Not-For-Profit Fiduciaries' Guide AU Not-For-Profit Fiduciaries' Guide

The

This is a guide to help not-for-profit organisations effectively oversee their investment programs and achieve their mission-driven goals with the help of an Outsourced Chief Investment Officer (OCIO) provider.

NoT-FOR-profit

Investment guide

Being entrusted to oversee and prudently manage your organisation’s investment program is an incredibly important, yet very tough, job. Especially in today’s complex and fast-moving market environment. Effectively executing all the steps required to manage your investment portfolio is critical to your success.

How to be an effective fiduciary?

It starts with trust.

Oversight of your investment program is just one of many of your responsibilities. Understanding where to direct your limited time and resources is key to effective management. Because of this, many fiduciaries have sought the expertise of an outsourced chief investment officer (OCIO) provider to help them prioritise and focus.

How can you be the most effective?

Delegate.

Become an effective fiduciary.

-step.

-by

Step

Section two

Design your investment program

Section one

Set up your governance structure

Section three

Build and oversee your dynamic, outcome-oriented portfolio

Worksheet library

CLOSING THOUGHTS

SECTION THREE - Build and oversee your outcome-oriented portfolio

SECTION TWO - Design your investment program

SECTION ONE - Set up your governance structure

INTRODUCTION - How to be an effective fiduciary

The Non-Profit Fiduciaries' Guide

Nothing contained in this material intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. Russell Investments is committed to ensuring digital accessibility for people with disabilities. We are continually improving the user experience for everyone, and applying the relevant accessibility standards. Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners, Russell Investments’ management and Hamilton Lane Incorporated. Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand. Copyright © 2015-2021. Russell Investments Group, LLC. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty. Date of first use: May 2021 AI-28759-05-24

Important information

The NoT-For-Profit Fiduciaries' Guide

For the best user experience, please view the Not-For-Profit Fiduciaries' Guide on a tablet or desktop.

Tip: Copy the link to the guide and email it to yourself.

The NoT-FOR-Profit INVESTMENT Guide

SECTION ONE - Set up your governance structure

SECTION TWO - Design your investment program

SECTION THREE - Build and oversee your outcome-oriented portfolio

CLOSING THOUGHTS

Now it's your turn.

INTRODUCTION - How to be an effective fiduciary

What decisions should you make? What should you delegate?

Answers to these questions can be found in what we call a ‘fiduciary ladder’. It’s designed to help you visualise the decisions that your investment committee, board, and staff will make versus those that you outsource to your OCIO.

build your ladder

1. What is a fiduciary ladder?

2. What are common challenges investment committee members face when designing their governance structure?

Spend a few minutes completing your own governance structure.

Worksheet: Being an effective fiduciary

Section 2: Design your investment program

Introduction: How to be an effective fiduciary

As a fiduciary, you should always retain control of governance and objective setting. You should also have the final say on the strategic asset allocation for your investment portfolio. After that, you and your team need to determine what decisions to keep, and which to delegate to an OCIO provider. Handing off responsibilities to your OCIO provider frees up your board, investment committee, and staff to focus on big picture governance issues, rather than the time-consuming, day-to-day management of your investment program.

Governance

Objective setting

Strategic asset allocation

Asset class strategy

Portfolio structure

Manager selection / monitoring

Execution

Portfolio risk management

Performance measurement & evaluation

It should look something like this.

strategic decisions

portfolio management

Decisions typically delegated to your OCIO provider

Investment committee, board, and staff own these decision while your OCIO provides guidance

review & control

It’s time to consider how you will structure your internal discussions and ensure that investment governance receives due consideration at the board level. Here are a few tips to keep in mind:

Decision-making and oversight should be separated, and you should clearly identify who is responsible for making what decision.

Decision-making authority should be delegated to the person or entity deemed most competent to make those decisions, and who has the time and resources to make those decisions effectively and quickly.

Watch for areas of disconnect where you either don’t have a clear decision-maker identified, or there are two entities responsible for making the same decision. These are areas you should address with your board, investment committee, staff, and OCIO provider.

