 30/70 Portfolio (20-30% Stock) Mod Conservative 40/60 Portfolio (30-40% Stock) Balanced 50/50 Portfolio (40-50% Stock) Moderate Growth 60/40 Portfolio (50-60% Stock) Growth 70/30 Portfolio (60-70% Stock) # Portfolios Avg Return +/- Index % 1.66% % 0.28% % -2.60% % -5.05% % -6.76% Likely contributors to underperformance are use of alternatives, investment fees, and poor market-timing judgments. Fees Matter The lower the fees, the better the results. In part because larger portfolios were more aggressively invested and less expensive. Investment fees detract directly from bottom line results. But managers with proven track records may be worth paying a higher fee. It may be difficult to know how much emphasis to place on investment fees. Our experience leads us to believe that managers with better past returns rarely persist in performing better going forward. Perhaps because they can and do charge higher fees thus making it more difficult to sustain superior results. The SONI results clearly show that in 2013 those with lower fees performed better on average. Page 5

6 Lack of Transparency Hurts Bottom Line Not knowing fees (more than 50% of respondents) correlated with lower results. More than 50% of the respondents to the 2013 SONI survey didn t know their investment fees. As one might expect, the notorious lack of transparency in investment fees lead to underperformance, with those respondents who know their fees outperforming those that did not (12.2% vs. 10.0%) Understanding Performance Results Portfolios with more US equity (particularly small cap), less emerging market and alternative investment exposure, and shorter term/corporate bonds performed best. In 2013, if your strategy emphasized US stocks over Intl stocks you enjoyed better results. If you re strategy emphasized international stocks and particularly emerging market stocks you fared poorly. On the fixed income side, interest rates rose hurting those that held longer term bonds but those who sought-out risk in lower quality bonds were largely rewarded in The asset classes that performed best in 2013 were not those that performed best in 2012 and those that will perform best in 2014 is anyone s guess (but in all likelihood they will be different than 2012 and 2013). The 2013 results are shared simply to help you understand why your portfolio may or may not have done well so you can take appropriate action. If, for example, your portfolio emphasizes US stocks and short term/high yield bonds and you still performed poorly in relation to the benchmarks there is another reason for your poor results that you should explore. If, on the other hand, you emphasize international emerging market stocks and long term, high quality bonds than just hold tight. Ongoing Expectations This is the second edition of an annual study. We trust you will find the results helpful in your organization s decision making going forward and we thank you for participating. Over time the survey will become more concise and the results will become even more meaningful. In order to make this happen we need your ongoing participation so please don t hesitate to make recommendations and share feedback to improve the experience of all those involved in this important study. For more information and to register to participate in next year s SONI survey visit Custom Versions of this Report For Sale Upon request, you may receive a custom designed Board-ready report to compare your organization s key survey responses (actual and target reserve/budget ratio, long term reserve asset allocation, 2013 investment return, and investment policy best practices) to the most relevant sub-group responses based on organization type and size. The fee for this custom, highlevel Board-ready report is $1,250 for non-survey participants and $450 for survey participants. To request a custom report send an to info@raffawealth.com About Raffa Wealth Management Raffa Wealth Management is an independent Registered Investment Advisor (RIA) offering nonprofit organizations a wide range of investment consulting and portfolio management services. info@raffawealth.com or visit for more information. Page 6

7 PROFESSIONAL OR TRADE ASSOCIATIONS The Professional or Trade Associations segment of the survey is comprised of 114 organizations with an average budget size of $12.9 million and average investable assets of $12.2 million. The number of respondents and average long term reserve portfolio performance for 2013 segmented by Association size cohort follows: Association Responses Average Performance $0 5M $5 25M $25M+ 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 15.1% 13.4% 7.8% $0 5M $5 25M $25M+ Portfolio Size Budget Size Portfolio Return Professional or Trade Associations - Budgets of less than $5 Million This cohort is comprised of 45 organizations with an average budget size of $1.92 million and average investable assets of $3.10 million. Professional or Trade Associations - Budgets of $5-25 Million This cohort is comprised of 59 organizations with an average budget size of $11.15 million and average investable assets of $13.74 million. In the pages that follow, the following core areas for each of the two Association size cohorts are examined: Segmentation of total cash assets Decision making authority Long term portfolio asset allocation policy Investment fees Long term portfolio 2013 investment performance Additional best practices are sited at the overall level. They include: Guidelines and restrictions contained in investment policies Maintaining asset allocation targets The potential impact of not knowing investment fees Page 7

