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  • Section dividers. Same drop as all copy blocks. (.62 / 1.4) Format AutoShape menu. Text box tab, internal margins should always be set on 0. This is not the default.
  • John Griswold In 1971 when the Ford Foundation made a grant of $2.8 million to create The Commonfund for Non-Profit Organizations -- $500,000 of that grant was restricted to research and publications designed to improve the overall state of endowment management… That initial grant seeded what is today a core part of Commonfund’s mission…and it is manifested in a broad range of programs – from research of the Commonfund Benchmarks Study to white papers, roundtables and seminars and opportunities for professional development in endowment management and treasury management. Jon and I will spend a few minutes highlighting some of these programs in a bit more detail…
  • Performance Charts Duration Adjusted Excess xx-xx

Transcript

  • 1. From Strategy To Structure: Fresh Perspective On The Board's Financial Leadership John S. Griswold, Jr., Executive Director, Commonfund Institute Friday, October 31 2008 BoardSource Leadership Forum Grand Hyatt Washington 1000 H Street, NW Washington DC 2000
  • 2. Agenda
      • Growth of Nonprofit Sector in the United States
      • Market Update
      • Overview of Nonprofit Financial Responsibilities
        • Financial Plan
        • Budget
        • Roles and Responsibilities
        • Governance / Committee Structure
        • Policies
      • Asset Management
        • Commonfund Benchmarks Study ®
      • Regulatory Environment
        • Fiduciary Standards
        • Sarbanes-Oxley
        • UPMIFA
  • 3. Steady growth of nonprofits and assets in United States
      • Nearly 2 million nonprofit institutions (approximation of nonprofits in the U.S.)
        • Representing an increase of 30% since 1996
      • Americans gave nearly $306 billion in 2007
      • $3.0 Trillion, estimated size of financial assets
        • 5.2% of U.S. GDP
        • 8.3% of U.S. wages and salaries
        • Nearly $1 trillion spending per year
      • 29% of Americans volunteered through a formal organization
    Source: Giving USA Foundation NOTE: Figures are adjusted for inflation.
  • 4. Setting the Context | Market Headlines
      • Busting bubbles and the ripple effect
      • Credit market freeze
      • Volatility returns with a vengeance
      • Consumer wealth has declined by between $10 to $12 trillion
      • Central banks become ATM machines
      • Recession is here: how long will it last?
      • Repricing of risk
  • 5. Global GDP by Region | 1995 vs. 2007 numbers in percent | totals = 100% 18 24 26 8 9 6 Germany 4 5 United Kingdom 5 United States France 4 4 4 Italy 14 13 Other Developed Japan 1995 2007 Developed Developing Economies Source: ISI 22 34 Developing Economies
  • 6. U.S. Dollar Index Weekly Data 8/27/1971 - 10/03/2008 (Log Scale) (I 240) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 79 83 87 92 97 102 107 112 118 124 131 138 145 152 160 79 83 87 92 97 102 107 112 118 124 131 138 145 152 160
  • 7. U.S. Real GDP Source: BEA
  • 8. Inflation January 2003 – August 2008 Source: BLS
  • 9. Liquidity | Money Supply Sources: Federal Reserve Bank
  • 10. Real Interest Rates Source: Bloomberg
  • 11. Employment January 1986 – September 2008* Source: BLS * Nonfarm Payroll Employment – August, September 2008 are preliminary. Black Monday October 19, 1987 S&L Crisis 1990 Mexican Debt Crisis | 1995 Russia/ LTCM 1998 NASDAQ Collapse | 2000 Credit Crisis | 2007 – 2008
  • 12. Housing Price Appreciation …. Depreciation 6.8% Price Decline from October 1989 to April 1991 Source: Standard & Poors, January 1987 – July 2008 21.1% Price Decline from June 2006 to July 2008
  • 13. Anatomy of a Bubble Source: Bloomberg S&L Crisis 1988-1992 747 savings and loan associations failed Dot-com Bubble 1998-2001 Credit Crisis 2007 - ???
  • 14. Volatility August 1998 – October 10, 2008 Source: Bloomberg
  • 15. S&P 500 | Historical Downturns Source: Bloomberg ? ? Years to Recovery 5.8 0.4 1.7 0.3 4.7 ?