Worksheet library

The Non-Profit Fiduciaries' Guide

Here is an example of how fiduciaries delegate important responsibilities to effectively oversee their investment programme, and how those decisions are typically allocated when working with an OCIO provider.

Decision-making responsibilities are shared, like this

3. How are decisions typically allocated when working with an OCIO provider?

structure

governance

set up your

section one

Worksheet: Being an effective fiduciary

Important information

The NoT-For-Profit Fiduciaries' Guide

For the best user experience, please view the Not-For-Profit Fiduciaries' Guide on a tablet or desktop.

Tip: Copy the link to the guide and email it to yourself.

The NoT-FOR-Profit INVESTMENT Guide

Download handbook

CLOSING THOUGHTS

SECTION THREE - Build and oversee your outcome-oriented portfolio

SECTION TWO - Design your investment program

SECTION ONE - Set up your governance structure

INTRODUCTION - How to be an effective fiduciary

Build your strategic asset allocation

Know your organisation’s investment beliefs

Start with your investment considerations

Before you begin setting up the parameters for your investment program, it’s important that all of your fiduciaries are aligned on your organisation’s mission and goals. A mission statement is critically important; it spells out your organisation’s reason for being. You need to articulate your mission and goals, and formally review these at regular intervals.

start with your investment considerations

Are you clear on the goals you're trying to achieve?

Download handbook

What else should you consider?

Dive into the four fundamentals of not-for-profit investment management

4. Current market environment

2. Risk

3. Inflation

While you may rely on your OCIO provider for their capital markets insights, as a fiduciary, you’ll want to understand what’s behind their views, and keep yourself informed on the latest economic and market developments. Doing so will allow you to make good long-term decisions for your investment program, ask focused questions during your investment committee meetings, and understand the impact the current market environment will have on your ability to meet your organisation’s goals.

Global Market Outlook

Market Week In Review

Investment beliefs drive all aspects of your investment program—from high-level governance functions, to the actual investment decisions being made, to the reporting and metrics used to evaluate success. That's why it's important to determine your beliefs BEFORE you start your strategic asset allocation process.

Your investment beliefs

4. What's the best way to ensure your investment program is "responsible?"

KNow YOUR ORGANIsATION's INVESTMENT BELIEFS

Identifying your investments beliefs is just the first step toward building your strategic asset allocation. You also need to:

Build your strategic asset allocation

Consider four key decision levers

When designing your strategic asset allocation (SAA), you will also need to make some decisions regarding four primary, organisation-specific inputs or levers.

1. Your spending policy

2. Your liquidity needs

3. Your risk tolerance

4. Your time horizon

Before you can determine which spending policy is right for you, you need to understand your specific circumstances. Discuss with your OCIO provider to ensure that the spending policy you put in place—and the asset allocation strategy you pursue—are aligned with your organisation’s specific circumstances and spending needs.

Read more about non-profit spending policy options

Ultimately, your investment approach should be designed to deliver the returns you need within a level of short-term risk you can survive. One of the benefits to come out of the 2008 global financial crisis is that many not-for-profit boards and investment committees are now better able to articulate how much loss they can tolerate. After discussing the following four points with your investment committee, take time to clearly document your risk tolerance in your Investment Policy Statement, as this will drive your strategic asset allocation.

Take the risk tolerance quiz

Turn your attention to capital market forecasts

Another piece of information that is vital to building your strategic asset allocation are capital market forecasts. It’s highly likely that you’ll be using your OCIO provider’s capital market forecasts. And you should have a solid understanding of how those are generated.

Here are some questions you should ask your OCIO provider about forecasts:

Are the forecasts based on short-, medium-, or long-term views?

Are they historical or forward looking?

What is your current view on market volatility and how do you anticipate managing that within our portfolio?

What is the forecast for inflation, and what impact might that have on the assets you are recommending for our portfolio?

What is the forecast for interest rates and how will you plan to take that into account in your recommended portfolio?

