Study on Nonprofit Investing Survey Analysis

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1 1899 L Street, NW, Suite 900 Washington, DC Tel: StudyonNonprofitInvestingSurveyAnalysis Produced:April4 th,2014 By:DennisGogarty,CFP,AIF MarkMurphy,CFA A Peer Benchmarking Study on Nonprofit Investment Policies and ROI Transparency, Accountability, Impact Thisreportsummarizestheresultsofaninformal,nonscientificstudycompiledbyanalyzing theresultsof261surveyscompletedbynonprofitfinanceexecutives.thispresentationisfor informationpurposesonly.participantresponseshavenotbeenverified.dataanalysiswas performedbyraffawealthmanagement.whenstating nonprofit responsesitshouldbe notedthatallresponsesarelimitedtothenonprofitsthatparticipatedinthesurvey.no broaderindicationsshouldbeassumed. Copyright2014RaffaWealthManagement,LLCallrightsreserved.

2 StudyonNonprofitInvestingSurveyAnalysis (SONI) By:DennisGogarty,CFP,AIF MarkP.Murphy,CFA April,2014 ExecutiveSummary PurposeoftheStudy TheStudyonNonprofitInvesting(SONI)createsanenvironmentwherenonprofitsofvarious sizes and types can learn from each other about how to best manage their nonprofits investments. Thisexecutivesummaryoutlinesthekeyfindingsofacomprehensivesurveycompletedby261 nonprofitfinanceexecutives.ourgoalwastoobtainbestpracticesrelatedtothequestions we remostfrequentlyaskedbynonprofitfinanceexecutives suchas: Howmuchdoorganizationsofvarioussizeandtypemaintaininreserve? Whatlevelofinvestmentfeesdoorganizationspay? Howdodifferentorganizationssegmenttheircash/reserves? Howmuchriskdoorganizationstakewiththeirlongtermreserves? Whattypesoftopicsareaddressedinmostinvestmentpolicies? Whatisthedecisionmakingprocesswithrespecttochangestoreserves? Howmuchdidothersimilarorganizationsearnontheirlongtermreserve? WhoparticipatedinSONI? Avarietyofnonprofitorganizationswereincludedinthisstudy,includingtradeassociations, professionalassociations,publiccharities,foundations,andothertypesoforganizations.the studyindicatesresultsforallorganizationscombinedandbythetypeoforganizationandsize formanyofthesurveyquestions. Excluding Raffa Wealth Management s nonprofit clients 261 nonprofit finance executives participated in the yearend 2013 SONI survey.the following chart is breakdown of the participantsbybudgetsizeandtype: Budget Of: Association Public Charity Private/Community Foundation Other Overall $0-5M $5-25M $25+M Total Other includes but is not limited to Educational, Religious, Cultural, and Community Developmentorganizations. 2 P age

3 2013SONIExecutiveSummary The full SONI report is available to survey participants and nonprofit leaders requesting special access.the full report details findings segmented by nonprofit size and type.for The key findings described below provide a snapshot of the overall results and important takealwaysorbestpractices. KeyFindings 1. GreatnewsoverallMarketreturnsin2013werebetterthanhistoricalexpectations andmorerespondentsaddedtoreservesthanwithdrew. a. 2013wasagreatyearforstocksandbondsfelljust2%despitedirepredictions. While the performance of the nonprofits participating in the survey lagged traditionalbenchmarks theystillgainedbetween8.5%and13.5%onaverage. b. Another positive sign is that far more respondents added to reserves than withdrewin2013 byameasureofalmost4:1. 2. PrudentuseofassetsClosetohalfofthenonprofitsparticipatingheldcloseto50%of theircashassetsinlongterminvestments. a. Thisisagreatreferencepointfornonprofitsseekingtogaugehowmuchoftheir assetsitmightbeprudenttoinvest.nonprofitsfacepressuretomakethebest useofalloftheirassets yettheymaybediscouragedfromputtingcashatrisk. Balancingthesecompetingprioritiesisdifficult.Knowinghowyoucompareto yourpeershelps. b. The range varies widely with larger organizations deploying 5060% of their assetsinlongerterminvestmentswithsmallernonprofitsbeingmorecautious onlyinvesting2045%oftheirassets. 3. Decisionmaking authority Half of the respondents give discretion to advisors to operatewithintheguidelinesoftheips. a. It sreassuringtoseethatmostnonprofitexecutivesknowwhetherornotthey havegrantedinvestmentauthoritytoadvisorstoactwithdiscretion.advisors withdiscretionaren trequiredtoseektradingapprovalsolongastheyadhereto policyguidelines. b. Inmostcases,afinancecommitteeischargedwithverifyingthattheportfolio staysinvestedincompliancewiththepolicy. 4. Disciplineprevails!ThemajorityofassociationshaveformalIPSswithassetallocation targets.havingapolicywithassetallocationtargets,andnotmakingchangestothem, improvedroiin2013. a. Anotherkeytakeaway:Someinvestmentpoliciescallforspecificassetallocation targets suchas50%tousstocksor50%tofixedincome.otherpoliciesallow investmentadvisorsbroadleewayindetermininghowtheportfolioisinvested. In2013,respondentswithspecificassetallocationtargetsperformedfarbetter (12.7%vs.6.34%) suggestingamoredisciplinedapproachprevailed. b. Not only was having target allocations helpful not making changes to those targets boosted performance further. Nearly 30% of the respondents with targetallocationsmadeachangetothemin2013.mostofthechangeswere 3 P age

