Fiduciary Training Needed by Nonprofit Clients

Findings in a new CAPTRUST survey report suggest there may be opportunities for advisers to support board-level investment and fiduciary training at endowments and foundations.

Late in 2018, CAPTRUST conducted and published its first annual Endowment and Foundation Survey. Leading the research effort were Grant Verhaeghe, senior director and asset-liability practice leader, and Eric Bailey, principal and financial advisor.

The analysis considers some 150 responses to a detailed survey, according to CAPTRUST. More than 70% of survey respondents report investable assets below $50 million, while 63% of respondents identified their organizational mission as charitable. The most prevalent philanthropic missions of the charitable-focused organizations tie into health and social issues. Nearly half (46%) of survey respondents represented public nonprofits, with the majority of those representing organizations supported through public donations.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Survey results show a significant amount of diversity in the ways endowments and foundations conduct their long-term investing and shorter-term fiscal management, with some areas of broad consensus. For their investment portfolios, more than 72% of organizations report return expectations in the 5% to 8% range, and more than 10% of respondents expressed return expectations of greater than 8%. When asked how they define investment objectives, more than 75% of respondents selected “benchmark relative” as their choice. “Absolute return” was the least prevalent answer, the survey shows.

Notably, survey data shows 44% of respondents said they were only willing to lose up to 5% of their portfolio values, and 56% were willing to lose 5% or greater to accomplish their return objective.

“There was a clear disconnect between respondents’ willingness to experience short-term losses and their stated return objectives,” Verhaeghe and Bailey warn. “Additionally, most respondents, based on their reported asset allocation, would have historically experienced losses far greater than the expressed willingness to experience loss.”

Another sign of a disconnected cited by CAPTRUST’s survey report is that the asset allocations reported by respondents varied widely and were not necessarily tied to stated return and risk objectives.

“In fact, the most conservative responses with respect to willingness to experience loss had more aggressive asset allocations compared to those with more moderate risk tolerance,” the report states.

According to the CAPTRUST survey, domestic equity was the most frequently cited asset class where respondents identified a passive indexed allocation, with more than 74% of respondents who answered the question indexing the asset class. Over 56% of respondents who answered the question have at least some allocation to a passive investment strategy for fixed income, the survey shows.

“The distribution of the allocation between active and passive for organizations that answered the question suggests that endowments and foundations have a bias toward active management,” the report concludes. “However, there were instances where organizations maintained a 100% indexed investment structure, and there was a slight lean towards increasing index exposure for those who indicated a likely action to change their current approach.”

Asked for their thoughts about using environmental, social and governance (ESG) investing themes, more than 34% of respondents who answered the question indicated they were undecided about whether to decrease, maintain or increase such allocations. Nearly half (49%) of organizations indicated that they have not seriously considered allocating to ESG when asked for the biggest obstacle they see to such investing. More than half (56%) of respondents indicated that ESG factors were built on positive identification as opposed to negative screening.

According to CAPTRUST, most respondents have formal documented investment policies, spending policies, conflict-of-interest policies, and documented responsibilities for committees/boards.

“However, 12% of respondents do not maintain a formal spending policy, and 55% of respondents maintain their spending policies separate from their investment policies,” the survey report says. “Only 46% of respondents indicated an overlap between the committees responsible for overseeing spending and investments. These trends suggest there is room for improved communication on spending policy relative to investment results. There appear to be opportunities for board-level investment and fiduciary training as well as new board member orientation.”

Other results show 80% of respondents utilize mutual funds, while less than half of respondents utilize separately managed accounts or individual securities. Use of collective trusts or limited partnerships were below 30% of responses.

“Organizations with less than $25 million were just a likely as those with more than $100 million to utilize mutual funds, dispelling the notion that mutual funds are oriented towards smaller, retail investors,” the report concludes.

When asked in an open-ended manner what their most pressing single challenge is, only “a few” organizations cited portfolio growth and investment returns relative to spending needs.

The full survey report is available for download here.