One important thing to remember about capital markets expectations is that they are just that—expectations. As a fiduciary, you need to feel confident that your OCIO provider’s expectations are reasonably derived, sound in methodology, and reflective of forward-looking expectations. Sound capital markets expectations will help ensure that you are able to make well-reasoned decisions regarding your SAA going forward.

Make decisions based on asset roles instead of asset classes

It is useful to consider investments based on the roles they are expected to play within your portfolio. Some assets play more than one role, so it is also helpful to consider an investment's role from your total portfolio perspective. There are generally two strategic roles for asset classes: 1. Growth (return enhancement): Includes equity-oriented and higher risk, higher return assets and is the growth engine of the portfolio; expect equity-like return and risk characteristics. 2. Defensive (risk reduction): Includes strategies that provide diversification to the growth allocations. Generally, expect lower returns with less risk. These are assets like cash and bonds.

Spending policy is key to determining the pattern of distributions from your investment program. Your spending policy has two components: 1. Spending rate 2. Spending methodology

Non-profit investors’ high use of moving average assets is not necessarily an endorsement for this methodology. Many non-profits have selected this only because their peers use it—not because they have done extensive analysis into whether it is the best methodology for them.

Explore your options

Understand your circumstances

C. Examine your liquidity program

D. Give it a stress test

Determine your risk tolerance

Whether or not your organisation wants to exist in perpetuity affects how you manage your investment program. Your board, investment committee, and staff should all be aligned around one of the following guiding principles:

Determine your organisation's time horizon

We wish to exist for as long as possible.

If this is the case, then maintaining or building on the assets already in your investment program will be critical. That way, you can help ensure you will have the same, or greater, purchasing power in the future.

We wish to prioritise spending today, and worry about how long we want to exist later.

This approach is fine for addressing short-term community needs, but it’s not sustainable over the long-term. In fact, organisations that stay in this situation for a long period of time are, in essence, choosing to spend down—because eventually your investment portfolio will erode so that your impact tomorrow is less than your impact today. If that’s not your intent, we recommend that you re-evaluate your priorities annually to ensure that your investment program remains aligned with your organisation’s time horizon.

We wish to make a point of spending down our assets over time.

For organisations that choose this path, maximising your short-term returns so you can spend more today is key. It’s also important to specify how long your spend down horizon is—for example, spending 7% over the next 25 years is easier to plan for than spending as much as you can for as long as possible. The decision you make regarding your organisation’s approach to perpetuity will have an impact on how you approach the other levers, as well as your SAA. It will affect: - How much you want to spend, and over what time frame - The amount of liquidity you'll need to meet those spending goals - The types of risks you can take in your investment portfolio - The investment time horizon you choose when setting your strategic asset allocation Keep in mind that, as with the other levers, your desire for perpetuity isn’t a static decision. It can be adjusted based on your organisation’s evolving situation and goals. It’s important to understand that you can lengthen, or shorten, your time horizon as dictated by your needs. And those changes may impact the decisions you make about the other levers, so you should revisit those as well.

We just identified the different components that help you create your strategic asset allocation. We also laid out a roles-based approach to asset allocation that helps you see how each strategy may contribute to your total portfolio outcomes. How does this all come together? Watch the video to see how.

Put the pieces together

The IPS is your guiding document for your organisation’s investment program. It captures your beliefs and expectations and provides long-term, strategic guidance on how to align your not-for-profit’s mission, objectives, and policies. It also outlines the decision-making responsibilities of the various players involved in managing your investment program.

Document your decisions and beliefs in your investment policy statement (IPS)

What should your IPS include?

Improving your ability to meet your mission

Achieving X returns over time

Spending down over X years

Spending CPI + X% per year

Your IPS should clearly capture the broader outcomes you are striving for. Some examples include:

Worksheet: IPS checklist

Section 3: Build & oversee your dynamic outcome-oriented portfolio

Section 1: Create your fiduciary ladder

5. Document your decisions and beliefs in your investment policy statement

4. Put the pieces together

3. Make decisions based on asset roles instead of asset classes

2. Turn your attention to capital market forecasts

1. Consider four key decision levers

c. Asset allocation

b. Your investment beliefs

a. Investment considerations

Worksheet library

The Non-Profit Fiduciaries' Guide

Download handbook

Global Market Outlook

Market Week In Review

Take the risk tolerance quiz

Worksheet: IPS checklist

1. Reward

Here are a couple of resources to help keep you informed:

That level of return is what's called the Target Return, which is Spending plus Inflation plus Expenses.

