2016-10-27 A Framework for Strengthening Your Nonprofits Investment Reserve Policies

1. Thrive. Grow. Achieve.
A Framework for
Strengthening Your
Nonprofit’s Investment
Reserve Policies
Dennis Gogarty, CFP®, AIF®
Copyright Raffa Wealth Management, LLC . All Rights Reserved.

2. Page
DISCLAIMER
2
This report summarizes the results of an informal study compiled by analyzing
the results of 722 surveys completed by nonprofit finance executives. All
performance data cited is as of December 31, 2015. The views expressed herein
are opinions reflecting the best professional judgment of Raffa Wealth
Management, LLC. This report is for informational purposes only. Participant
responses have not been verified or audited. The information contained has
been gathered from sources we believe to be reliable, but we do not guarantee
the accuracy or completeness of such information. Data analysis was performed
by Raffa Wealth Management. When stating “nonprofit responses” it should be
noted that all responses are limited to the nonprofits that participated in the
survey. No broader implications should be assumed.
Different types of investments involve varying degrees of risk, and there can be
no assurance that the future performance of any specific investment, investment
strategy, or product referenced directly or indirectly in this report, will be
profitable, equal any corresponding indicated historical performance level(s), or
be suitable for your nonprofit’s portfolio. Moreover, you should not assume that
any discussion or information contained in this report serves as the receipt of, or
as a substitute for, personalized investment advice from Raffa Wealth
Management, LLC or from any other investment professional. To the extent that
you have any questions regarding the applicability of any specific issue discussed
above to your nonprofit’s unique situation, you are encouraged to consult with
Raffa Wealth Management, LLC or the professional advisor of your choosing.

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INTRODUCTION
3
Polling Question 1: Type of Nonprofit
1. Public Charity
2. Membership Association
3. Private Foundation
Polling Question 2: Reserve Size
1. Less than $5 million
2. $5 - $25 million
3. More than $25 million
Fourth
Annual
Study On
Nonprofit
Investing
(SONI)

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INTRODUCTION
4
In February of this year, over 700 nonprofit finance executives
completed a survey about their organization’s investment
policies and results.
Raffa Wealth Management has analyzed the results of the
survey and prepared the 2016 SONI report for review.
Fourth
Annual
Study On
Nonprofit
Investing
(SONI)

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AGENDA
5
Considerations for
Reserve and
Investment Policy
Development and
Review
• High Level Goals and Objectives
• Governance Procedures
• Reporting Requirements
• Investment Policy Components
• Key Takeaways

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HIGH LEVEL GOALS & OBJECTIVES
6
What is your
nonprofit
organization's
current total annual
operating budget?
What are your
organizations total
cash assets:
•Cash in checking,
•Excess operating
cash,
•Short/intermediate
term investments,
•Long term
investments?
Association
Public Charity

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HIGH LEVEL GOALS & OBJECTIVES
7
Do Reserve
Policies Align with
the Strategic Plan?
How are reserves defined?
• The unrestricted net assets as reported on the Statement of Financial Position.
• The accumulated net surpluses of the organization.
• Liquid cash and investments held in a reserve fund investment account.
What is the purpose?
• To ensure that the organization has adequate funds available in the event of an
unanticipated catastrophic event or business situation that reduces reserves and
threatens the financial viability of the organization.
• To cover unbudgeted and extraordinary expenditures brought about by
unanticipated challenges and as a source for emergency funding.
• To provide a source of capital for the research and development of new products and
services.
• To enhance the purchasing power of funds held for future expenditure and to
maintain the financial stability of the association.

