Key Considerations for Trustees When Investing Nonprofit Endowments

By Elizabeth B. Wagner | Published: August 2022

Endowments work hard to ensure their resources last in perpetuity–but forever is a long time, and it’s impossible to predict what might happen. In addition, trustees come and go as term limits dictate, so it’s more important than ever that those with fiduciary responsibility can make smart decisions to help the endowment grow.

Nonprofit trustees, whether experienced or new to the role, will find these key factors helpful as they invest endowments for the future.

Asset allocation is your primary decision: The classic endowment portfolio was a 60/40 allocation–60% equities, implemented either as individual stocks or mutual funds/exchange-traded funds (ETFs), and 40% fixed income. These days, endowments are looking to 70/30 asset allocations and some reach even further into equities to capture additional growth. Asset allocation is your best tool to express your goals, so think carefully about what you’re trying to achieve.

Manage risk sensibly: It’s been a volatile time, but remember that you’re a long-term investor and shouldn’t overreact to market activity, whether positive or negative–you care much more about a 10-year return than any single month or quarter. If you have a smaller endowment, consider skipping individual stocks in favor of the risk diversification mutual funds offer. Remember that endowments often include donated funds and you’re responsible to the donors to capture growth over time. Encourage the organization’s staff to take a holistic approach to risk management, minimizing liability so the investment portfolio is a growth engine, not a safety net.

Get a great partner: Find an investment manager who works closely with your finance staff, board and investment committee. The right firm will educate board members who don’t have investment backgrounds. You need a dedicated team that will talk to you any time and are people you like and trust. If you have concerns, call your investment manager immediately and work together to resolve them–that’s what a good partnership looks like. Don’t forget to celebrate successes, which will help the board remain confident in the investment committee and your choice of manager.

Credit isn’t a bad word: These days, many smart organizations maintain a line of credit, often secured by the endowment portfolio, for those moments when they need access to additional liquidity but don’t want to see invested assets. Public charities used to worry that funders would see credit as an indication of weakness, but that’s old news; now, access to credit is part of the suite of tools your finance team needs to do their job. Consider whether it is a good time to set up a line of credit with so many organizational balance sheets looking strong.

Build the right Investment Committee: The strongest investment committees do include members with relevant professional expertise, but they also have a secret weapon; members whose good judgment and strong critical thinking skills have been homed in other professions. Often, those are the people who remember to ask the big picture questions and they help keep the investments aligned with important mission and risk considerations. An investment committee that asks questions beginning with “why.”

Review the IPS: Your Investment Policy Statement (IPS) is your direction to your investment manager. Look at it annually but know that most endowments don’t make changes to these documents more than once or twice a decade. As a long-term investor, you’re most likely to be successful if you have one durable strategy and stick to it!

Consider your spend: The endowment’s primary job is returning a predictable, reliable income stream to the operating budget. Many organizations cap their annual spend at 4% so the portfolio grows over time. When you calculate spend, use average market value over the past 12 quarters versus just the current quarter-end, so you smooth out the bumps of the market cycle. That makes your 4% spend a similar amount year to year, easily predicted for budgeting purposes, which keeps the CFO happy.

Many nonprofit Trustees have investment experience that’s most relevant to individuals, so it’s an adjustment to think about investing for forever. Paying attention to these key factors will help Trustees make prudent decisions, get the expert guidance they need, and steward these special resources for future generations.

---

About the Author – Elizabeth B. Wagner
Elizabeth B. Wagner is Senior Vice President, Director of Institutional Wealth Management at Bryn Mawr Trust, a WSFS company. For over two decades, she’s worked with nonprofits to help them build long-term financial sustainability, and with generous people and families to help them make the impact they imagine.

---

This communication is provided by Bryn Mawr Trust for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that Bryn Mawr Trust believes to be reliable; however, Bryn Mawr Trust does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.