What's the minimum return you need to maintain your status quo?

Target return

INFLATION

SPENDING

expenses

(e.g., investment management and operating)

Investment beliefs can be grouped by area. For example, the belief that equities should outperform bonds is a beta belief, while the belief that active managers will outperform passive management over the long term is an alpha belief. Some beliefs, like responsible investing, may require deeper review and consideration.

1. What are investment beliefs?

You need to understand what your organisation believes in—so when uncertainty arises, you can make effective investing decisions that align with your beliefs.

2. Why do you need them?

All beliefs require discussion, periodic review, and documentation in your investment policy statement (IPS). It's your job as a fiduciary to identify and document your beliefs, and it's your OCIO provider's job to build an investment solution that balances your convictions with your need for investment returns.

3. How do you ensure your investment program is aligned with your beliefs?

C. Measure success

B. Share the list with your provider and ask the right questions

A. Get your responsible investing concerns down on paper

Here are three simple steps to get started:

Begin with a list of your ESG risk concerns. Here are some examples:

Consider four key decision levers Turn your attention to capital market forecasts Make decisions based on asset roles instead of asset classes Put all the pieces together Document your decisions and beliefs in your investment policy statement

#1 #2 #3 #4 #5

This is also where you should spell out your organisation’s specific ESG investing requirements. Overall, your IPS serves as a roadmap for investment decision-making, which will help you navigate stressed market environments—and it may prove especially useful during the next black swan event. As a fiduciary, you not only need to align your team on major investment decisions, but also to document those decisions in your IPS—before a significant shift in the markets happens. This will help you maintain focus on the outcomes that will position you for investing success.

To determine this, you need to:

What risk premium or premia should you exploit?

A. Decide on the target return you wish to achieve (e.g. 4% inflation + spending + expenses). B. Evaluate how much risk you may need to take in order to achieve that target return, and if that is in line with your risk tolerance. C. Only take risks for which you believe you will be compensated.

When calculating your target return, it’s important that you choose a measure of inflation that best reflects your not-for-profit’s sector. This is because not all sectors experience the same rate of inflation. For example, those in the education sector typically face an inflation rate that is materially higher than inflation rates in other parts of the economy.

What measure of inflation do you use?

Maintaining your purchasing power is critical to ensuring that you're able to maintain consistent support for your community now and into the future.

Understand what risks you're taking and the impact on your ability to meet your spending goals if those risks don't pay off.

The returns needed to accommodate your spending goals over your specified time horizon.

Environmental

Air & water pollution

Waste management

Energy use

Carbon emissions

Community relations

Diversity

Health & safety

Living wage disputes

Social

Shareholder voting

Donations & political lobbying

Anti-corruption policies

Executive compensation

Governance

Your provider should have strategies to help you capture specific ESG outcomes, remove unwanted exposures, and manage ESG risks in your portfolio. These might include:

Here are examples of questions you might ask:

Integration of ESG considerations in manager research and selection processes

ESG-integration strategies

Focused strategies such as decarbonisation and social capital

Specific strategies

Allocations to higher material ESG scores or impact investing strategies

Positive investment

Removal of companies involved in the manufacture and/or production of weapons, tobacco, cluster ammunitions, gambling, and fossil fuels

Negative screening

- How do you efficiently and proactively manage exposures in order to express your ESG beliefs and ensure adequate return? - Are companies and investment managers in your global equities and real assets strategies poised to contribute to and/or benefit from the global transition to a low-carbon economy? - Which companies and investment managers have higher material ESG scores? Do they comprise the majority of your portfolio? - What is your portfolio’s carbon footprint / exposure to fossil fuel reserves? - How extensive are the diversity and inclusion efforts of the investment managers your provider uses? Are there any minority- or women-owned managers in your portfolio? - Is your provider a signatory to the United Nations-supported Principles for Responsible Investment (PRI)? If so, how do their scores compare to those of their peers? - Does your provider have a well-developed proxy voting and shareholder engagement program?