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HIGH LEVEL GOALS & OBJECTIVES
8
Do Reserve
Policies Align with
the Strategic Plan?
What is the objective of the
investments?
• To preserve capital and provide liquidity
• Long term growth of assets
• Optimize return while minimizing risk through diversification and asset
allocation

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HIGH LEVEL GOALS & OBJECTIVES
9
How Much do We
Need to Maintain
in Reserves?
• The target of the reserve fund is to maintain a balance equal to three/six/twelve
months of the annual general operating expenditures.
• The target will be achieved by contributing a minimum of 50% of unrestricted net
income before depreciation at year-end.
• Target may be based on quantifying potential risk and opportunities.
Risks
Approximate
cost
Likelihood of
occurring
Contribution
to reserves
Revenue shortfall
Dues $1,000,000 10% $100,000
Meeting attendance $1,000,000 20% $200,000
Staffing change $1,000,000 50% $500,000
Legal action $1,000,000 10% $100,000
Pension plan shortfall $1,000,000 25% $250,000
Total resave needed $1,150,000
Opportunities
Technology $1,000,000 20% $200,000
Programming $1,000,000 50% $500,000
Facilities $1,000,000 10% $100,000
total reserves needed $800,000
Grand total $1,950,000

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HIGH LEVEL GOALS & OBJECTIVES
10
How Much do We
Need to Maintain
in Reserves?
What happens after target is met?
• Range around target:
– Target is six months operating expenses. Max is 12 months, minimum is 3 months.
• Trigger at upper limit:
– Reduce portfolio risk
– Increase member/charitable benefits
– Return to members
• Trigger at the lower limit:
– Budget implications

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HIGH LEVEL GOALS & OBJECTIVES
11
Are we Making the
Best Use of Our
Assets
Segmentation based on timing of
various objectives
• Operating reserve – 3 months of budgeted expenses
• Short term reserves – dollar amount based on need
• Long term reserves – excess not needed in operating or short term

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HIGH LEVEL GOALS & OBJECTIVES
12
For this question,
we are asking
about your
organization's
total cash assets.
Please enter a
dollar amount in
each of the
following
categories,
segmented by
distinct
investment
objectives /
projected time
until use.
Public Charity
Association

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HIGH LEVEL GOALS & OBJECTIVES
13
How much
investment
risk are we
willing to
take?
Ability
• Current financial condition (Review Financials)
• Future financial outlook (Interview Key Personnel)
Willingness
• High level risk survey
– Objective
– Time frame
– Tolerance for volatility
– Consider sample portfolio’s (likely, best, worst case)

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ASSET ALLOCATION STRATEGY
14
How much
investment
risk are we
willing to
take?
Association
Public Charity

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ASSET ALLOCATION STRATEGY
15
How much
investment
risk are we
willing to
take?
Association
Public Charity

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AGENDA
16
Third
Annual
Study On
Nonprofit
Investing
(SONI)
• High Level Goals and Objectives
• Governance Procedures
• Reporting Requirements
• Investment Policy Components
• Key Takeaways

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GOVERNANCE PROCEDURES
17
Roles and
Responsibilities
Staff
• Communicating financial condition and recommended reserve levels
• Facilitating volunteer policy discussions
• Reporting to make volunteer oversight easy
• Verifying policy compliance
Volunteers (Committees and Boards)
• Establishing reserve and investment policies
• Verifying policy compliance
• Assessing reasonableness of fees
• Hiring consultants
Advisors/Managers
• Portfolio management (asset allocation strategy & mutual fund or manager selection)
• Trading
• Reporting (performance and policy compliance)

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GOVERNANCE PROCEDURES
18

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GOVERNANCE PROCEDURES
19
Who is given
authority
over
investment
decisions?
Association
Public Charity

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GOVERNANCE PROCEDURES
20

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GOVERNANCE PROCEDURES
21
How do
nonprofits
decide
when to
rebalance
their
portfolio?
Association
Public Charity

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AGENDA
22
Third
Annual
Study On
Nonprofit
Investing
(SONI)
• High Level Goals and Objectives
• Governance Procedures
• Reporting Requirements
• Investment Policy Components
• Key Takeaways

