Author: Kevin Schmid
The COVID-19 global pandemic has brought an unprecedented series of operational and financial challenges for many nonprofit organizations. These may have been amplified by significant volatility in the financial markets and disruption to the national and global economy. Investment portfolios may have been negatively impacted to various degrees by the rapid decline in U.S. equity markets from all-time highs in mid-February, into bear market territory in late March. Fortunately, rebounds in the S&P 500 Index may have lessened the severity of those impacts. This has provided an opportunity to review the investment portfolio through the spectrum of fiduciary, longevity, market, and reputational risk, and make decisions and adjustments as necessary in a measured manner.
Fiduciary risk for nonprofits
Fiduciary risk tends to be more focused on sound process rather than outcomes. While positive financial investment results can sometimes mask deficiencies in governance, negative performance can bring such deficiencies to light. In this environment, it is important to have independent third-party oversight to ensure you are following your Investment Policy Statement closely, and are in compliance with asset allocation tolerance bands. Avoid attempts to “time” the market and instead follow disciplined rebalancing procedures.
In addition, it is an opportune time to review investment fees and ensure that the overall cost structure of the investment program is appropriate. While it is not possible to control the returns provided by the financial markets, it may be possible to control what is being paid toward investment management and other investment-related services.
Longevity risk for nonprofits
Longevity risk reflects the ability of the asset pool to last long enough to meet its future obligations. Nonprofits should take the opportunity to revisit their spending policy in conjunction with their asset allocation and risk tolerance, and should also prepare for the possibility of reduced donations in the short and intermediate term. Although the CARES Act has provided some additional incentives for charitable giving, we anticipate a challenging environment for nonprofit fundraising, which could change the liquidity profile for the investment portfolio.
Market risk for nonprofits
After ten plus years of consistently positive investment returns, it may be easy for financial investors to lose sight of the potential for downside risk in their portfolios. Investment portfolios with a long-term time horizon, like endowments, have a higher risk tolerance and are able to absorb short-term losses. However, we know that large losses are the biggest impediment to long-term compounding of return. Even larger gains are required to offset significant losses. So, it is still important to ensure that portfolios are well-diversified and designed to withstand market dislocations.
Reputational risk for nonprofits
Aligning your investment portfolio with your nonprofit organizations’ underlying mission may help mitigate fundraising challenges and provide a positive story to tell to current and prospective donors. Moreover, it could potentially impact investment results positively, depending on the circumstances. For example, investment portfolios with limited exposure to the energy sector may have benefited during the most recent downturn as oil prices plummeted.