It's important to ask your provider the right questions to help you better understand their responsible investment approach—and to be able to tell the difference between greenwashing and actual ESG integration.

2020 PRI scoring assessment

Our responsible investing research and practices

Materiality matters!

As more and more investors look to incorporate ESG factors across their portfolios, understanding the connection between sustainability and investment performance is an increasingly important challenge.

Not all ESG factors are equally important. In fact, certain ESG factors are more financially “material” or relevant to a company’s business than others. For example, fuel efficiency has a bigger impact on the bottom line of an airline than it does on an investment bank, while data security and customer privacy are of greater interest to a cloud computing company than to an automobile manufacturer. From our own research, we have observed that traditional aggregated ESG scores tend to incorporate ESG issues that are not related to financial performance. Instead, we have found that material ESG scores are better predictors of return and have a larger impact on performance than traditional ESG scores do. To capitalise on the power of materiality, you should ensure that your provider has the appropriate tools and methodologies to differentiate companies that score high on ESG issues that are financially material to their business from those that score high on issues that are financially immaterial. Ultimately, a more nuanced ESG score can serve as a more reliable signal for investment decision-making than the traditional aggregated score.

More about materiality

What is your capacity to tolerate loss and volatility?

This hinges on, among other things, the flexibility of your spending program. Access to new assets (e.g., those flowing from fundraising activity) can also affect the capacity of an organisation to tolerate risk.

What is your willingness to tolerate loss and volatility?

Meaning, if you take this risk will you be able to sleep at night? Will you be able to stay the course?

What is your perception of risk?

Perception is a subjective judgment of risk, and it's unique to every investment committee and organisation. The important takeaway here is to ensure that there is an "agreed upon" perception of risk across your organisation. Meaning, does your investment committee believe index-like equities are riskier than hedge funds? Or not? You need to clearly understand how your organisation perceives risk.

What is your time horizon on risk?

You should consider how much risk you can tolerate in the short-term while remaining on track to meet your long-term objectives—for example, you may need to take on additional risk to achieve your long-term return targets. However, can your organisation survive a decrease in portfolio value that might occur in any one year given an extreme negative market environment? You should consider the impact this risk might have on your spending program in a down market.

B. Design a holistic liquidity program

Even if your organisation has a steady hand on its spending policy, if it's not paired with sound liquidity management, the results can be disastrous. Let's start by defining what we mean by liquidity in the context of your investment program. Liquidity allows you to: • Meet your spending requirements • Deploy your capital opportunistically to take advantage of evolving market conditions • Rebalance your portfolio as needed or wanted • Meet pre-existing private capital commitments During the financial crisis, illiquidity became an issue for many not-for-profits. Aside from the known illiquid investments some had in their portfolios, other presumed liquid investments became illiquid during the crisis, which led to a severe liquidity squeeze. As a result, some institutions were unable to fund their missions.

In simple terms, having a holistic liquidity program means aligning the liquidity profile of your investment portfolio with your time horizon and cash-flow demands. By working with your OCIO provider to create a liquidity program, you should be able to meet your spending obligations as they come due, without incurring unacceptable losses. Here are some key steps for establishing a holistic liquidity program: • Establish your cash flow expectations: Identify the sources, timing, and flexibility of your cash inflow and outflow. • Use a variety of approaches to achieve your required liquidity profile: Your OCIO provider can coordinate between asset allocation, sensitivity/stress analysis, spending policy, rebalancing, and derivatives. • Document and frequently monitor your liquidity profile: An OCIO provider should continuously monitor your liquidity profile, along with other critical risk factors, and provide you with the information necessary to document clear liquidity guidelines in your investment policy statement (IPS). • Keep up with regulatory changes: It is important to stay abreast of regulatory changes, as they could impact your liquidity considerations.