8 ASSOCIATIONS WITH BUDGETS LESS THAN $5 MILLION Breakdown of Total Cash Assets Smaller Associations kept a majority of their total cash assets in longer term investments with just 43% held in cash (operating checking or other very short term investments). This segmentation of total cash assets is a great reference point for nonprofits seeking to gauge how much of their assets it might be prudent to invest for longer terms objectives. Nonprofits are pressured to make the best use of all of their assets yet they may be discouraged from putting cash at risk. Balancing these competing priorities is difficult. Knowing how you compare to your peers helps. Cash & Ops Reserve 42.8% Short/Interm & Long 57.2% 0% 20% 40% 60% 80% 100% Percentage of Total Assets Decision Making Authority A slight majority (53%) of Smaller Associations gave discretion to their financial advisors to autonomously make final investment management decisions within the guidelines of an investment policy. The remaining 47% maintained final decision authority internally, typically through a finance committee. While this year s study didn t find a material performance difference, there may be a difference in liability. Granting discretion to investment professional when accompanied by other governance practices may limit Trustees liability related to investment decisions. 47% 53% Fiscal Committee Approves Discretion to Advisor Asset Allocation Policy Those Smaller Associations who had formal asset allocation targets listed in their investment policy statements had slightly better returns in 2013 than those without targets whose asset allocations are determined ad-hoc. The 73% of responses who had targets listed had an average return of 8.56% - compared to 8.05%. Having and maintaining formal asset allocation targets can remove some guess work from decision making and reduce the inclination to try to time the markets. When it comes to investing, anything that 8.6% brings discipline to the process is likely to help. 73.2% 26.8% Formal Allocation Targets Ad hoc Allocations Portfolio Performance 8.5% 8.4% 8.3% 8.2% 8.1% 8.0% 7.9% 7.8% 7.7% 8.56% Formal Allocation Targets 8.05% Ad hoc Allocations Page 8

9 Average Long Term Portfolio Allocation The average portfolio breakdown for smaller Association Long Term Reserves was approximately 51% Stock, 49% Bond. This balance between growth and stability is typical and is in line with broad asset allocation averages seen in Portfolios typically contained a roughly 5% allocation to international stocks and only a slight allocation to alternative investments which were primarily commodities and real estate. 51.4% 48.6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Stock Bond US Equity 44.8% Intl Equity 5.3% Fixed Income 32.0% Cash 15.4% Alternatives 2.5% Overall Average Fees The average fees shown here reflect the total advisory and management fees combined reported by all Association participants. We note that the majority (56%) of respondents did not know their investment fees. Other findings were that the lower the fees, the better the results. This was in part because larger portfolios were more aggressively invested. Investment fees detract directly from bottom line results - but managers with proven track records may be worth paying a higher fee. It may be difficult to know how much emphasis to place on investment fees but this year s SONI suggests there is value in having lower fees. Association Average Fees 1.60% 1.40% 1.20% 1.44% 1.00% 0.80% 1.11% 0.60% 0.72% 0.40% 0.20% 0.00% $0 5M $5 25M $25M+ Portfolio Size Overall Performance The most meaningful way to compare investment returns is to first segment respondents based on their investment strategy (conservative, moderate, aggressive, etc.). The next step to a meaningful comparison is to develop portfolio benchmarks using different mixes of broad market indexes (US stock, Intl stock, Bond, and Cash) that reflect these different strategies. When comparing respondent s reported returns to the appropriate portfolio benchmark, the underperformance is significant particularly among those with more growth oriented strategies. (See important 24% 20% 16% 12% 8% 4% 0% 7.8% 6.9% Conservative (30/70) Overall Portfolio Performance 9.8% 10.3% Mod Conservative (40/ % 13.7% 11.8% 12.0% 14.7% 20.4% Balanced (50/50) Growth (60/40) Aggressive (70/30) Page 9

