Study on Nonprofit Investing Survey Analysis

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P r o d u c e d : M a y 2 0 1 5

B y D e n n i s G o g a r t y , A I F

®

,

C F P

®

M a r k M u r p h y , C F A

C h a s e D e t e r s , C F P

®

, C h F C

®

A Peer Benchmarking Study on Nonprofit Investment Policies and ROI

Executive Summary

Transparency, Accountability, Impact

www.npinvesting.org

This report summarizes the results of an informal, non-scientific study compiled by analyzing the results of 467 surveys completed by nonprofit finance executives. This presentation is for information purposes only. Participant responses have not been verified. 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 indications should be assumed.

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A

BOUTTHE

A

UTHORS

The Study on Nonprofit Investing (SONI) is an independent, joint research project of Raffa Wealth Management, LLC and Raffa, PC. SONI was developed to answer the question “what are other nonprofits doing with their reserves”. SONI’s mission is to empower nonprofits with actionable data that will lead to better decisions about their investments.

Raffa, PC is recognized as one of the 100 largest and best-managed accounting firms in the U.S. – serving as advisors and back office solution providers to nonprofit organizations.

Raffa Wealth Management, LLC is an independent investment advisory firm offering both portfolio management and investment policy consulting services to nonprofits of all size and type. In 2014, CNBC identified Raffa Wealth Management as the 75th ranked fee-only wealth management firm in the country.

Data has been analyzed and aggregated by the following members of Raffa Wealth Management:

 Dennis P. Gogarty, CFP®, AIF® - President

Dennis Gogarty is the President of Raffa Wealth Management. He has been a consultant to the nonprofit sector since 1994. He joined Raffa in 2002 specifically to provide investment advice and qualified retirement services to a select group of nonprofits. He has been active in promoting the need for increased investment education in the nonprofit sector ever since.

 Mark P. Murphy, CFA® - Senior Portfolio Manager

Mark is Raffa Wealth Management’s Senior Portfolio Manager. Mark’s career in financial services begin in 2004 and he now supports all areas of the firm’s analytical and due diligence processes, and coordinates research efforts with the firm’s external investment committee.

 Chase Deters, CFP®, ChFC® - Director of Operations, Portfolio Manager

Chase Deters is a Portfolio Manager with Raffa Wealth Management. Chase’s career in financial services began in 2005 and he now directs all areas of the firm’s internal operations and supports the firm’s portfolio management functions.

Visit www.raffawealth.com or www.raffa.com for more information. You may also reach out directly to Raffa Wealth Management at dennis@raffawealth.com

If considering working with Raffa Wealth Management please review our disclosure brochure (Download

RWM's Disclosure Brochure). This is the document that we file annually with the SEC. It outlines our

business practices and material arrangements and is intended, in part, to make you aware of any potential conflicts of interest. While CNBC has categorized Raffa Wealth Management as a “Fee Only” Wealth Management firm, CNBC’s use of the term “Fee Only” does not match the CFP Board’s definition of the term. Raffa Wealth Management’s owners and affiliates include CFP® professionals that are licensed insurance agents receiving insurance commissions and are not deemed “Fee Only” by the CFP Board.

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P

URPOSEOFTHE

S

TUDY

The Study on Nonprofit Investing (SONI) creates a community where nonprofits of various sizes and types can learn from each other about how to best manage their nonprofits investments. In 2015, approximately 500 nonprofit finance executives participated in a survey about their investment polices and portfolio management practices. The results are segmented into several cohorts separated by size and/or nonprofit type.

This report details the findings unique to each cohort. Our goal was to obtain best practices in several key areas that will help nonprofits fulfill their oversight responsibilities and hold accountable all those involved in the management of their organization’s investments.

Who Participated in SONI

A variety of nonprofit organizations were included in this study, including Trade Associations, Professional Associations, Public Charities, Foundations, and other types of organizations. The study indicates results for all organizations combined and segmented by type and size.

