Principles of Nonprofit Investment Management - Commonfund

Asset AllocationThe inevitable ebb and flow ofmarkets pose a special challenge tononprofits, whether they are striving topreserve their capital base over the longterm or concentrating their distributionswithin a limited time period.Anyone faintly aware of the behaviorof the stock and bond markets fromthe early 1990s into the early 2000shas seen how extreme and rapid theups and downs can be, and how unpredictable.Even within short time frames– single trading days, for instance –market volatility has become moreextreme than in almost any time in thepast century.Nonprofits obliged to make relativelyfrequent withdrawals from their portfoliosmay naturally wish for somesemblance of consistency in theirinvestment results. This suggests alow-risk, low-volatility strategy.Nonprofits with urgent distributioncommitments and shorter timehorizons, such as international relieforganizations, might well concentratea portion of their portfolios in fixedincomeinvestments of short durationand high liquidity, a strategy thatminimizes volatility.On the other hand, nonprofits with along time horizon may find that riskavoidance has a very significant cost.Over the long term, high returns generallycome as the reward for takinggreater risks. And, with rising payoutpressures, nonprofits certainly needhigher returns.Either way, nonprofits face difficultdecisions in investment management.Obviously this challenge calls notonly for financial expertise but alsofor great prudence in managing theinvestment process.Historically, prudence was a legalrequirement of fiduciary responsibilityand fostered a highly conservativeinvestment bias. In some early commonlaw rulings, common stock weredeemed “per se” imprudent. The experienceof the 1930s, however, provedthat bonds could be risky, too. Thecentury-old legal principle, popularlyknown as “the prudent man rule,”then became the pervasive guide fortrustees, giving them greater discretionin selecting investments, but stillrequiring them to invest for currentincome rather than total return.- 15 -