A. Liquidity 101

Once you have worked with your OCIO provider to identify the sources and uses of cash, it is useful to classify the cash requirements of your investment program based on when you need to access that cash. This will allow you to match your liquidity requirements with the liquidity profiles of your investments. A sample liquidity profiles classification is shown below:

Do you know the extent to which such a shift could impact your portfolio?

Stressed market environment based on experience in 2008/2009, when some investments became less liquid than expected. There is no guarantee that any stated expectations will occur. Some portfolio in stressed market environments may have more strastic impact on liquidity than the scenario depicted above. These examples are for illustrative purposes only.

What do you use to keep tabs on global markets and economies?

Stay current on the latest economic and capital market developments to help you make good long-term decisions.

Pursuing a responsible/sustainable investment strategy in your investment program can be a challenge. And it can be hard to know where to start.

To provide you with a better understanding of how these high-level design considerations come together, we have created four model portfolios. These models have distinctly different allocations across the three asset roles to show you the type of output you can expect from the SAA modeling process.

For more information, read about best practices in non-profit portfolio design.

The table below summarizes some of the methodologies most often used by non-profit investors.

Three questions your organisation should discuss to help define your responsible investing beliefs:

What changes need to be made to our investment policy statement or asset allocation strategy to capture our beliefs regarding questions 1 & 2?

Do certain ESG risk factors matter more to us than others?

As an organisation, do we believe ESG risk concerns will have an impact on our portfolio?

Design your program in three PHASES

No matter what your goals are, you need an investment program that is designed to help you achieve them.

program

investment

design your

SECTION TWO

Read more about non-profit spending policy options

Important information

Need help defining your organization's risk tolerance? Take our quiz.

Have you captured your decisions and beliefs in your IPS? Our checklist can help.

The NoT-For-Profit Fiduciaries' Guide

For the best user experience, please view the Not-For-Profit Fiduciaries' Guide on a tablet or desktop.

Tip: Copy the link to the guide and email it to yourself.

Why this matters: If your objective is to grow your assets over the long term and/or to spend a percentage of your assets, then you are probably aiming for a consistent return over inflation. CPI is the most commonly used measure of inflation in capital market forecasts. How to manage the effects of inflation: When evaluating different strategies, you should consider their relationship to inflation. For example, real assets have demonstrated inflation linkages; and when evaluating these investments you need to take into account not only the inflationary environment, but also how underlying cash flows might be explicitly or implicitly tied to inflation.

The NoT-FOR-Profit INVESTMENT Guide

Defensive (risk reduction): Includes strategies that provide diversification to the growth allocations. Generally, expect lower returns with less risk. These are assets like cash and bonds. Portfolio design: a starting point To provide you with a better understanding of how these high-level design considerations come together to create a portfolio, we will use three of multi-asset funds as examples. These are three Funds with distinctly different allocations across asset roles and classes. We have also included the target return and risk levels associated with each Fund.

Your strategic asset allocation should reflect your long-term investment beliefs, spending policy, risk tolerance, liquidity needs, and desired time horizon—while the implementation of these decisions will evolve with the shifting market environment. You should determine this while you are setting strategy and writing your investment policy statement, not when you’re tactically choosing which funds to add to which bucket. We believe a roles-based framework can help you gain a more accurate picture of how each asset class in your strategic asset allocation may contribute to your total portfolio outcomes.

access the right managers

Outcome-oriented

Build & oversee your

SECTION Three

CLOSING THOUGHTS

SECTION THREE - Build and oversee your outcome-oriented portfolio

SECTION TWO - Design your investment program

SECTION ONE - Set up your governance structure

INTRODUCTION - How to be an effective fiduciary

You’ve designed your investment program and set your strategic asset allocation (SAA). What’s next? It’s time to work with your OCIO provider to build and oversee your outcome-oriented portfolio.

e. Ensure you have the right provider

d. Build a robust enterprise risk management system

c. Effectively manage your portfolio

b. Access the right managers

a. Find the right balance of implementation approaches

Evaluate implementation options

Access the right managers

Effectively manage your portfolio

Ensure you have the right provider

Build a robust enterprise risk management system

Closing thoughts

It’s a bit like putting together a puzzle. Individual managers bring unique strengths and biases to the table, and it’s up to you to ensure that your OCIO provider has taken these into account when putting together your overall investment program.

