By James Pender, CRPC® and John McManus
When it comes to investing, nonprofit organizations have many of the same objectives as businesses or even individuals. However, oftentimes these groups are more conservative in their goals due to regulations and donor concerns. Seeking reliable cash flow from income, lower levels of risk and principal protection are common goals. Given these circumstances, it is critical that investment decisions stay true to the organizations values, as well as within the regulatory guidelines.
Setting the Framework
To be certain, the level of oversight for these organizations cannot be understated. Nonprofits, associations and charities must take into account the organization’s spending needs relative to both long and short term objectives and any social concerns. Additionally, nonprofit investments are regulated under the Uniform Prudent Management of Institutional Funds Act or UPMIFA. Under this statute, groups must “act in good faith with the care an ordinary prudent person would exercise.” This means in plain language that costs must be kept reasonable; there must be an articulated investment strategy, maintenance of proper diversification relative to the goal and risk of the portfolio.
The first step for the committee or board is to develop an investment policy statement or IPS. The basic components take into consideration the investment objectives of the funds. A typical investment policy statement discusses the scope or purpose of the fund and specifically spells out any constraints. For example, some organizations for philosophical reasons may have constraints regarding weapons manufacturers or “sin” industries such as gambling or alcohol. Next, the timeframe for the investment must be stated. This is important so that the portfolio may be properly invested and diversified. Finally, risk must be discussed.
Risk is one of the most important factors to consider when developing an IPS. This is because risk is not simply defined as “losing money in the stock market.” In fact, there can be risk in investments that a first glance might be considered “safe” such as bonds or even CDs. Beyond stock volatility the three most common types are credit risk, interest rate risk and liquidity risk.
Credit risk is the prospect that an investment’s value will change due to a ratings downgrade by a ratings agency such as Standard and Poor’s. Interest rate risk could be a factor if there is a change in the level of interest rates. Long dated interest bearing securities value could diminish in an environment of rising interest rates. Liquidity risk arises from the difficulty of selling as asset. If there is no secondary market available, the security cannot be liquidated quickly enough to minimize a loss to the portfolio.
Pulling it all together
As mentioned above, non-profits, associations and charities have a responsibility to thoughtfully consider their strategy when making investment decisions. There are more constraints involved in the development of the investment strategy and subsequent implementation. A thoughtful solution may include development of three funds, for instance something along the lines of “working capital”, “operating reserves” and “long term”. The idea being that the “reserves” would provide a buffer between the known uses of the funds held for liquidity and the longer term invested funds. There can be several distinct funds, each for a specific purpose.
Access National Bank is a business bank with dedicated bankers experienced in working with non-profits and trade associations having $1 to $100 million in revenue. Whether you need tax-exempt financing, deposit services or investment management, we will develop a plan to improve cash flow, operating efficiency and yield on investments. John McManus is a SVP, Relationship Manager at Access National Bank and James Pender is a Financial Advisor at Access Investment Services.
When it comes to investing, nonprofit organizations have many of the same objectives as businesses or even individuals. However, oftentimes these groups are more conservative in their goals due to regulations and donor concerns. Seeking reliable cash flow from income, lower levels of risk and principal protection are common goals. Given these circumstances, it is critical that investment decisions stay true to the organizations values, as well as within the regulatory guidelines.
Setting the Framework
To be certain, the level of oversight for these organizations cannot be understated. Nonprofits, associations and charities must take into account the organization’s spending needs relative to both long and short term objectives and any social concerns. Additionally, nonprofit investments are regulated under the Uniform Prudent Management of Institutional Funds Act or UPMIFA. Under this statute, groups must “act in good faith with the care an ordinary prudent person would exercise.” This means in plain language that costs must be kept reasonable; there must be an articulated investment strategy, maintenance of proper diversification relative to the goal and risk of the portfolio.
The first step for the committee or board is to develop an investment policy statement or IPS. The basic components take into consideration the investment objectives of the funds. A typical investment policy statement discusses the scope or purpose of the fund and specifically spells out any constraints. For example, some organizations for philosophical reasons may have constraints regarding weapons manufacturers or “sin” industries such as gambling or alcohol. Next, the timeframe for the investment must be stated. This is important so that the portfolio may be properly invested and diversified. Finally, risk must be discussed.
Risk is one of the most important factors to consider when developing an IPS. This is because risk is not simply defined as “losing money in the stock market.” In fact, there can be risk in investments that a first glance might be considered “safe” such as bonds or even CDs. Beyond stock volatility the three most common types are credit risk, interest rate risk and liquidity risk.
Credit risk is the prospect that an investment’s value will change due to a ratings downgrade by a ratings agency such as Standard and Poor’s. Interest rate risk could be a factor if there is a change in the level of interest rates. Long dated interest bearing securities value could diminish in an environment of rising interest rates. Liquidity risk arises from the difficulty of selling as asset. If there is no secondary market available, the security cannot be liquidated quickly enough to minimize a loss to the portfolio.
Pulling it all together
As mentioned above, non-profits, associations and charities have a responsibility to thoughtfully consider their strategy when making investment decisions. There are more constraints involved in the development of the investment strategy and subsequent implementation. A thoughtful solution may include development of three funds, for instance something along the lines of “working capital”, “operating reserves” and “long term”. The idea being that the “reserves” would provide a buffer between the known uses of the funds held for liquidity and the longer term invested funds. There can be several distinct funds, each for a specific purpose.
Access National Bank is a business bank with dedicated bankers experienced in working with non-profits and trade associations having $1 to $100 million in revenue. Whether you need tax-exempt financing, deposit services or investment management, we will develop a plan to improve cash flow, operating efficiency and yield on investments. John McManus is a SVP, Relationship Manager at Access National Bank and James Pender is a Financial Advisor at Access Investment Services.
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