10 disclosures at the end of this report for construction of these benchmarks and their limitations) ASSOCIATIONS WITH BUDGETS BETWEEN $5-25 MILLION Breakdown of Total Cash Assets Mid-sized Associations kept a majority of their total cash assets in longer term investments with just 37% held in cash (operating checking or other very short term investments). This segmentation of total cash assets is a great reference point for nonprofits seeking to gauge how much of their assets it might be prudent to invest for longer terms objectives. Nonprofits are pressured to make the best use of all of their assets yet they may be discouraged from putting cash at risk. Balancing these competing priorities is difficult. Cash & Ops Reserve 37.4% Short/Interm & Long 62.6% 0% 20% 40% 60% 80% 100% Percentage of Total Assets Decision Making Authority A large majority (67%) of Mid sized Associations gave discretion to their financial advisors to autonomously make final investment management decisions within the guidelines of an investment policy. The remaining 33% maintained final decision authority internally, typically through a finance committee. While this year s study didn t find a material performance difference, there may be a difference in liability. Granting discretion to investment professional when accompanied by other governance practices may limit Trustees liability related to investment decisions. Fiscal Committee 32.7% 67.3% Discretion to Advisor Asset Allocation Targets The vast majority of Mid sized Associations had formal asset allocation targets listed in their investment policy statements and this group had significantly better returns in 2013 than those without targets whose asset allocations are determined ad-hoc. The 95% of responses who had targets listed had an average return of 13.12% - compared to 6.00%. Having and maintaining formal asset allocation targets can remove some guess work from decision making and reduce the inclination to try to time the markets. When it comes to 14% investing, anything that brings discipline to the process is 12% likely to help % 95% Portfolio Performance 10% 8% 6% 4% 6.00% 5% Formal Allocation Targets Ad hoc Allocations 2% 0% Formal Allocation Targets Ad hoc Allocations Page 10

11 Average Long Term Portfolio Allocation The average portfolio breakdown for Mid-sized Association Long Term Reserves was approximately 54% Stock, 46% Bond. This balance between growth and stability is typical and is in line with broad asset allocation averages seen in Portfolios typically contained a roughly 11% allocation to international stocks and a small allocation (6%) to alternative investment which were primarily commodities and real estate and hedge funds to a lesser degree. 54.7% 45.3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Stock Bond US Equity 40.3% Intl Equity 10.9% Fixed Income 36.8% Cash 5.7% Alternatives 6.4% Overall Average Fees The average fees shown here reflect the total advisory and management fees reported by all Association participants. We note that the majority (56%) of respondents did not know their investment fees. Other findings were that the lower the fees, the better the results. This was in part because larger portfolios were more aggressively invested. Investment fees detract directly from bottom line results - but managers with proven track records may be worth paying a higher fee. It may be difficult to know how much emphasis to place on investment fees but this year s SONI suggests there is value in having lower fees. Association Average Fees 1.60% 1.40% 1.20% 1.44% 1.00% 0.80% 1.11% 0.60% 0.72% 0.40% 0.20% 0.00% $0 5M $5 25M $25M+ Portfolio Size Overall Performance The most meaningful way to compare investment returns is to first segment respondents based on their investment strategy (conservative, moderate, aggressive, etc.). The next step to a meaningful comparison is to develop portfolio benchmarks using different mixes of broad market indexes (US stock, Intl stock, Bond, and Cash) that reflect these different strategies. When comparing respondent s reported returns to the appropriate portfolio benchmark, the underperformance is significant particularly among those with more growth oriented strategies. (See important disclosures at the end of this report for construction of these benchmarks and their limitations) 24% 20% 16% 12% 8% 4% 0% 7.8% 6.9% Conservative (30/70) Overall Portfolio Performance 9.8% 10.3% Mod Conservative (40/ % 13.7% 11.8% 12.0% 14.7% 20.4% Balanced (50/50) Growth (60/40) Aggressive (70/30) Page 11

12 PUBLIC CHARITIES The Public Charity segment of the survey is comprised of 130 organizations with an average budget size of $11.07 million and average investable assets of $13.85 million. Included in public charities are all types of educational, religious, cultural, and community development organizations. The number of respondents and average long term reserve portfolio performance segmented by Charity size cohort follows: Public Charity Responses Average Performance $0 5M $5 25M $25M+ 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 12.8% 11.7% 9.3% $0 5M $5 25M $25M+ Portfolio Size Budget Size Portfolio Return Public Charity - Budgets of less than $5 Million This cohort is comprised of 72 organizations with an average budget size of $1.91 million and average investable assets of $3. million. Public Charity - Budgets of $5-25 Million This cohort is comprised of 41 organizations with an average budget size of $10.63 million and average investable assets of $17.53 million. For each cohort, the following core areas are examined: Segmentation of total cash assets Decision making authority Long term portfolio asset allocation policy Investment fees Long term portfolio 2013 investment performance Additional best practices are sited at the overall level. They include: Guidelines and restrictions contained in investment policies Maintaining asset allocation targets The potential impact of not knowing investment fees Page 12

