By Heather Holden PhD, Wealth Advisor The Afro News Vancouver
If you’re a member of a non-profit or charity board with an investment portfolio, you’ve likely had at least one meeting recently full of consternation regarding the state of your organization’s assets. And if you’re like the non-profits and charities I work with, the themes of those conversations were similar. Here is a brief summary of lessons learned.
1. Develop a benchmark measure of acceptable risk
Board members are paying more attention to articulating their organization’s tolerance for risk and including this measure in their Investment Policy Statements. Benchmarks to evaluate performance with respect to risk are being added to the typical return evaluation benchmarks.
Whether defined as volatility or uncertainty, the debate and discussion regarding risk tolerance have raised the profile of this important component of a non-profit’s investment policy.
Board members are also demanding full transparency and are asking questions about how returns will be generated and the risks associated with their portfolio. People are thinking about risks more broadly and asking questions about the risks of passive vs. active investing, individual securities vs. managed products, and inflation.
2. Be explicit about liquidity needs
Boards members are including explicit statements in their investment policies regarding the speed at which they need to be able to convert their investments to cash.
Organizations with funds in alternative investments with low liquidity may have enjoyed higher returns over the long run, but the focus has returned to the need for liquidity.
Because many organizations rely on their investment portfolios to supplement or even fully fund their annual operating budget, the market crash combined with a lack of liquidity compromised or stifled their ability to meet their objectives.
3. Healthy reflection
Smaller charities and non-profits often find themselves at a disadvantage with respect to staff and board member skill sets and time to devote to investment management. Many are being more realistic about their resources and are taking the time to weigh perceived investment opportunities against their risks with more focus on minimizing mistakes.
As fiduciaries are being even more vigilant about due diligence, they are especially focused on their ability and willingness to take on risk and reassessing what they can do as volunteer board members. This healthy self-appraisal has lead to many productive conversations and modifications to many organization’s processes and policies.
4. Rethinking the definition of success
It would seem that many organizations are moving towards definitions of success that are more broadly measured. Conversations and strategic planning session debates are focused on evaluating progress as a function of meeting well-defined goals.
Board members seem to be much less concerned about beating benchmarks or the results of their peers because they recognize that their constraints and needs are unique.
5. Back to Basics
The sheen of complex portfolios perceived as more sophisticated has dulled. Conversations are focused on the benefits and elegance of simple portfolios and long term investing. The long track records of traditional asset classes have the advantage of more reliable historical risk and return records.
The more complicated investment innovations do not always allow fiduciaries to fully gauge risk-return ratios and appropriate asset-allocation decisions. As a result, many boards found that their portfolios were not as well diversified as they thought.
I would be delighted to speak with you, attend a meeting of your investment committee, or even hold a workshop for your board if you feel like your organization could use a healthy second look at your investment policies and procedures, so feel free to ask!
Heather Holden, PhD, Wealth Advisor
ScotiaMcLeod, 650 West Georgia St. Suite 1100
(604) 661-1523 Heather_holden@scotiamcleod.com