Excluding Raffa Wealth Management’s nonprofit clients – 393 nonprofit finance executives participated in the 2015 SONI survey. The following chart is a breakdown of the 393 participants who fully completed the survey by budget type and size:

Format of the Report

The complete SONI reports are segmented at an overall level, by Association, Public Charity, and Private or Community Foundation. These segments are then separated into cohorts based on the size of budget and size of reserve portfolio. Depending on your organization type, and budget and portfolio size, you can quickly and easily identify which cohort your organization falls into and make the relevant comparisons.

For each of the organization cohorts in the study, the following core areas are examined:

 Segmentation of total cash assets

 Level of reserves by budget size

 Decision making authority

 Long term portfolio asset allocation policy

 Portfolio rebalancing policies

 Investment fees and benchmarking

 2014 long term portfolio investment performance

 Use of alternative investments

Additional best practices are sited at the overall level. They include guidelines and restrictions contained in investment policies, maintaining asset allocation targets, and the potential impact of not having a formal portfolio benchmark.

Budget Of: Association Public Charity

Private/Community  Foundation Overall $0‐5M 43 97 24 164 $5‐25M 63 93 10 166 $25+M 23 36 4 63 Total 129 226 38 393

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E

XECUTIVE

S

UMMARY

US stock market returns in 2014 were better than historical expectations, but international equities detracted from performance with a –3.9% return. Bonds also saw substantial gains at almost 6% in 2014, but we believe interest rate concerns caused many nonprofits to hold much shorter term holdings that did not perform as well. Although the nonprofits participating in the survey lagged traditional benchmarks – they still gained between 3.8% and 5.9% on average.

Prudent Use of Assets

Most associations and public charities reported holding close to 50% of their cash assets in long term investments. The most common target for both association and public charity reserves was between 4 and 6 months worth of their annual budget. Most organizations maintained balances in excess of that figure, closer to 8-9 months.

 This is a great reference point for nonprofits seeking to gauge how much of their assets it might be prudent to invest. Nonprofits face pressure to make the best use of all of their assets – yet they may be discouraged from putting cash at risk. Balancing these competing priorities is difficult. Knowing how you compare to your peers helps.

Decision Making Authority

The majority of larger organizations (over $5M in reserves) gave discretion to their advisors to operate within the guidelines of the IPS, while smaller public charities, associations and foundations, elected to give their board or Finance Committee final say on investment decisions.

 Advisors with discretion aren’t required to seek trading approval so long as they adhere to policy guidelines, and in most cases a Finance Committee is charged with verifying that the portfolio stays invested in compliance with the policy.

Discipline Prevails

Most organizations reported having a formal investment policy statement with set asset allocation targets, and this increased as the portfolio size increases.

 While most of the investment policies call for specific asset allocation targets – such as 50% to US stocks or 50% to fixed income, smaller associations allowed their investment

Page 4 64 46 19 133 69 22 19 19 0 20 40 60 80 100 120 140 <$5M $5‐25M >$25M SONI Participants By Portfolio Size

Associations Public Charity Foundation

4.9% 4.4% 5.9% 5.3% 5.5% 4.0% 4.0% 3.9% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% <$5M $5‐25M >$25M

SONI Participant Performance

By Portfolio Size

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advisors, Finance Committee, or board broad leeway in determining how the portfolio is invested.

Average Asset Allocation

The majority of association and public charity participants reported having portfolios that are balanced approximately equal between stock and bond holdings (50/50). Foundation participants reported a much higher allocation to stock and alternative investments (~70%). As portfolio size increases, participants reported an increase in the allocation to alternative investments.

 It is often difficult to balance competing desires for reduced risk and higher returns, knowing where your peer group has landed on this decision can aid in your own portfolio construction.