13 CHARITIES WITH BUDGETS LESS THAN $5 MILLION Breakdown of Total Reserves Smaller Public Charities kept a majority of their cash assets safe and liquid with over 61% held in cash or other very short term investments (operating cash). The remaining 38% of cash assets were invested in longer term investments such as stocks and bonds. This is a great reference point for nonprofits seeking to gauge how much of their assets it might be prudent to invest. Nonprofits are pressured to make the best use of all of their assets yet they may be discouraged from putting cash at risk. Balancing these competing priorities is difficult. Cash & Ops Reserve 61.8% Short/Interm & Long 38.2% 0% 20% 40% 60% 80% 100% Percentage of Total Assets Decision Making Authority A majority (59%) of Smaller Public Charities maintained final decision making authority for approving specific investments in their portfolios. Typically, this responsibility was granted to a finance committee. The remaining 41% granted discretionary authority to an investment advisor to operate autonomously within the guidelines of the organization s investment policy. While this year s study didn t find a material performance difference, there is a difference in liability. Granting discretion to 59.5% Fiscal Committee 40.5% Discretion to Advisor investment professional when accompanied by other governance practices can limit Trustees liability related to investment decisions. Asset Allocation Targets Smaller Public Charities who had formal asset allocation targets listed in their investment policy statements had better returns in 2013 than those without targets whose asset allocations are determined ad-hoc. The 53% of responses who had targets listed had an average return of 14.04% - compared to 4.38%. Having and maintaining formal asset allocation targets can remove some guess work from decision making and reduce the 16% inclination to try to time the markets. When it comes to 14% investing, anything that brings discipline to the process is 14.04% 12% likely to help. 53.3% 46.7% Portfolio Performance 10% 8% 6% 4% 2% 4.38% 0% Formal Allocation Targets Ad hoc Allocations Formal Allocation Targets Ad hoc Allocations Page 13

14 Average Long Term Portfolio Allocation The average portfolio breakdown for smaller Public Charity Long Term Reserves was approximately 48% Stock, 52% Bond. This balance between growth and stability is typical and is in line with broad asset allocation averages seen in Portfolios typically contained a roughly 10% allocation to international stocks and only a slight allocation to alternative investments which were mostly in commodities and real estate. 48.0% 52.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Stock Bond US Equity 36.5% Intl Equity 9.7% Fixed Income 30.9% Cash 19.1% Alternatives 3.7% Investment Fees The average fees shown here reflect the total advisory and management fees reported by Charities. We note that the majority (56%) of all respondents did not know their investment fees. Other findings were that the lower the fees, the better the results. This was in part because larger portfolios were more aggressively invested. Investment fees detract directly from bottom line results - but managers with proven track records may be worth paying a higher fee. It may be difficult to know how much emphasis to place on investment fees but this year s SONI suggests there is value in having lower fees. Overall Performance The most meaningful way to compare investment returns is to first segment respondents based on their investment strategy (conservative, moderate, aggressive, etc.). The next step to a meaningful comparison is to develop portfolio benchmarks using different mixes of broad market indexes (US stock, Intl stock, Bond, and Cash) that reflect these different strategies. When comparing respondent s reported returns to the appropriate portfolio benchmark, the underperformance is significant particularly among those with more growth oriented strategies. (See important disclosures at the end of this report for construction of these benchmarks and their limitations) 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Public Charity Average Fees 1.01% 0.81% 0.79% $0 5M $5 25M $25M+ Portfolio Size 24% 20% 16% 12% 8% 4% 0% 7.8% 6.9% Conservative (30/70) Overall Portfolio Performance 9.8% 10.3% Mod Conservative (40/ % 13.7% 11.8% 12.0% 14.7% 20.4% Balanced (50/50) Growth (60/40) Aggressive (70/30) Page 14

