Principles of Nonprofit Investment Management - Commonfund

Asset AllocationIn the fast-moving world of nonprofits,where investment returns can be socrucial, a detailed point of view aboutthe trends in the economy and marketsis essential.For all the information and analytictools used to guide decision makers,the asset allocation decision stillremains difficult; it involves more thannumbers. For nonprofits, this decisionmust embody the philanthropic missionand perhaps deeply held feelingsof founders and members of governingboards, their risk tolerance, their senseof the nonprofit’s time horizon, andany number of policy issues that cannotbe expressed in numbers alone.Private nonprofits, established on thestock of the founder’s company, remainin a highly risky predicament untilthe portfolio can be diversified. Thatin itself needs careful planning –assuming that liquidation is allowed.In any scenario, the determinationof the asset allocation target must becarried out in a disciplined manner. Atthe outset, the investment committee,or the full board, ought to agree ona moderator and an agenda for thediscussion. Every member should havethe opportunity to express his or herconcerns and expectations. Allow eachone to propose the level of risk he orshe considers tolerable.In writing its investment policy statement,the committee should includea rationale for the asset allocation onwhich it has decided. A brief, wellstatedexplanation could help achievethe concurrence of the full board andfounder or founding family and helpguide portfolio managers in implementinginvestment strategy.In time, as markets change, theportfolio’s actual asset allocation willdeviate from the targets set down inthe policy statement. This is a naturalconsequence of the markets grantinghigher returns to certain asset classesthan to others. Therefore, adjustmentsmust be made on a regular basis.The theory underlying asset allocationstrategy prescribes periodic rebalancingto bring the portfolio back into targetedranges. This means sellingsome of the appreciated assets andreinvesting the proceeds in assetcategories that have declined.For the inexperienced, selling successfulinvestments may seem counterto long-held beliefs. But, looked atanother way, it forces action that getsto the very essence of successful investing– buying cheap and selling dear.The investment committee mustmaintain oversight of the portfoliothrough all the cycles of the investmentmarkets. But for implementation ofits asset allocation policy it employsprofessional investment managers.And that is the subject of the nextsection, under Principle Four.- 19 -