  • 16. Historical | Dow Jones Industrial Average Logarithmic Scale Source: Bloomberg
  • 17. Cumulative Inflation-Adjusted Performance 70% S&P 500, 30% Lehman Aggregate and 5% Spend Real Value using CPI as the Deflator Real Value using HEPI as the Deflator Time Period – 42 Years Source: Ibbotson, Bloomberg, Commonfund Institute The equity portion of the hypothetical portfolio is based on monthly returns of the S&P 500 Index (12/65-2/08), and the fixed income portion is based on monthly returns of the Lehman Brothers Aggregate Index (01/73-2/08) and the Ibbotson Associates Long Term Corporate Bond Index (12/65-12/72). HEPI data from 07/06 to 2/08 is estimated using the Commonfund Institute method based on regression analysis. Returns for this hypothetical portfolio assume that it is rebalanced to 70/30 annually on 1/1/yy and 5% is distributed annually on 1/1/yy.
  • 18. Return/Risk 10 Year Period Ending December 31, 2007 Source: Style Advisor; Altvest The following are the indices used by asset class: U.S. Government Bonds, Lehman Aggregate Bond Index; U.S. High Yield Bonds, Merrill Lynch High Yield Master II; International Bonds, Citigroup World Govt’ Bond Index; U.S. Large Cap Equities, S&P 500 Index; U.S. Small Cap Equities, Russell 2000 Index; International Equities, MSCI World Ex-US Index; Private Real Estate, NCREIF; Private Capital, Venture Economics (10 years through 9/30/2007); Emerging Markets Equities, MSCI EMF Index; Distressed Debt, HFRI Distressed Securities Index; Hedge Strategies, HFRI Equity Hedge Index; Commodities, Dow AIG Commodity Index; Public Real Estate, Dow Wilshire REIT Index
  • 19. The Power of Diversification Sources: Bloomberg, HFRI, Venture Economics
  • 20. Strategic Financial Plan
    • 1. Institutional Strategic Plan
      • Goal: Success of Mission
    • 2. Strategic Financial Plan
      • Goal: Financial Equilibrium
    • 3. Strategic Budgeting
      • Goal: Coordination of Competing Needs and Resources
    • 4. Annual Budget
      • Goal: Efficient Execution
  • 21. Financial Plan
      • Based on mission
      • All-encompassing
      • Coordinated with strategic plan
      • Board approved
    QUESTON: How close are we to financial equilibrium?
  • 22. Budget
      • Balance Sheet (Revenues/ Liabilities)
      • Income Statement (Cash flows)
      • Spending (Method/ Rate)
    QUESTON: Are we maintaining intergenerational equity?
  • 23. Roles and Responsibilities
      • Staff
      • Volunteers
      • External resources
    QUESTON: Are the right people on the bus and in the right seats?
  • 24. Nonprofit Investment Management Governance Model Volunteer Roles Board Investment Committee Finance Committee Audit Committee Staff Roles CEO CIO CFO CDO Consultant/Manager Roles External Resources Investment Consultant Auditor/ Custodian Portfolio Manager
  • 25. Nonprofit Investment Management Governance Model
    • Chief Development Officer (CDO)
    • Report to CEO and Finance Committee
    • Develop and oversee major and annual gift strategy
    • Develop and oversee planned gift strategy
    • Supervise development staff
    • Needs a working knowledge of endowment management best practices
    • Chief Investment Officer (CIO)
    • Report to CEO and Finance Committee
    • Prepare and manage annual budget
    • Recommend and manage debt policy
    • Oversee audit of organization, including investment portfolio
    • Optimize cash flow
    • Chief Financial Officer (CFO)
    • Report to CEO and Investment Committee
    • Execute investment policy
    • Maintain asset allocation / policy portfolio
    • Oversee and recommend manager / security selection
    • Oversee performance reporting and attribution
    • Recommend and implement risk management
    • Recommend and conduct portfolio rebalancing
    • Conduct tactical asset allocation within policy portfolio
    • Audit Committee
    • Report to Board
    • Select and hire independent auditor
    • Manage and oversee audit process
    • Review audit findings and management letter with auditors
    • Present financial statements and auditors’ recommendations to Board
    • Oversee business office processes
    • Oversee conflict-of-interest and whistleblower policy
    • Finance Committee
    • Report to Board
    • Develop financial strategy and oversee financial operations
    • Review and monitor financial operations
    • Maintain financial records
    • Present financial information to Board
    • Approve capital budgets and debt issuance
    • Communicate with and educate Board on financial matters
    • Investment Committee
    • Report to Board
    • Develop investment policy
    • Develop and oversee asset allocation / Policy portfolio
    • Develop and oversee spending policy