15 CHARITIES WITH BUDGETS BETWEEN $5-25 MILLION Breakdown of Total Reserves Mid sized Public Charities kept a majority of their total cash assets in longer term investments such as stocks and bonds with just 33% held in cash or other very short term investments. This is a great reference point for nonprofits seeking to gauge how much of their assets it might be prudent to invest. Nonprofits are pressured to make the best use of all of their assets yet they may be discouraged from putting cash at risk. Balancing these competing priorities is difficult. Cash & Ops Reserve 33.4% Short/Interm & Long 66.6% 0% 20% 40% 60% 80% 100% Percentage of Total Assets Decision Making Authority A majority (59%) of Mid-sized Public Charities gave discretion to their financial advisors to make final investment management decisions within the guidelines of an investment policy autonomously. The remaining 41% maintained final decision authority internally most through a finance committee. While this year s study didn t find a material performance difference, there may be a difference in liability. Granting discretion to investment professional when accompanied by other governance practices may limit Trustees liability related to investment decisions. 40.6% 59.4% Fiscal Committee Discretion to Advisor Asset Allocation Targets The vast majority of Mid sized Charities had formal asset allocation targets listed in their investment policy statements and this group had significantly better returns in 2013 than those without targets whose asset allocations are determined ad-hoc. The 77% of responses who had targets listed had an average return of 13.28% - compared to 3.68%. Having and maintaining formal asset allocation targets can remove some guess work from decision making and reduce the inclination to try to time the markets. When it comes to 14% investing, anything that brings discipline to the process is likely to help. 12% 13.28% 77.1% 22.9% Portfolio Performance 10% 8% 6% 4% 2% 3.66% Formal Allocation Targets Ad hoc Allocations 0% Formal Allocation Targets Ad hoc Allocations Page 15

16 Average Long Term Portfolio Allocation The average portfolio breakdown for mid sized Public Charity Long Term Reserves was approximately 63% Stock, 36% Bond. This balance between growth and stability is typical and is in line with broad asset allocation averages seen in Portfolios typically contained a roughly 13% allocation to international stocks and a 10% allocation to alternative investment which were primarily commodities, real estate and hedge funds to a lesser degree. 60.1% 39.9% Stock Bond 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% US Equity 42.7% Intl Equity 12.8% Fixed Income 33.4% Cash 3.5% Alternatives 7.7% Investment Fees The average fees shown here reflect the total advisory and management fees reported by Charities. We note that the majority (56%) of all respondents did not know their investment fees. Other findings were that the lower the fees, the better the results. This was in part because larger portfolios were more aggressively invested. Investment fees detract directly from bottom line results - but managers with proven track records may be worth paying a higher fee. It may be difficult to know how much emphasis to place on investment fees but this year s SONI suggests there is value in having lower fees. 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Public Charity Average Fees 1.01% 0.81% 0.79% $0 5M $5 25M $25M+ Portfolio Size Overall Performance The most meaningful way to compare investment returns is to first segment respondents based on their investment strategy (conservative, moderate, aggressive, etc.). The next step to a meaningful comparison is to develop portfolio benchmarks using different mixes of broad market indexes (US stock, Intl stock, Bond, and Cash) that reflect these different strategies. When comparing respondent s reported returns to the appropriate portfolio benchmark, the underperformance is significant particularly among those with more growth oriented strategies. (See important disclosures at the end of this report for construction of these benchmarks and their limitations) 24% 20% 16% 12% 8% 4% 0% 7.8% 6.9% Conservative (30/70) Overall Portfolio Performance 9.8% 10.3% Mod Conservative (40/ % 13.7% 11.8% 12.0% 14.7% 20.4% Balanced (50/50) Growth (60/40) Aggressive (70/30) Page 16

17 LARGE NONPROFITS BUDGETS GREATER THAN $25 MILLION The Large Nonprofits cohort includes all of the organizations with budgets greater than $25 million that participated in the survey. It includes both Associations, Public Charities, all types of educational, religious, cultural, and community development organizations, as well as Private and Community Foundations. In the following pages, we examine the large nonprofit segment of the survey that is comprised of 28 organizations with an average budget size of $57.9 million and average investable assets of $47.5 million. Illustrated in the two charts below is the average budget and reserve balance for each broad type of nonprofit and their average long term reserve portfolio performance: $80 $70 $60 $50 $40 $30 $20 $10 $ Large Nonprofit Balances (In $MM) Associations Public Charity Foundation Average Portfolio Size Average Budget 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Large Nonprofit Average Performance 14.7% 12.4% 10.0% 10.0% Associations Public Charity Foundation Average The following core areas are examined in the following pages: Segmentation of total cash assets Decision making authority Long term portfolio asset allocation policy Investment fees Long term portfolio 2013 investment performance Additional best practices are sited at the overall level. They include: Guidelines and restrictions contained in investment policies Maintaining asset allocation targets The potential impact of not knowing investment fees Page 17

