Jeffrey W. Steed
Utopia sailing is going downwind with the raw power of the wind giving the vessel full throttle.
However, that is not the typical, consistent situation when sailing. It often takes strategic moves going upwind to make it on the journey.
Endowment management seemingly is never simply a straight, downwind experience at full throttle. Traveling upwind is inevitable.
There are several areas to review periodically and to adjust when needed in order to help manage the winds of change with endowments:
Asset Allocation: When the portfolio seems to be running smoothly, the endowment-management team can get comfortable with the existing allocation of asset classes and managers. Such allocation needs to be reviewed periodically and consistently.
Another consideration with asset allocation is periodically confirming optimal diversification among asset classes as well as optimal diversification of the managers within the various asset classes.
Individual Managers: Not only should the performance and risk measures of individual managers be evaluated periodically and consistently for the sake of any changes that need to be made, but the actual performance and risk measurement tools also need to be evaluated for optimal monitoring of managers.
And when removing or adjusting weighted holdings of a manager, objective standards need to be in place for such changes.
Advisors/consultants: In addition to the individual managers being evaluated periodically, the advisors and consultants to the endowment-management team also need to be evaluated for performance and risk related to the overall endowment portfolio.
Objective standards need to be in place to guide any changes to advisors and consultants. One must also determine whether there is the appropriate number of individuals that advise the endowment team in light of the complexity of the endowment portfolio.
Variance limits: Periodically, variances should be evaluated comparing the actual percentage weighting of the endowment portfolio for individual managers as well as asset classes to targeted percentages.
Based upon objective variance limits, changes may need to be made. Variance limits could be exceeded easily due to the volatility of some asset classes.
New asset classes: The financial industry periodically creates or packages new asset products and classes. The endowment-management team needs one or more consultants that keep them aware of such new developments.
However, evaluating new asset products and classes needs to be done with a very critical and cautious eye due to potentially unknown risks that have not been tested or experienced within the markets.
Insurance protection: Consultants need to keep the endowment-management team apprised of insurance products and strategies that may help protect against the loss of endowment principal.
The evaluation and procurement of principal protection should be done under the close guidance of competent specialists. Such principal protection often comes with costs and limited upside participation, but the endowment team needs to be constantly aware of available methods for principal protection.
Communication with investment committee: Communication with the nonprofit’s investment committee and board may need to increase in more volatile periods. Their insight in such times is valuable to the endowment-management team.
Internal staffing versus outsourcing: Regularly evaluate the various operations of the endowment-management staff.
Consider what is done internally and what is outsourced. Are any changes needed in either direction for the most productive, cost-efficient endowment management?
Even though nonprofit budgets may be tight, proper staffing (internally or outsourced) of the endowment-management team is critical for the most effectively managed endowment and the beneficiary for whom the team serves.
Fees reviewed: It is important to review and trace managers’ fees compared to a universe of managers within a specific asset class.
Such data can be helpful in negotiating or renegotiating fees. However, one must consider the manager’s net performance compared to comparable risk-taking among other managers.
Good managers should be fairly compensated for optimal performance that benefits the endowment.
Periodically retreating with investment peers: A competitive spirit can be an endowment-management team’s downfall if it fails to see the value in sharing thoughts and ideas with peers that have similar investment-management responsibilities.
Periodic meetings with peers can help the group benefit from one another’s wisdom and experience.
Beneficiary objectives: Consider whether the objectives of any beneficiary have changed, such as cash needs. Periodic meetings with the beneficiary should help both parties stay aligned with underlying objectives.
And if more distributions are needed from an endowment, return and risks need to be re-evaluated.
At what point are such short-term needs threatening the long-term viability of the endowment due to additional risks needed for a higher payout? Objectives need to be balanced in order to help meet the short-term needs of a beneficiary as well as the long-term, perpetual nature of the endowment.
The winds of change seem constant in endowment management. Making necessary changes is part of the endowment-management process.
Jeffrey W. Steed is vice president of the Arkansas Baptist Foundation and Christian Ministry Services.