Not-for-profit organizations face unique challenges when it comes to investing and managing their financial assets. Unlike for-profit companies, not-for-profits rely heavily on donations and grants to fund their operations and advance their mission. As such, they have a fiduciary duty to make prudent investment decisions that protect their assets while generating sustainable returns. An investment policy is a critical tool that provides guidance and establishes limits on how a not-for-profit’s portfolio can be invested. Here we will explore key considerations for creating effective investment policies tailored to the needs of charitable organizations.
Align investment policies with organization’s financial needs and risk tolerance
A not-for-profit’s investment policy should start with a clear assessment of the organization’s cash flow needs and risk tolerance. For example, an advocacy group with stable revenue streams and limited liquidity needs may opt for a more aggressive policy targeting higher returns. In contrast, a social service provider dependent on government grants may require an investment policy focused on capital preservation and liquidity. The investment time horizon is another key factor, as organizations with longer time horizons can afford to take on more risk. By tailoring the investment policy to the specific financial profile and risk appetite of the organization, not-for-profits can create an optimal asset allocation plan.
Establish reasonable return objectives and risk constraints
In addition to articulating the organization’s needs, a not-for-profit investment policy should establish parameters for target returns and risk exposure. Return objectives provide guidance on the level of investment income required to support operations and growth. These targets need to be realistic based on capital market assumptions and the organization’s risk constraints. On the risk side, prudent policies will limit exposure to more volatile assets like equities, as well as concentration in any single investment. Diversification across asset classes, sectors, and securities is critical for not-for-profits seeking to minimize risk. By setting clear but reasonable return goals and risk limits, organizations can actively monitor investment performance against policy guidelines.
Define roles and responsibilities in investment management process
To ensure proper oversight and implementation, a not-for-profit’s investment policy should delineate roles and duties in the investment process. The board and relevant committees should have responsibility for approving the policy, setting asset allocation, and selecting investment managers. Investment advisors and consultants can assist with asset allocation, manager search, performance evaluation, and risk management. Front-line staff executing day-to-day investment activities must have clearly defined duties. Segregation of duties and dual authorization on key decisions (e.g. moving assets) helps mitigate operational and fraud risks. Defining responsibilities creates accountability and allows all stakeholders to execute their part in the prudent management of assets.
Establish procedures for regular policy review and performance reporting
An investment policy is a living document that needs to be revisited regularly to ensure it remains aligned with the organization’s current financial position and market conditions. Policies should be reviewed annually at minimum, with allowance for ad hoc revisions if there are material changes in capital needs or risk tolerance. Ongoing monitoring of investment performance vs. benchmarks and risk metrics is also critical. Investment reports distributed regularly to key stakeholders help identify any deviations from policy that require action. By incorporating procedures for policy review and performance reporting, not-for-profits can keep their investment plan current and ensure assets are managed according to guidelines.
A sound investment policy tailored to a not-for-profit’s specific needs and risk profile is the foundation for effectively managing financial assets. Aligning the policy with cash flow requirements, return objectives, and risk constraints ensures an optimal asset allocation and strategy. Defining stakeholder responsibilities creates accountability. And keeping policies current through regular review maintains relevance. For mission-driven organizations, prudent investing supported by thoughtful policies is key to financial sustainability.