18 LARGE NONPROFITS BUDGETS GREATER THAN $25 MILLION Breakdown of Total Reserves Large nonprofits kept a majority of their total cash assets in longer term investments such as stocks and bonds with just 30% held in cash or other very short term investments. This is a great reference point for nonprofits seeking to gauge how much of their assets it might be prudent to invest. Nonprofits are pressured to make the best use of all of their assets yet they may be discouraged from putting cash at risk. Balancing these competing priorities is difficult. Cash & Ops Reserve 30.3% Short/Interm & Long 69.7% 0% 20% 40% 60% 80% 100% Percentage of Total Assets Decision Making Authority A slight majority (52%) of Large nonprofits gave discretion to their financial advisors to make final investment management decisions autonomously within the guidelines of an investment policy. The remaining 48% maintained final decision authority internally most through a finance committee. While this year s study didn t find a material performance difference, there may be a difference in liability. Granting discretion to investment professional when accompanied by other governance practices may limit Trustees liability related to investment decisions. 47.8% Fiscal Committee 52.2% Discretion to Advisor Asset Allocation Targets The vast majority of large nonprofits (76%) had formal asset allocation targets listed in their investment policy statements. The remaining 24% had their asset allocation policy determined ad -hoc. The 76% of responses who had formal targets listed had an average return of 12.31% compared to 12.52%. Despite the slight performance advantage in favor of those without asset allocation targets, the fact that the vast majority of these large nonprofits have formal asset allocation target policies suggests that have such formal disciplines in place is a best practice for nonprofit portfolio 13.0% management. When it comes to investing, anything that 12.8% brings discipline to the process is likely to help. 76.0% 24.0% Formal Allocation Targets Ad hoc Allocations Portfolio Performance 12.5% 12.3% 12.0% 11.8% 11.5% 11.3% 11.0% 12.31% Formal Allocation Targets 12.52% Ad hoc Allocations Page 18

19 Average Long Term Portfolio Allocation The average portfolio breakdown for mid sized Other Nonprofits Long Term Reserves was approximately 54% Stock, 11% and 46% Bond. This balance between growth and stability is typical and is in line with broad asset allocation averages seen in Portfolios typically contained a roughly 15% allocation to international stocks and an 11% allocation to alternative investment which were a mix of hedge fund strategies, private equity investments and commodities. 54.0% 46.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% US Equity 33.0% Intl Equity 15.1% Fixed Income 35.9% Cash 5.0% Alternatives 11.0% Stock Bond Overall Average Fees The average fees shown here reflect the total advisory and management fees reported by participants. We note that the majority (56%) of respondents did not know their investment fees. Other findings were that the lower the fees, the better the results. This was in part because larger portfolios were more aggressively invested. Investment fees detract directly from bottom line results - but managers with proven track records may be worth paying a higher fee. It may be difficult to know how much emphasis to place on investment fees but this year s SONI suggests there is value in having lower fees. 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Average Fees 1.19% 1.00% 0.87% $0 5M $5 25M $25M+ Portfolio Size Overall Performance The most meaningful way to compare investment returns is to first segment respondents based on their investment strategy (conservative, moderate, aggressive, etc.). The next step to a meaningful comparison is to develop portfolio benchmarks using different mixes of broad market indexes (US stock, Intl stock, Bond, and Cash) that reflect these different strategies. When comparing respondent s reported returns to the appropriate portfolio benchmark, the underperformance is significant particularly among those with more growth oriented strategies. (See important disclosures at the end of this report for construction of these benchmarks and their limitations) 24% 20% 16% 12% 8% 4% 0% 7.8% 6.9% Conservative (30/70) Overall Portfolio Performance 9.8% 10.3% Mod Conservative (40/ % 13.7% 11.8% 12.0% 14.7% 20.4% Balanced (50/50) Growth (60/40) Aggressive (70/30) Page 19

