What to Expect from Your Investment Consultant: Investment Philosophy & Policy
An investment philosophy is comprised of the organization’s high-level investment beliefs. These principles are a reflection of the organization’s culture and should transcend committee and staff members. A well-structured investment program features an investment philosophy that informs each portfolio’s investment policy.
Here are a few key investment philosophy decision points:
- Aggressive or conservative – Nonprofits that are aggressive with their investment funds are likely to generate higher returns over time, albeit with greater volatility. For financially sound organizations focused on the long term, an aggressive tilt may make sense. On the other hand, nonprofits (especially Christian nonprofits) are often conservative in nature. Organizations that elect a conservative stance are essentially forgoing some long-term return with the goal of better insulating themselves from market swings.
- Active or passive – An active investment approach typically utilizes investment vehicles intended to “beat the market.” An active approach may also involve changes to the asset allocation, depending on market predictions. Conversely, a passive method uses investment vehicles designed to simply track an index. Passive investing generally also includes a static asset allocation. Passive investors are essentially electing to accept the return of a benchmark minus costs.
- Biblically Responsible Investing (BRI) – As the name indicates, BRI involves choosing to invest in a manner consistent with biblical principles. BRI comes in different forms, such as avoiding investing in certain types of companies (e.g., “sin stocks”) or pursuing investment in virtuous companies. Some organizations choose to make their investments follow the organization’s values. Other nonprofits may believe that using BRI is not in the organization’s best interest.
Many consultants do not place much focus on investment philosophy. However, an investment philosophy is critical to the success of an organization’s investment program and thus should be carefully formed and communicated. Nonprofits should seek out consultants who will assist in investment philosophy development.
While the investment philosophy is overarching, an investment policy is typically a governing document for a specific portfolio. Investment policies are more technical in nature and may be organized into these sections:
- Purpose – The purpose provides an introduction and describes the intended use of the funds.
- Goals – The goals indicate the long-term return and volatility (risk) targets.
- Constraints – Constraints include the distributions/spending from portfolio along with the portfolio’s time horizon, legal, and regulatory matters.
- Action plan – The final portion of the investment policy details which types of investments are allowed and in what proportions.
The investment consultant may often take the lead in drafting each investment policy. Policies should be relatively easy to interpret and follow. A well-articulated investment philosophy along with practical investment policies will create a common understanding among stakeholders, support organizations in fulfilling fiduciary responsibilities, and give confidence to prospective donors.
In the third post of the series, we will discuss the service models a consultant can use and valuable additional services consultants can provide.
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About the Author
Winters Richwine is Chief Operating Officer and a Principal of Cornerstone Management. In this role, he develops and implements firm initiatives regarding process and efficiency and supports the portfolio management and charitable trust tax teams.Sign up for e-news and alerts