Dow Jones Newswires quotes Tony Martignetti on non-profit investment policy statements.

Dow Jones Newswire logo

US Charities Firm Up Investment Policies In Madoff's Wake
By Shelly Banjo
16 December 2008

(c) 2008 Dow Jones & Company, Inc.

NEW YORK (Dow Jones)--The tens of millions lost by U.S. charities in Bernard L. Madoff's alleged $50-billion Ponzi scheme, coupled with overall declining markets, is prompting nonprofits and family foundations to fashion more stringent investment policy statements that govern how an organization's funds are invested.

"The scandal highlights the importance of prudent investment practices and board governance practices in the nonprofit sector" which can be "outlined and carried out through an investment policy statement," says John S. Griswold Jr., executive director of the Commonfund Institute, the research and education arm of investment advisor Commonfund.

Such statements act as written direction for asset managers, members of an investment committee and donors, allowing nonprofits to align their overall missions with investment strategies and comply with state and federal laws. Policies can also provide benchmarks for investment performance, diversity of funds, and monitoring of investments.

According to Grant Thornton LLP's 2008 Not-for-Profit Board Governance Survey, only a quarter (27%) of organizations had revised their investment policies within the last year. An additional 13% reported not having a policy at all. Likewise, only 7% of organizations established an audit committee within the last year (22% had done so within the past one to three years).

"Now with the volatility in the market, clients are revisiting their policy statements and realizing changes are necessary," says Holly Isdale, managing director of Barclays Wealth.

Set Realistic Benchmarks

A policy statement should begin with the organization's objective or benchmark for the endowment. For example, private foundations without expectations of future capital may be less inclined to take risks than a university or hospital that may be able to depend on cash flow.

Organizations created to exist in perpetuity may invest with an eye on capital preservation, whereas organizations with a mandate to spend down assets may invest more aggressively.

Setting a benchmark for both investment earnings and spending can guide prudent decision-making by investment committees and asset managers. In light of current market activity and lower returns, now is the time to reevaluate these targets and adjust for losses. For example, an endowment may have previously had an earnings target of say, 7%, and a spending rate of 5%, but due to losses may scale down these expectations.

Brand New Market

This is a crucial time for nonprofits and foundations to reassess their risk tolerance policies and further diversify their investments, Isdale says.

Use investment policy statements to outline risk tolerance and set limits on asset allocation, including restrictions on investing in certain industries such as finance or technology, or sectors such as alternative investments or private equity. Statements can include language to emphasize the nonprofit's commitment to diversification.

These policies can also be used to align investments with the missions of the organization, says Tony Martignetti, director of Martignetti Planned Giving Advisors in New York. "For instance, the American Lung Association may not want to invest in tobacco stocks," he says.

Due to tightening credit markets, many nonprofits are now having a hard time getting access to their investments and don't have enough cash on hand to meet program needs.

"In a stable market, people underestimate the likelihood of a risk event," but the volatility in the market is causing people to think otherwise, Isdale says.

To prevent a situation where desired funds are constricted, set guidelines on how liquid a portfolio has to be on a day to day basis, "especially if nonprofits expect to use funds for particular programs in the near future," says Melanie Schnoll-Begun, director of philanthropic services for Citi Global Wealth Management.

Oversight and Governance

Review investment policy statements on a regular basis and consult tax, law and investment professionals for help, especially in times of crisis.

This isn't a "set and forget," scenario, "you want to keep asking yourself, is this the right direction to go in, are we taking the appropriate risks?" Griswold says.

Include criteria for the selection and monitoring of investment advisers. Boards should interview managers and their references, evaluate historical returns and expertise in certain asset classes, and review the reputation of both the manager and the overseeing audit firm.

"Anytime you see a manager with a return pattern that doesn't match volatility or normal market returns, a red flag should go up," Isdale says.

Policies should state clear transparency standards for investment managers, board members and employees. These include the expected frequency and extent of communications, as well as conflict of interest policies such as procedures when investing in a company owned by a board member.