Find the right managers to help meet your outcomes

Using the worksheet (link below), take a moment to mark whether your provider has the right resources and processes to source, hire, and manage the best managers for your investment program. If more of your answers are in the “No” column than in the “Yes” column, you should have an in-depth conversation with your OCIO provider regarding their capabilities and consider working with a provider with a more robust research platform.

Factor investing

Factor investing targets exposure to the underlying characteristics that drive the returns of stocks, bonds, and other assets to help maximise a portfolio’s returns and manage its risk. For instance, Value, Momentum, Quality, and Low Volatility are examples of four common equity factors that have the potential to affect return performance over the broad market cycle.

Passive strategies

A passive approach aims to track the behaviour of an index that represents the asset class or market to which you want to have exposure.

Active strategies

Active managers aim to deliver better risk-adjusted returns than those associated with passive approaches.

You and your OCIO provider should decide the balance of implementation approaches you need to incorporate into your portfolio, such as active or passive strategies, as well as factor exposures. This will help you determine the types of managers your provider hires on your behalf.

Take only those risks for which you believe you will be rewarded

Keep fee constraints in mind as they may drive the decision about where to incorporate which type of manager

Consider passive or factor investing as a means of providing certain exposures in a more cost-effective way than active management

Understand your liquidity needs, as they will be a driving factor in your decision making

When making your decisions, you should remember to:

Find the right balance of implementation options

Evaluate implementation options

Your OCIO provider should:

Have the right processes and resources to source, hire, and manage the best managers for your investment program

Seek to limit uncompensated portfolio risk

Ensure you have adequate diversification by including managers / strategies that have diverse and complementary investment styles and processes

Help you understand the drivers of excess return for different strategies

There are three main approaches:

Worksheet: Resources & processes

How do you ensure your OCIO provider has a robust manager research process?

Set trading bands around the target SAA for each asset class and/or role in your portfolio

Give discretion to your provider so they can implement your decisions in real time

What you need to do:

Once your OCIO provider has found the right strategies and managers to populate your portfolio, you’re all done, right? Not quite. There are additional steps that you, as a fiduciary, need to take, as well as capabilities your provider must have to ensure success.

Effectively manage your portfolio

Effectively Manage your portfolio

Section 2: Design your investment program

Hire or fire an existing manager

Adjust manager weights within the portfolio

Create targeted exposures within the portfolio using either physical or synthetic instruments to capture short-term opportunities or mitigate risk

What your provider needs to be able to do:

Capabilities like these can help make the difference between a truly responsive portfolio and the one that merely pays lip service to being dynamic.

Some of the best OCIO providers in the market serve as co-fiduciaries for their client’s assets. This ensures their interests remain aligned with yours.

You should also expect your OCIO provider to deliver the following:

Advice on your investment program and capabilities to execute against your IPS

Daily, real-time portfolio management

Reporting tailored to the outcomes that matter most to your organisation

Implementation strategies that are cost efficient and easy to execute

An OCIO provider should do much more than just combine the right managers and meet with your committee quarterly to discuss performance versus your goals.

Ensure you have the right provider

A solution customised to your unique governance structure and organisational goals

How do you build a robust risk management system?

Effective risk management is critical to the success of your investment program. You and your OCIO provider should be aligned on the risks that are both internal and external to your organisation. Your OCIO provider can then help you manage the portfolio risks that have the capacity to affect your broader organisation. Your job as a fiduciary is to ensure that your OCIO has the right tools and expertise to manage your exposures accordingly.