    • Set risk tolerance and oversee risk management
    • Monitor investment performance (manager / portfolio)
    • Direct hiring / compensation of managers and consultants
    • Auditor/ Custodian
    • Auditor reports to CFO / Audit Committee
    • Custodian reports to CIO / Investment Committee
    • Provide audit / custody services
    • Reporting, fund accounting
    • Transfer agent
    • Compliance
    • Legal counsel
    • Investment Consultant
    • Report to CIO/ Investment Committee
    • Educate / inform Investment Committee
    • Assist with development and review of investment policy statement and policy portfolio
    • Conduct asset allocation studies
    • Implement manager search process
    • Conduct ongoing manager evaluation and reporting
    • Provide Investment Committee with research / analysis
    • Portfolio Manager
    • Report to CIO / Investment Committee
    • Conduct investment strategy as contracted
    • Provide regular written reports and risk-adjusted performance attribution
    • Provide educational materials and economic / market analysis
    Volunteer Roles Board Investment Committee Finance Committee Audit Committee Staff Roles CEO CIO CFO CDO Consultant/Manager Roles External Resources Investment Consultant Auditor/ Custodian Portfolio Manager
  • 26. Financial Governance/ Committee Structure
      • Financial
      • Investment
      • Audit
      • (Governance)
    QUESTON: Do our committees operate effectively and efficiently?
  • 27. Board Committees Note: Data represents responses from 603 not-for-profit organizations Source: The 2007 Grant Thornton LLP, National Board Governance Survey for Not-for-Profit Organizations
  • 28. Policies
      • Investment
        • Asset Allocation (policy portfolio)
        • Spending
        • Roles and Responsibilities
      • Conflict of Interest
      • Debt
      • Gifts
      • Whistleblower
      • Document retention
      • Code of Ethics
    QUESTON: Are we covered?
  • 29. Governance Policy Changes Note: Data represents responses from 603 not-for-profit organizations Source: The 2007 Grant Thornton LLP, National Board Governance Survey for Not-for-Profit Organizations
  • 30. Asset Management
      • Cash
      • Endowment/ Long term funds
        • Benchmarks Study Topline
        • Leaders
      • Plant/ Campus
      • Human Resources
    QUESTON: Are we staying ahead of spending + inflation + costs?
  • 31.
    • Commonfund Benchmarks Study ® Series
    • Endowment Institute
    • Regional Roundtables and Seminars
    • Publications and White Papers
    • Treasury Institute for Higher Education
    • Higher Education Price Index (HEPI)
    • Commonfund Xchange Teleconferences
    Education and Best Practices A Commitment to Professional Development and the Sharing of Best Practices Commonfund Investment Management & Governance Seminars (3 per Year) Commonfund Trustee Roundtable Series (Twice monthly on average) (Also in Canada and Puerto Rico)
  • 32. Total Return by Segment NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations. All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
  • 33. Asset Allocation Trends Overall Foundations Operating Charities Healthcare Educational Endowments NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations. All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
  • 34. Asset Allocation Trends Alternatives – Marketable Alternatives Continue to Dominate Alternative Strategies Foundations Healthcare Operating Charities Educational Endowments NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations. All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
  • 35. Spending Rate By Fiscal Year NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations. All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
  • 36. Staffing of Investment Function By Fiscal Year Investment Committee Members FTEs Overseeing Investments NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations. All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
  • 37. Development
      • Annual Giving
      • Capital Gifts
        • Endowment (Restricted/ Unrestricted)
        • Construction/ Renovation
      • Planned Gifts
    QUESTON: Are we staying ahead of spending + inflation + costs?
  • 38. Debt Management
      • Capital needs plan
      • Debt service
      • Hedging risk of rate volatility
    QUESTON: What is our risk exposure?
  • 39. Legal/ Regulatory
    • 3 Duties
      • Care
      • Loyalty
      • Responsibility
    • IRS Form-990
    • UPMIFA
    • Federal
    • State
    QUESTON: What is our risk exposure?
  • 40.
    • “ The Trustees of an endowment institution are the guardians of the future against the claims of the present. Their task is to preserve equity among generations.”