4 2013SONIExecutiveSummary eitheramovetoamoreaggressiveapproachoraddinganewclassificationof investments. Regardless of the nature of the change, those that remained disciplinedtotheirtargetsperformedmateriallybetter(13.8%vs.11.0%). 5. SizemattersThelargertheorganizationandthemoreaggressivetheassetallocation policy,thebettertheperformanceresultsin2013. a. Inayearinwhichstocksrosebyover30%,andbondreturnswerenegative 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 moregrowthorientedpositionledlargerorganizationstooutperformin2013. b. Havingariskierposturewon talwaysleadtooutperformance.itwasn ttoolong ago (2008) when stocks fell by more than 30% and bond values rose.so, we cautionagainstmovingtoamoreriskypostureinanefforttoboostinreturns. Rather,seeifyourcashflowexpectationsaresuchthatshiftingmoreintolonger termbucketsisprudent.havingmorecashinvestedmaybemoreprudentthan takingmoreriskwithlesscash. 6. Questioningalternativeinvestments?Allocatingtoalternativeassetslikelydetracted fromperformanceresultsin2013. a. 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.anywayyousliceditin2013;nonprofitswouldlikelyhavebeenbetter offstickingwitha60/40mixoftraditionalstocksandbonds. b. Alternative investments may certainly prove to be helpful portfolio diversifiers eventually.buttheirhighfees,opaquerisks,andrecentunderperformancemay legitimatelycausenonprofitstoquestionifalternativesplayaproductiverolein nonprofitinvesting. 7. RelativeperformanceproblemsInrelationtotraditionalbroadmarketstockandbond benchmarks,participantreturnstrailedsignificantly. a. 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 portfoliobenchmarksusingdifferentmixesofbroadmarketindexes(usstock, Intlstock,Bond,andCash)thatreflectthesedifferentstrategies. b. When comparing respondent s reported returns to the appropriate portfolio benchmark,theunderperformanceissignificant particularlyamongthosewith more growth orientedstrategies.(seeimportantdisclosuresattheendofthis reportforconstructionofthesebenchmarksandtheirlimitations) 2013 Results Nonprofit Investment Allocation # Portfolios Avg Return +/- Index Conservative 30/70 Portfolio (20-30% Stock) % 1.66% Mod Conservative 40/60 Portfolio (30-40% Stock) % 0.28% Balanced 50/50 Portfolio (40-50% Stock) % -2.60% Moderate Growth 60/40 Portfolio (50-60% Stock) % -5.05% Growth 70/30 Portfolio (60-70% Stock) % -6.76% c. Likely contributors to underperformance are use of alternatives, investment fees,andpoormarkettimingjudgments. 4 P age