Build a robust risk management system

It’s important to understand what goes into a risk management system. Risks may originate from:

Once you’ve identified the risks impacting your organization, you’ll need to prioritize and rank them based on which risks you feel may have the greatest potential to derail your organizational goals.

There are two broad categories: organizational risks and investment risks

2. Prioritize and rank your non-profit's risks

1. Identify the risks that have the potential to derail your non-profit's mission

Worksheet: Enterprise risk assessment sample

Identify, prioritize and rank your organization’s risks now

Worksheet: Areas of enterprise risk

Once you have implemented an ERM program, you need to ensure you have a clear understanding of whether it’s working. Download this worksheet to check whether your program is working efficiently.

And don’t forget to track the success of your ERM program.

Note: If you have more check boxes in the “No” column than in the “Yes” column, use this worksheet to help you identify some of the weakest links in the program.

Worksheet: ERM weakest links

Worksheet library

The Non-Profit Fiduciaries' Guide

Worksheet: Resources & processes

Worksheet: Areas of enterprise risk

Worksheet: ERM program efficiency

For more information about selecting a provider, visit our OCIO Fundamentals Hub. You can also request a copy of our not-for-profit investment handbook.

OCIO Fundamentals hub

Your portfolio’s structural composition (policies, benchmarks, active / passive strategies, style, liquidity, rebalancing)

The economy and financial markets

Your organisation's operational policies and procedures

Your organisation's governance structure

To help you effectively manage risk, you and your OCIO need to work together to identify the potential risks your organisation is exposed to. It's also helpful to have an appropriate report that highlights the sources of risk.

Worksheet: Enterprise risk assessment sample

Worksheet: ERM program efficiency

Worksheet: ERM weakest links

Portfolio

Important information

The NoT-For-Profit Fiduciaries' Guide

For the best user experience, please view the Not-For-Profit Fiduciaries' Guide on a tablet or desktop.

Tip: Copy the link to the guide and email it to yourself.

The NoT-FOR-Profit INVESTMENT Guide

Request Handbook

Closing thoughts

Know who is responsible for what decision, create alignment, and pay attention to risk.

CLOSING THOUGHTS

SECTION THREE - Build and oversee your outcome-oriented portfolio

SECTION TWO - Design your investment program

SECTION ONE - Set up your governance structure

INTRODUCTION - How to be an effective fiduciary

The Non-Profit Fiduciaries' Guide

Worksheet library

Section 3: Build and oversee your dynamic outcome-oriented portfolio

We're always here to lend a helping hand.

Reach out to us

Worksheet library

Find more not-for-profit resources

Find more non-profit resources

Reach out to us

Important information

The NoT-For-Profit Fiduciaries' Guide

For the best user experience, please view the Not-For-Profit Fiduciaries' Guide on a tablet or desktop.

Tip: Copy the link to the guide and email it to yourself.

The NoT-FOR-Profit INVESTMENT Guide

worksheet library

CLOSING THOUGHTS

SECTION THREE - Build and oversee your outcome-oriented portfolio

SECTION TWO - Design your investment program

SECTION ONE - Set up your governance structure

INTRODUCTION - How to be an effective fiduciary

The Non-Profit Fiduciaries' Guide

Being an effective fiduciary

Worksheet 1

Defining your goals

Worksheet 2A

Spending policy

Worksheet 2c-1-1

Risk tolerance quiz

Worksheet 2c-1-3

Investment Policy Statement (IPS) checklist

Worksheet 2C-5

Resources and processes

Worksheet 3B

Areas of enterprise risk

Worksheet 3D-1

Enterprise risk assessment sample

Worksheet 3D-2

Enterprise Risk Management (ERM) program efficiency

Worksheet 3d-ERM1

Enterprise Risk Management (ERM) weakest links

Worksheet 3d-ERM2

Nonprofit Guide Worksheet Collection

all Worksheets

Important information

The NoT-For-Profit Fiduciaries' Guide

For the best user experience, please view the Not-For-Profit Fiduciaries' Guide on a tablet or desktop.

Tip: Copy the link to the guide and email it to yourself.

The NoT-FOR-Profit INVESTMENT Guide