    • James Tobin – Yale University
  • 41. Duty of Care
      • To act reasonably and in an informed manner when making decisions
      • Follow the “prudent man” rule
      • Attend meetings
      • Show independent judgement
      • Know your organization
      • Rely on trustworthy sources
  • 42. Duty of Loyalty
      • Trustees must give undivided allegiance to the institution when making decisions affecting the organization
      • Personal interests (family or associated business interests) should be subordinate to the interests of the organization
      • Avoid conflicts of interest
        • Develop a written policy
        • Disclose and record all relationships
        • Be aware that perception can equal reality
      • Review ambiguous situations at Board level
  • 43. Duty of Responsibility
      • Ensure that the organization remains faithful to its central purpose as expressed in its mission statement and by-laws
      • Make certain that all those in authority are acting in concert and in the best interest of the organization
  • 44. Summary
      • Take an all encompassing approach to developing a financial plan
      • Review your governance structure
      • Recruit the best talent available
      • Develop written policies and review regularly
      • Control costs
      • Diversify your revenue streams
      • Diversify your portfolio
      • Keep an eye on regulatory environment
  • 45. APPENDIX
  • 46. UPMIFA Highlights
      • Investment freedom. Portfolio managers are not limited in the kinds of assets that may be sought for the portfolio. (Broader than UMIFA)
      • Costs. Costs must be managed prudently in relationship to the assets, the purposes of the institution and the skills available to the institution. (Not addressed in UMIFA)
      • Expenditure of funds. Total return expenditure is expressly authorized under comprehensive prudent standards relating to the whole economics situation of the charitable institution. (UMIFA does not address this standard)
      • UPMIFA abolishes the historic dollar value limitation on expenditure in UMIFA.
      • Seven percent rule. States may adopt an optional rule that presumes expenditure exceeding 7% of total return is imprudent. (Not addressed in UMIFA)
      • Release of restrictions for small institutional funds. These is a new procedure for releasing restrictions on small institutional funds (less than $25,000) held for a long period of time (20 years), requiring only notice to the Attorney General 60 days in advance of the release. (Not addressed in UMIFA)
      • Application. UPMIFA applies to funds held in any form, including nonprofit corporate form, except charitable trusts, with a commercial or individual trustee. (UMIFA applies only to endowments held by a charitable institution for its own account)
  • 47. Bibliography (page 1 of 3)
    • The Nonprofit Policy Sampler, Second Edition, © 2006 BoardSource
    • Margin of Excellence – The New Work of Higher Education Foundations, Edited by Rick D. Legon,  AGB 2005
    • Stragegicfinance, Planning and Budgeting for Boards, Chief Executives, and Finance Officers, by Kent John Chabotar  AGB 2006
    • 2005 NACUBO Endowment Survey. NACUBO, 2005.
    • An Unconventional Approach to Institutional Investing, David F. Swensen. The Free Press, 2000.
    • Asset Allocation: A Handbook of Portfolio Policies, Strategies, and Tactics. Robert Arnott and Frank J. Fabozzi, eds., Probus Publishing Co., 1988.
    • The Asset Allocation Debate: All About Alpha. Commonfund Institute, Monograph Series, 2005.
    • The Challenges of Investing for Endowment Funds. Cathryn E. Kittell, ed., Institute of Chartered Financial Analysts, 1987.
    • Classics: An Investor’s Anthology. Charles D. Ellis and James R. Vertin, eds., Dow-Jones Irwin, 1989.
    • Commonfund Benchmarks Study  Commonfund Institute, Education Report, Foundations Report, Healthcare Report, Revised Annually.
    • The Complete Guide to Securities Transactions. Wayne H. Wagner, ed., John Wiley & Sons, 1989.
    • Creating and Using Investment Policies: A Guide for Nonprofit Boards. Robert P. Fry, Jr., Association of Governing Boards of Universities and Colleges, 1997.
    • Debt Is Not the Issue. Commonfund Institute Whitepaper, 2005.
    • Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. James K. Glassman and Kevin A. Hassett, Times Books, 1999.
    • Endowment Management. William T. Spitz, Association of Governing Boards of Universities and Colleges, Board Basics Series, 1997.
    • Endowment Management, A Practical Guide. Jay A. Yoder, Association of Governing Boards of Universities and Colleges, 2004.
    • Endowment: Perspectives, Policies, & Management. William F. Massy, Association of Governing Boards of Universities and Colleges, 1990.