23. Page
REPORTING REQUIREMENTS
23
Policy Compliance
Stock Allocation Diversification
Requirements
• Industry/Sector
• Geography
• Company
Fixed Income Requirements
• Credit Quality Restrictions
• Average Maturity
Asset Allocations In-line with Targets
Performance Reasonableness

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REPORTING REQUIREMENTS
24

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REPORTING REQUIREMENTS
25
What
nonprofits
maintain a
target asset
allocation?
Public Charity
Association

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REPORTING REQUIREMENTS
26
Does your
Investment
Policy
Include a
Formal
Portfolio
Benchmark?
Association
Public Charity

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POLLING QUESTION 3
27
Global
Equity
Markets
Portfolio Benchmarking
• How much of the total global equity market does the US comprise?

28. MARKET CAP DATA IS FREE-FLOAT ADJUSTED FROM BLOOMBERG SECURITIES DATA. MANY NATIONS NOT DISPLAYED. TOTAL MAY NOT EQUAL 100% DUE TO ROUNDING. FOR EDUCATIONAL PURPOSES; SHOULD NOT BE USED AS INVESTMENT ADVICE.
CHINA MARKET CAPITALIZATION EXCLUDES A-SHARES, WHICH ARE GENERALLY ONLY AVAILABLE TO MAINLAND CHINA INVESTORS.
THE GLOBAL EQUITY MARKET
PERCENT OF WORLD MARKET CAPITALIZATION AS OF DECEMBER 31, 2014
A REPRESENTATIVE GLOBAL EQUITY MARKET INDEX IS THE MSCI ALL COUNTRY WORLD INDEX
2

29. Total United States Stock Market
Russell 1000
Index: top 1000
largest US publicly
traded companies
Russell 2000 Index: remaining
2000 mid-sized and small US
publicly traded companies
S&P 500: top 500 largest US
publicly traded companies
Value Stocks Growth Stocks
Russell 3000
Index: all publicly
traded US
companies
Russell
1000
Index:
Russell
2000
Index:
For Illustration purposes only. Indices are not available for direct investment and performance does not
reflect expenses of an actual portfolio. Past performance is not a guarantee of future results.

30. Total International Stock Market
Large International
Developed
Country Stocks
Stocks from
Emerging Market
Countries
MSCI All Country
World
Ex-US Index
MSCI
EAFE
Index
MSCI
Emerging
Markets
Index
For Illustration purposes only. Indices are not available for direct investment and performance does not
reflect expenses of an actual portfolio. Past performance is not a guarantee of future results.
Other: Canada

31. Total US Bond Market
BarCap 1-5yr
Gov/Credit Index:
Avg Duration ~ 2.7yrs
BarCap Long Term
Gov/Credit Index:
Avg Duration ~ 14.2yrs
BarCap
Aggregate Bond
Market Index:
Avg Duration ~
5yrs
BarCap
1-5yr
Gov/Credit
Index: Avg ~
2.7yrs
BarCap
Long Term
Gov/Credit
Index:
Avg ~
14.2yrs
For Illustration purposes only. Indices are not available for direct investment and performance does not
reflect expenses of an actual portfolio. Past performance is not a guarantee of future results.
BarCap 5-10yr
Gov/Credit
Index:
Avg ~ 6.5yrs
BarCap 5-10yr
Gov/Credit Index:
Avg Duration ~ 6.5yrs
BarCap US Credit Index:
Avg Duration ~ 6.8yrs
BarCap US Treasury
Index:
Avg Duration ~ 6yrs
US Government,
Agency &
Treasury Bonds
US Corporate &
Mortgage Backed
Bonds

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CUSTOM BENCHMARK
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1. How much does your policy allocate to US stocks?
• 38% to the Russell 3000 index
2. How much does your policy allocate to international stocks?
• 12% to the MSCI All Country World Ex US
3. How much does your policy allocate to fixed income?
• 45% to the Barcap Aggregate Bond index
Or if your policy calls for a specific allocation to shorter term bonds
or a target maturity, you may split the fixed income
• 25% to the Barcap Aggregate bond index
• 20% to the 1-5 year government bond index
4. How much does your policy allocate to cash?
• 5% to the Barcap one month treasury bill index
5. Are you including alternatives in your portfolio benchmark?
• No