5 2013SONIExecutiveSummary 8. Fess Matter The lower the fees, the better the results. In part because larger portfoliosweremoreaggressivelyinvestedandlessexpensive. a. Investment fees detract directly from bottom line results.but managers with proventrackrecordsmaybeworthpayingahigherfee.itmaybedifficultto knowhowmuchemphasistoplaceoninvestmentfees.ourexperienceleadsus to believe that managers with better past returns rarely persist in performing better going forward.perhaps because they can and do charge higher fees thusmakingitmoredifficulttosustainsuperiorresults. b. The SONI results clearly show that in 2013 those with lower fees performed betteronaverage. 9. Lack of transparency hurts bottom line Not knowing fees (more than 50% of respondents)correlatedwithlowerresults. a. Morethan50%oftherespondentstothe2013SONIsurveydidn tknowtheir investmentfees. b. Asonemightexpect,thenotoriouslackoftransparencyininvestmentfeeslead to underperformance, with those respondents who know their fees outperformingthosethatdidnot(12.2%vs.10.0%) 10. UnderstandingperformanceresultsPortfolioswithmoreUSequity(particularlysmall cap), less emerging market and alternative investment exposure, and shorter term/corporatebondsperformedbest. a. In 2013, if your strategy emphasized US stocks over Intl stocks you enjoyed better results. If you re strategy emphasized international stocks and particularlyemergingmarketstocksyoufaredpoorly.onthefixedincomeside, interestratesrosehurtingthosethatheldlongertermbonds butthosewho soughtoutriskinlowerqualitybondswerelargelyrewardedin2013. b. The asset classes that performed best in 2013 were not those that performed bestin2012andthosethatwillperformbestin2014isanyone sguess(butinall likelihood they will be different than 2012 and 2013).The 2013 results are sharedsimplytohelpyouunderstandwhyyourportfoliomayormaynothave done well so you can take appropriate action.if, for example, your portfolio emphasizesusstocksandshortterm/highyieldbondsandyoustillperformed 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 internationalemergingmarketstocksandlongterm,highqualitybonds than justholdtight.thingswillcomearoundforyou! OngoingExpectations Thisisthesecondeditionofanannualstudy.Wetrustyouwillfindtheresultshelpfulinyour organization sdecisionmakinggoingforwardandwethankyouforparticipating.overtime thesurveywillbecomemoreconciseandtheresultswillbecomeevenmoremeaningful.in ordertomakethishappenweneedyourongoingparticipationsopleasedon thesitatetomake recommendationsandsharefeedbacktoimprovetheexperienceofallthoseinvolvedinthis importantstudy. For more information and to register to participate in next year s SONI survey visit 5 P age

6 2013SONIExecutiveSummary Fullreportsegmentsresultsbysizeandnonprofittypes ThefullSONIreportisavailabletosurveyrespondentsandnonprofitleadersrequestingspecial access.thisfullreportprovidesthedetailedsurveyresponsesseparatedbynonprofitsizeand type.therelevantsectionmaybeidealforyoutosharewithyourboard.torequestthefull Customversionsofthisreportareforsale Upon request, you will receive a custom designed highlevel Boardready report to compare your organization s key survey responses (actual and target reserve/budget ratio, long term reserveassetallocation,2013investmentreturn,andinvestmentpolicybestpractices)tothe most relevant subgroup responses based on organization type and size.the fee for this custom,highlevelboardreadyreportis$1,250fornonsurveyparticipantsand$450forsurvey participants.torequestacustomreportsendan toinfo@raffawealth.com Disclosure Thisinformationwasgatheredfromreliablesourcesbutwecannotguaranteeaccuracy.Any performancerelatedinformationisbasedonparticipantresponsesandhasnotbeenverified. Pastperformanceisnotanindicationoffutureresultsandanyinvestmentcanlosevalue. * Performance results have been compared to balanced benchmark portfolios comprised of broadmarketindexes.thebenchmarkswereselectedbecausewefeeltheyarethemostwell knownineachbroadcategory.theymayormaynotbesuitablebenchmarksforcomparisonto anyparticularinvestor sportfolioorfortheaverageresultsreflectedinthisstudy.indexesdo not reflect the fees associated with actual investments and such fees would reduce the performanceillustrated. 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% AboutRaffaWealthManagement 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.comorvisitwww.raffawealth.comformoreinformation Traditional Market Benchmarks Russell 3000 MSCI AW ExUS BarCap Agg Bond 1Month US T-Bills HFRI Fund-of-Funds 6 P age