    • Endowment-Spending Policies. Stephen T. Golding and Lucy S. G. Momjian, Morgan Stanley Investment Management, 1998.
    • The Financial Analyst’s Handbook. Sumner N. Levine, ed., 2nd ed., Dow-Jones Irwin, 1988.
    • Financial Responsibilities of Governing Boards . William S. Reed, Association of Governing Boards of Universities and Colleges, 2001.
  • 48. Bibliography (page 2 of 3)
    • Fixed Income Portfolio Strategies. Frank J. Fabozzi, Probus Publishing Co., 1988.
    • Foundation Trusteeship, Service in the Public Interest . John Nasson, Council on Foundations, 1989.
    • Funds for the Future: College Endowment Management for the 1990s. J. Peter Williamson, The Common Fund in cooperation with Association of Governing Boards of Universities and Colleges, and National Association of College and University Business Officers, 1993.
    • Governance. Your Board: Dynamic or Dysfunctional? Commonfund Institute, Monograph Series, 2005. Guidebook for Directors of Nonprofit Corporations. George W. Overton and Jeannie Carmedelle Frey, eds., American Bar Association, 2002.
    • The Handbook on Private Foundations. David F. Freeman, Council on Foundations, 1991.
    • Hedge Fund and Absolute Return Strategies. Commonfund Institute, Monograph Series, 2005.
    • How Efficient is Your Frontier? Commonfund Institute Whitepaper, 2003.
    • How to Write an Investment Policy Statement. Jack Gardner, Marketplace Books, 2003.
    • Improving the Investment Decision Process: Quantitative Assistance for the Practitioner and for the Firm. H. Russell Fogler and Darwin M. Bayston, Institute of Chartered Financial Analysts, 1984.
    • Inflation: Avoid that Sinking Feeling. Commonfund Institute, Monograph Series, 2005.
    • Investing with the Best. Claude N. Rosenberg, John Wiley & Sons, 1986.
    • The Investment Committee. John H. Biggs, Association of Governing Boards of Universities and Colleges, Board Basics Series, 1997.
    • Investments. William F. Sharpe and Gordon J. Alexander, 4th ed., Prentice-Hall, 1989.
    • Investments. Zvi Bodie, Alex Kane and Alan J. Marcus, 4th ed., Richard D. Irwin, Inc., 1999.
    • Irrational Exuberance. Robert J. Shiller, Princeton University Press, 2000.
    • The Law and the Lore of Endowment Funds. William L. Cary and Craig B. Bright, The Ford Foundation, 1969.
    • The Management of Investment Decisions. Donald B. Trone, William Allright, Philip Taylor, Irwin Books, 1996.
    • Managing Your Investment Manager. 2nd ed., Arthur Williams, III, Dow-Jones Irwin, 1986.
    • Nonprofit Investment Policies. Robert P. Fry, John Wiley & Sons, 1998.
    • Performance Expectations and Reality: Smaller vs. Larger Endowments. Commonfund Institute, Monograph Series, 2005.
    • Performance Presentation Standards. Financial Analysts Federation, adopted as amended by the Committee for Performance Presentation Standards, April 1990.
    • Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. David F. Swensen, Free Press, 2000.
  • 49. Bibliography (page 3 of 3)
    • Principles of Real Estate Investment. Commonfund, 2000.
    • Risk Bucketing – Keeping an Eye on What Is Important. Commonfund Institute Whitepaper, 2005.
    • The Role of Hedge Funds in Nonprofit Investment Management. Commonfund, Revised 2005.
    • Spending Policy for Educational Endowments. Richard M. Ennis and J. Peter Williamson, The Common Fund, 1976.
    • The Standards of Measurement and Use for Investment Performance Data. Investment Counsel Association of America, 1988.
    • Succeed in Private Capital Investing. Commonfund, Revised 2003.
    • Understanding the Four Levers of Fiduciary Responsibility. Commonfund Institute Whitepaper, 2005.
    • Why Do We Feel So Poor? Commonfund Institute Whitepaper, Reprinted 2004.
    • Winning the Loser’s Game: Timeless Strategies for Successful Investing. Charles D. Ellis, McGraw-Hill, 4th Edition 2002.
    • The Yale Endowment. Yale University Press, 1995. The Yale Endowment, Updates 1996-2004 . Yale University Press, 1996-1999.
  • 50. Bibliography Web sites
    • www.agb.org
    • www.commonfund.org
    • www.nacubo.org