Portfolio Rebalancing Procedures

Rebalancing a portfolio to ensure that target asset allocations are preserved is an important part of maintaining an investment portfolio. We found that for all of the organizations who participated in the SONI survey, the majority elected to allow their internal Finance Committee or financial advisor discretion on when and how to rebalance their portfolio, with only about 20% including formal rebalancing guidelines in their policies.

 Those organizations who elected to have formal rebalancing guidelines in their policy tended to report slightly better returns in 2014 than those who left rebalancing decisions up to their internal finance committee or advisor.

Fees Matter

Most organizations reported that the larger their portfolio balance, the lower the percentage of total of advisory and fund expenses. Some large foundations did report a slight increase in fund level expenses, likely due to large allocations to alternative investments which tend to be more expensive positions. The percentage of those nonprofits who did not know how much they were paying for investment advice fell to between 36% - 16% of responses (down from over 50% in 2014).

 Investment fees detract directly from bottom line results. But managers with proven track records may be worth paying a higher fee. It may be difficult to know how much emphasis to place on investment fees. Our experience leads us to believe that managers with better past returns rarely persist in performing better going forward. Perhaps because they can and do charge higher fees – thus making it more difficult to sustain superior results.

 We found that for the second year in a row, those nonprofits who paid less in advisory and fund level fees generally performed better.

Portfolio Benchmarking

Maintaining a portfolio benchmark is critical to holding investment advisors and fund managers accountable for their bottom line results. The majority of all nonprofits reported that they include a formal benchmark in their investment policy, and those who did, saw higher returns in 2014.

Relative Performance Problems

In relation to traditional broad market stock and bond benchmarks, nonprofits on an overall level reported returns that trailed these traditional benchmarks by a significant margin. When comparing respondent’s reported returns to the appropriate portfolio benchmark, the

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underperformance was meaningful regardless of target level of risk.

 Likely contributors to underperformance in 2014 are use of alternatives, very short fixed income maturity, investment fees, and poor market-timing judgments.

Use of Alternative Investments

Allocating to alternative assets likely detracted from performance results in 2014, with the HFRI fund of hedge fund composite index performing substantially below both the US stock market return (3.4% vs. 12.6%) and the aggregate bond market index (6.0%).

 Investing in alternatives means different things to different organizations. To smaller nonprofits it meant investing in commodities or real estate. Larger nonprofits invest more heavily in hedge funds and private equity.

 Alternative investments may certainly prove to be helpful portfolio diversifiers eventually. But their high fees, opaque risks, and recent underperformance may legitimately cause nonprofits to question if alternatives play a productive role in nonprofit investing.

Ongoing Expectations

This is the third edition of the annual Study On Nonprofit Investing. We trust you will find the executive summary helpful and encourage you to participate next year and gain access to the full report that can help inform your organization’s decision making process going forward. Over time the survey will become more concise and the results will become even more meaningful. In order to make this happen we need your ongoing participation so please don’t hesitate to make recommendations and share feedback to improve the experience of all those involved in this important study. For more information and to register to participate in next year’s SONI survey, visit www.npinvesting.org and be sure to follow us on Twitter @SONIstudy

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D

ISCLOSURES

SONI is an informal, non-scientific survey for information purposes only. This information was gathered from reliable sources but we cannot guarantee accuracy. Any performance related information is based on participant responses and has 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 most well known 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. Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance.

2014 Return 30/70 40/60 50/50 60/40 70/30 12.56% 20% 29% 38% 47% 56% ‐3.88% 10% 11% 12% 13% 14% 5.97% 65% 55% 45% 35% 25% 0.03% 5% 5% 5% 5% 5% 3.37% 0% 0% 0% 0% 0% 6.01% 6.50% 7.00% 7.49% 7.98% 3 Month US T‐Bills

Traditional Market Benchmarks Russell 3000

MSCI AW ExUS BarCap Agg Bond

HFRI Fund‐of‐Funds

Blended Portfolio Sample Benchmarks

Blended Benchmark Return

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References

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