Nonprofit organizations face increasing pressure to adopt prudent investment policies. A robust investment policy provides a framework for making investment decisions aligned with an organization’s mission and goals. This article will offer guidelines for nonprofit boards to develop investment policies covering governance, objectives, asset allocation, monitoring and other key elements. Properly implementing the investment policy is crucial for nonprofit organizations to achieve sustainable funding, manage risks effectively and fulfill their charitable purposes over the long-term.
Clearly define responsibilities for investment activities
The investment policy should specify the division of responsibilities between the board, investment committee, staff, advisors and any other parties involved in investment activities. The board retains fiduciary duty but can delegate implementation to staff or advisors. However, the board should define the scope of delegated powers, reporting requirements, and conduct regular reviews. Segregating duties for making investment decisions, execution, custody of assets and monitoring will improve governance.
Articulate risk tolerances, return objectives and time horizon
The investment policy sets the risk and return parameters for the portfolio. Consider factors like liquidity needs, timeframe for utilizing funds, and ability to withstand volatility. For nonprofits relying on the portfolio for annual distributions, a total return objective balancing income and growth is prudent. The investment horizon depends on whether funds are permanent endowments or restricted temporarily. Constraints tied to the nonprofit’s mission can also shape asset allocation. Specifying quantitative metrics like target returns and risk ranges provides measurable guidelines.
Define appropriate asset classes and ranges
The investment policy should outline suitable asset classes like cash, fixed income, equities, alternatives etc. and guidelines for minimum/maximum allocations to each class. More diversified portfolios with a long-term horizon can include higher equity exposure. Nonprofits with near-term spending needs may favor more liquid assets. Alternative assets like private equity or hedge funds require greater oversight. Setting strategic targets and ranges creates a roadmap for asset allocation aligned with objectives.
Establish procedures for investment manager selection
Criteria for selecting investment managers is a key component. Requirements may include minimum assets under management, performance benchmarks, risk-adjusted returns, fees, and other quantitative filters. Qualitative factors like firm stability, investment philosophy and client service approach also matter. The number of managers utilized depends on portfolio size. Actively managed or passive approaches can be considered. Standardized due diligence, regular performance reviews and criteria for termination should be incorporated.
Define monitoring methodology and benchmarks
Ongoing monitoring evaluates if the investment program stays on track to meet its objectives. This includes assessing asset allocation, returns relative to benchmarks, risk metrics, fees and investment managers. Common benchmarks like market indices can gauge comparative performance. Absolute return hurdles may also be set. Responsibility for regular monitoring and quarterly/annual reporting should be delineated. When objectives are not met, the policy should guide reviewing issues and making adjustments.
A well-constructed investment policy provides nonprofit boards a robust framework to supervise and evaluate investment activities. It articulates the organization’s risk profile, return targets, asset allocation approach, manager selection criteria and monitoring procedures aligned with the nonprofit’s mission. Adhering to the policy helps ensure investments are managed prudently for sustainable funding.