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2012 -2014 INDEX RISK AND RETURN
33
For Illustration
purposes only.
Indices are not
available for direct
investment and
performance does not
reflect expenses of an
actual portfolio. Past
performance is not a
guarantee of future
results.
International stocks
US Stocks
Cash
30/70 40/60 50/50 60/40 70/30
20% 29% 38% 47% 56%
10% 11% 12% 13% 14%
65% 55% 45% 35% 25%
5% 5% 5% 5% 5%
0% 0% 0% 0% 0%
Blended Portfolio Sample Benchmarks
3 Month US T-Bills
Traditional Market Benchmarks
Russell 3000
MSCI AW ExUS
BarCap Agg Bond
HFRI Fund-of-Funds
*Representative, sample portfolio benchmarks are intended to give context to
performance results. The benchmarks were selected because we believe they are the
broadest index available in each broad category (US stock, Intl stock, Bond, and Cash).
They may or may not be suitable benchmarks for comparison to any particular
investor’s portfolio or for the average results reflected in this study.
*Indexes do not reflect the fees associated with actual investments and such fees would
reduce the performance illustrated. Past performance is not an indication of future
results and any investment can lose value.
How do the
investment
results
compare to a
blended
portfolio
benchmark?

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PORTFOLIO RESULTS & ANALYSIS
34
What level of
under -
performance
is
acceptable?
What level of underperformance is acceptable?
• Most nonprofits (45%) believe advisors should be expected to
outperform their market benchmark gross of their fees
• A surprisingly large number (22%) of nonprofits “didn’t know” what
level of underperformance was acceptable.
0 20 40 60 80 100
Idon't know
Net of fees, trailing by 2% or less is
reasonable
Net of fees, trailing by 1% or less is
reasonable
Net of fees, trailing by 0.5% or less is
reasonable
Outperformgross of fees,but
underperformance netof feesis…
Over 5yrs,advisors are expected to
outperformnet of all fees
Advisor Performance

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AGENDA
35
• High Level Goals and Objectives
• Governance Procedures
• Reporting Requirements
• Investment Policy Components
• Key Takeaways

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INVESTMENT POLICY COMPONENTS
36
Check to make
sure you have
these guidelines
covered.

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KEY TAKEAWAYS
37
Ask yourself these
questions the next
time you review
your reserve and
investment policy.
1. Do your reserve policies align with the organization’s
strategic planning?
2. Do investment objectives align with reserve policies?
3. Is your organization, and the current personnel,
willing and able to endure the level of market
volatility your policy directs?
4. Are you making the best use of your cash assets?
5. Are the right people making the right investment
decisions?
6. Do investment reports make oversight easy?
7. Are investment return expectations simple and clear?
Past performance is not an indication of future results. Any investment can lose value.

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CONCLUSION
38
Thank you
for
attending!
RWM is available to engage in Investment
Policy Development engagements at a fixed
hourly fee.
For more information:
• Visit www.npinvesting.org or
• Email info@raffawealth.com

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DISCLOSURE
39
This information was gathered from reliable sources but
we cannot guarantee accuracy. Any performance related
information is based on participant responses and have
not been verified. Past performance is not an indication of
future results and any investment can lose value.
Performance results have been compared to balanced
benchmark portfolios comprised of broad market indexes.
The benchmarks were selected because we feel they are the
broadest market benchmark available in each broad
category. They may or may not be suitable benchmarks
for comparison to any particular investor’s portfolio or for
the average results reflected in this study. You should
consult with your investment professional to determine
suitable benchmarks for your portfolio.
Indexes do not reflect the fees associated with actual
investments and such fees would reduce the performance
illustrated.
Past performance is not an indication of future results. Any investment can lose value.