20 PRIVATE AND COMMUNITY FOUNDATIONS The Private and Community Foundation segment of the survey is comprised of 20 organizations with an average budget size of $3.33 million and average investable assets of $17.95 million. The number of respondents in each size category (less than $5million, $5 $25 million, and $25 million +) and their average long term reserve portfolio performance in 2013 follows: Foundation Responses 14.0% Average Performance $0 5M $5 25M $25M+ 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 13.0% 10.9% 10.0% $0 5M $5 25M $25M+ Portfolio Size Budget Size Portfolio Return The following core areas for Foundations are examined in the pages that follow: Segmentation of total cash assets Decision making authority Long term portfolio asset allocation policy Investment fees Long term portfolio 2013 investment performance Additional best practices are sited at the overall level. They include: Guidelines and restrictions contained in investment policies Maintaining asset allocation targets The potential impact of not knowing investment fees Page 20

21 PRIVATE AND COMMUNITY FOUNDATIONS Breakdown of Total Reserves Private Foundations kept a majority of their total cash assets in longer term investments such as stocks and bonds with just 30% held in cash or other very short term investments. This is a great reference point for nonprofits seeking to gauge how much of their assets it might be prudent to invest. Nonprofits are pressured to make the best use of all of their assets yet they may be discouraged from putting cash at risk. Balancing these competing priorities is difficult. Cash & Ops Reserve 44.9% Short/Interm & Long 55.1% 0% 20% 40% 60% 80% 100% Percentage of Total Assets Decision Making Authority A majority (70%) of Foundations gave discretion to their financial advisors to make final investment management decisions autonomously within the guidelines of an investment policy. The remaining 30% maintained final decision authority internally most through a finance committee. While this year s study didn t find a material performance difference, there may be a difference in liability. Granting discretion to investment professional when accompanied by other governance practices may limit Trustees liability related to investment decisions. 30% 70% Fiscal Committee Discretion to Advisor Asset Allocation Targets The vast majority of Foundations had formal asset allocation targets listed in their investment policy statements and this group had significantly better returns in 2013 than those without targets whose asset allocations are determined ad-hoc. The 77% of responses who had targets listed had an average return of 13.17% - compared to 5.00%. Having and maintaining formal asset allocation targets can remove some guess work from decision making and reduce the inclination to try to time the markets. When it comes to investing, anything that brings discipline to the process is likely to help. 14% 12% 13.17% 76.9% 23.1% Portfolio Performance 10% 8% 6% 4% 2% 5.00% Formal Allocation Targets Ad hoc Allocations 0% Formal Allocation Targets Ad hoc Allocations Page 21

22 Average Long Term Portfolio Allocation The average portfolio breakdown for Foundations was approximately 60% Stock, 40% Bond. This balance between growth and stability is typical and is in line with broad asset allocation averages seen in Portfolios typically contained a roughly 20% allocation to international stocks and a roughly 13% to alternative investment which were a mix of hedge fund strategies, private equity investments and commodities. 59.1% 40.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Stock Bond US Equity 29.7% Intl Equity 21.4% Fixed Income 18.0% Cash 17.4% Alternatives 13.5% Overall Average Fees The average fees shown here reflect the total advisory and management fees reported by participants. We note that the majority (56%) of respondents did not know their investment fees. Other findings were that the lower the fees, the better the results. This was in part because larger portfolios were more aggressively invested. Investment fees detract directly from bottom line results - but managers with proven track records may be worth paying a higher fee. It may be difficult to know how much emphasis to place on investment fees but this year s SONI suggests there is value in having lower fees. 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Nonprofit Average Fees 1.19% 1.00% 0.87% $0 5M $5 25M $25M+ Overall Performance The most meaningful way to compare investment returns is to first segment respondents based on their investment strategy (conservative, moderate, aggressive, etc.). The next step to a meaningful comparison is to develop portfolio benchmarks using different mixes of broad market indexes (US stock, Intl stock, Bond, and Cash) that reflect these different strategies. When comparing respondent s reported returns to the appropriate portfolio benchmark, the underperformance is significant particularly among those with more growth oriented strategies. (See important disclosures at the end of this report for construction of these benchmarks and their limitations) 24% 20% 16% 12% 8% 4% 0% 7.8% 6.9% Conservative (30/70) Overall Portfolio Performance 9.8% 10.3% Mod Conservative (40/ % 13.7% 11.8% 12.0% 14.7% 20.4% Balanced (50/50) Growth (60/40) Aggressive (70/30) Page 22

