Investment Policy Setting for Nonprofits SCANPO KNOWLEDGE NETWORK WEBINAR APRIL 20, 2016 PRESENTED BY MARIO NARDONE, CFA, PRESIDENT – EAST BAY FINANCIAL SERVICES 1

Fiduciary Duty (recap) A non-profit board has three main legal responsibilities: Duty of Care Duty of Loyalty Duty of Obedience And are legally obligated to all stakeholders to act solely in the best interest of the organization This extends to finance and investment decisions and decision-makers such as finance / investment committee 2

The Importance of Policy 3

What is “Investment Policy?” Minimum Requirements of an Enduring Investment Policy Statement Why does the Fund exist? How does the committee define success? What is the risk tolerance of the trustees for the Fund? How do we evaluate performance? 4

Elements of the IPS Objective Capital Preservation Liability-driven (i.e. provide $XX,000 or X% income each year) Real return + Growth Maximize Return 5

Elements of the IPS Spending Policy Will the fund make ongoing, regular distributions to the organization (or other entities) Will it fund specific programs Establish safe withdrawal rates or maximum withdrawals 6

Elements of the IPS Asset Allocation Policy The #1 determinant of the variability in portfolio returns* is the mix of stocks, bonds, and other assets, making it the single most important decision you will make *Established initially in 1986 in the research Determinants of Portfolio Performance (Brinson, Hood, and Beebower) 7

Elements of the IPS Diversification Policy Among sub-asset Classes (domestic versus international) Within sub-asset classes (by country, industry, and issuer) How to achieve (mutual funds or ETFs versus individual stocks) 8

Elements of the IPS Exclusions and Restrictions Margin trading or leverage Securities lending Derivatives 9

Elements of the IPS Monitoring Guidelines Frequency Benchmarks Quality of services of investment manager / advisor / consultant 10

Professional Fiduciary An organization can significantly reduce exposure and workload with an outside advisor, or “co-fiduciary” Registered Investment Advisors are held to a Fiduciary Standard by the Securities & Exchange Commission and states’ securities offices Many other kinds of “advisors” are available but may simply adhere to a “suitability” standard Not all advisors have valid experience in the non-profit sector or understand its unique needs 11

Typical Services of the Advisor Investment Policy Statement Construction & Maintenance Assistance in formation of Investment Committee if desired Discretionary asset management (through qualified custodian) Regular account review / rebalancing 12

Typical Services of the Advisor (continued) Regular (typically monthly) reporting In-person meeting attendance Assistance with documentation Side benefits (may) include Promotional support of events and activities (community champion or advocate) Enhanced confidence of donors that you take your fiduciary responsibility seriously! 13

Next Topic – Setting Asset Allocation Policy Establishing “risk tolerance” of an organization Setting spending limits based on “safe withdrawal rates” Historical performance of various types of portfolios Best practices among US-based non-profits Diversification strategies Other suggestions? 14

Questions? Mario Nardone, CFA President, East Bay Financial Services 15