As a board member, you have a tough job, as you need to ensure that your organization has the money, talent, expertise, along with the resources needed to fund the organization's mission, while also doing this in the constantly changing markets and regulatory environment.

If your organization relies heavily on your investment program to meet spending needs, it is essential for the organization's board to understand how to effectively manage this program.

Economic forecasters predict that the inflation-adjusted growth rate of a non-effective portfolio of 60% equities and 40% bonds may decline to 2.8% over the next ten years, a level of returns that would make supporting a 5% spending rate unsustainable.

In other words, trustees in nonprofit organizations must think differently about how to achieve return goals, and so if market return expectations decline, there are still ways to improve portfolio returns, thus achieving your long-term goals.

Here, my colleagues and I propose 5 strategies that trustees of nonprofit organizations should adopt moving forward.

  1. Manage your investment portfolio dynamically:

Dynamically managing means actively monitoring financial movements in your investment portfolio on a daily basis, seizing short-term market opportunities, and adjusting as market conditions dictate, helping to mitigate risks. Dynamic management is critical in a low-return environment and is designed to help ensure that short-term movements do not disrupt long-term return objectives.

In this respect, investors in such an environment should consider all available methods to ensure that spending goals can be met, which means integrating investment strategies that may provide additional returns, avoiding risks for your organization, as well as ensuring the effective execution of the investment portfolio program.

  1. Consider spending policy:

Rationalizing your nonprofit's spending policy and balancing the needs of current beneficiaries with those of future beneficiaries can significantly impact the amount of returns that need to be generated for your nonprofit's investment program.

  1. Liquidity management:

Many nonprofits discovered that liquidity had a significant impact on their ability to meet spending goals during the 2008-2009 global financial crisis, and while we believe that illiquid assets can help you achieve spending goals over time, they must be managed wisely to ensure alignment with your organizational objectives.

  1. Holistic risk management:

Investment risk is among the challenges facing nonprofit organizations; in fact, viewing the risks threatening your organization holistically, rather than from an individual perspective, better equips your organization to manage any potential surprises.

It is also important to have a risk management plan that includes the risks that the organization may face, such as investment risks, credit risks or governance risks, as well as operational risks, structural risks, and market risks.

5. Define your organization's time horizon:

Whether your organization desires to continue indefinitely or not will impact how you approach other strategies, including how you manage your investment program. Furthermore, you may have a desire for your nonprofit to last as long as possible in the market or prioritize spending now and focus on market presence duration later.

Over time, you may prefer to make the spending point a secondary issue within the organization. In either case, all board members, the investment committee, and staff must agree on these points. Remember that this decision is not fixed and should be adjusted based on how your organization evolves and its goals.

Having a solid understanding of these strategies and identifying your nonprofit board's willingness to prioritize the organization is essential for effectively managing your investment program. It is important to discuss these strategies at a high level and make high-level decisions in the investment policy statement.

Additionally, the investment policy statement serves as the guiding document for your organization’s investment program, providing long-term strategic guidance on how to align your mission, goals, and nonprofit policies. This statement also outlines the responsibilities of various actors involved in managing your investment program, furthermore, it helps maintain your nonprofit's vision in the long term.

Source: BoardSource