23 Best and Worst Market Segments in 2013 In 2013, if your strategy emphasized US stocks over Intl stocks you enjoyed better results. If you re strategy emphasized international stocks and particularly emerging market stocks you fared poorly. On the fixed income side, interest rates rose hurting those that held longer term bonds but those who sought-out risk in lower quality bonds were largely rewarded in Understanding why your portfolio s results over or under performed the market benchmarks empowers you to know whether or not changes should be considered. It may be that the best course of action is to stay disciplined to your current strategy even if you underperformed. Chasing last year s winning strategy is a bad idea. If, however, under performance was due to high fees or poor market timing judgments it may be best to seek out a different strategy. Conclusion When it comes to investing simple is good. This is great news for nonprofits because anything they can do to simplify the investing process is likely to make a positive impact on their bottom line results. Here are three simple things nonprofits can do to simplify their investing process and require discipline, transparency, and accountability: Set clear, specific asset allocation targets and rebalance to them based on a predetermined range. When it comes to investing, anything you can do to remove emotion and market timing tendencies from the process is likely to add value. Develop a simple, clear overall portfolio benchmark comprised of the traditional broad market benchmarks that correspond to your asset allocation policy targets. An example of such a benchmark is listed below and available on the SONI website at Know the fees you pay for the three levels of portfolio management (investment advisor, weighted average of separate account managers or mutual funds, and custodian) and have returns show both gross and net of fees so you can see the impact of fees. Ask your advisor to outline these total investment expenses. Disclosure This information was gathered from reliable sources but we cannot guarantee accuracy. Any performance related information is based on participant responses and has not been verified. Past performance is not an indication of future results and any investment can lose value. Performance results have been compared to balanced benchmark portfolios comprised of broad market indexes. The benchmarks were selected because we feel they are the most well known in each broad category. They may or may not be suitable benchmarks for comparison to any particular investor s portfolio or for the average results reflected in this study. Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated. Traditional Market Benchmarks Russell 3000 MSCI AW ExUS BarCap Agg Bond 1Month US T-Bills HFRI Fund-of-Funds Blended Portfolio Sample Benchmarks 2013 Return 30/70 40/60 50/50 60/40 70/ % 20% 29% 38% 47% 56% 15.29% 10% 11% 12% 13% 14% -2.02% 65% 55% 45% 35% 25% 0.02% 5% 5% 5% 5% 5% 8.72% 0% 0% 0% 0% 0% Page 23

24 APPENDIX SONI SURVEY DATA EXHIBIT I Page 24

25 SONI SURVEY DATA Introduction In February of this year over 300 nonprofit finance executives completed a survey about their organization s investment policies and results. Excluding organizations that are also clients of Raffa Wealth Management, 264 participates remain. The survey was developed and distributed with the help of a third-party research provider (Visionary Marketing). This is an analysis of their survey responses. Budget Of: Association Public Charity Foundation Other Overall $0-5M $5-25M $25+M Total *Other Includes: Educational, Religious, Cultural & Community Development nonprofit groups who were merged into the Association, Public Charity or Foundation groups for purposes of the final SONI report Percentage of a Nonprofit s Reserves are held in Cash For most nonprofits, the relative size of their operating cash reserves tend to decrease as their operating budget increases. Budget Of: Association Public Charity Foundation Other Overall $0-5M 22.2% 32.8% 23.7% 39.4% 29.8% $5-25M 18.4% 16.7% 51.4% 21.0% 18.9% $25+M 8.5% 22.1% 4.9% 11.4% 13.7% Percentage of a Nonprofit s Reserves are held in a Long Term Portfolio Once operational cash reserves are funded, most nonprofits focus the majority of their investable assets in long term investment portfolios Budget Of: Association Public Charity Foundation Other Overall $0-5M 46.7% 28.2% 44.7% 21.4% 34.5% $5-25M 49.0% 59.8% 10.0% 42.5% 50.5% $25+M 53.7% 57.6% 94.1% 50.6% 55.5% Minimum Target for Reserves Most of the nonprofits participating in the survey target 4-6 months for their minimum level of reserves, and most also held more in reserves than their minimum goal. Operational Budget in Reserve 4-6 Months in Reserve 1-3 Months in Reserve 7-12 Months in Reserve More than 1yr in Reserve Associations Public Charity Other 45.5% 36.6% 37.5% 23.4% 31.7% 41.7% 22.1% 24.4% 12.5% 9.1% 4.9% 8.3% Page 25