Nonprofits Struggle to Meet Mission With Traditional Investing Strategies, Finds U.S. Trust Report

Nonprofits Struggle to Meet Mission With Traditional Investing Strategies, Finds U.S. Trust Report

New Market Realities Call for Realignment of Investment, Spending and Government With Goals

NEW YORK--(BUSINESS WIRE)-- U.S. Trust's Institutional Investments and Philanthropic Solutions Group, a provider of CIO outsourcing and fiduciary investment manager with over $25 billion in assets as of March 31, 2013 for nonprofit organizations and pensions, released a new report titled "The Endowment Challenge".

In the new report, U.S. Trust outlines how nonprofit organizations can use goals-based strategies as they adapt to new market realities: an era of lower returns, ongoing market volatility, higher inter-asset class correlations and increasing fiduciary responsibilities with greater scrutiny from regulators, government agencies and donors.

With donor funding in stress, increasing needs of beneficiaries, and rising costs, nonprofits are increasingly relying on investment returns to fund their operations and spending mandates. U.S. Trust's analysis finds it will be challenging to generate sufficient returns to support historical spending levels if organizations continue to invest as they have in the past.

"For the first time in years, perhaps decades, foundations, endowments and other nonprofit organizations question whether they will have the financial resources to continue to fulfill their missions," said Keith Banks, president of U.S. Trust. "To meet current and future needs, nonprofit organizations are urged to reach beyond traditional strategies and realign their approach to investing, spending and governance around the distinct mission and goals of their organization."

"Hospitals, colleges and universities, charitable foundations and other nonprofits have a distinct need for cash to fund current spending needs and, at the same time, a need to grow the purchasing power of their principal. These needs are typically reflected in a traditionally conservative 60/40 percent mix of stocks and bonds," according to Christopher Hyzy, chief investment officer of U.S. Trust. "The typical nonprofit portfolio lost one-quarter of its value in 2008, the height of the financial crisis. While other individual and institutional investors have recouped much of their losses, many nonprofits continue to struggle. By adhering to traditional strategies that have not kept pace with changing market dynamics, many have been unable to benefit from emerging and rebounding growth opportunities."

"The implications of negative return years and market volatility on spending are particularly problematic for mission-driven organizations," said Joe Curtin, head of U.S. Trust's Institutional Investments Group. "Nonprofits are finding ways to do more with less, but if they want to expand their mission and sustain it for future generations, they need to embrace more creative responses to new market realities."

"While U.S. Trust's mission-based investment approach is an important strategy for maximizing success, institutions must also focus on operational efficiencies and productivity. For the last few years in particular, institutions have been challenged in these areas due to uneven markets, growing competition for contributions and donor loyalty, increased demand for services and accountability to both their constituency and donor base. U.S. Trust Philanthropic Solutions has extensive experience working with nonprofits to navigate such complexities and draws on this experience to provide a unique, integrated set of portfolio management, strategic planning, administrative and governance advisory solutions to aid in each institution's success," according to Gillian Howell, head of U.S. Trust's Philanthropic Solutions Group.

Roadmap for a changing market:Goals-based strategies

In its paper, U.S. Trust outlines a new roadmap, with goals-based strategies nonprofit for organizations to consider in order to add long-term value and build resources that will support the organization's mission. Some key advice for nonprofits:

  • Rethink strategic asset allocation. Strategic asset allocation should marry two critical components of goals-based investing: forward-looking market expectations and selection of asset classes in appropriate proportions to generate incremental returns through good and bad markets.

  • Diversify portfolio to manage both risk and return. Optimal asset allocation strategies should include diversification with global and nontraditional investments such as real estate, private equity, commodities and hedge funds, not only to manage risk, but to drive incremental return. Diversification cannot ensure a profit or guarantee against loss.

  • Employ tactical asset allocation. By actively managing asset allocation and manager selection, nonprofits can generate additional return through tactical adjustments that increase or decrease exposure to near-term market changes.

  • Analyze cash flow needs and set appropriate liquidity levels. Because cash on hand is forecast to earn a negative return when inflation and fees are taken into account, excess liquidity in a low-return environment can be detrimental. Nonprofits that have not yet analyzed liquidity needs relative to the distinct mission of the organization may be sacrificing additional return opportunities.

  • Adjust spending rate and investment strategy to meet both present and future goals. Proper spending rate is a critical factor in a nonprofits long-term sustainability. Boards have a fiduciary responsibility to balance the immediate needs of the organization and current beneficiaries with the expected needs of future generations.

  • Measure goals versus benchmark performance. The most relevant measure of success for nonprofit organizations is not rate of return, but rather, how much money the organization has to support its mission.

  • Strengthen board governance. Well-crafted board governance increases the likelihood that investment decision making is nimble, proactive and aligned with the goals and mission of the organization. Members of the investment committee are now expected to be active participants in formulating overall strategy as well as the selection and assessment of advisors.

  • Outsource to mitigate risk and maximize resources. With fiduciary risk falling squarely on members of the board and investment committee, many investment committees are reassessing their ability and willingness to manage the organization's investment portfolio. By outsourcing the investment function, boards mitigate risk, use resources more efficiently, gain expertise and have access to the best professional investment managers.

A full copy of U.S. Trust's paper "The Endowment Challenge" is available for download at

U.S. Trust also achieved a successful five-year performance track record for its Global Portfolio Solutions models. Performance of the models is attributed to three key factors:

  • Strategic asset allocation - benefitting from the structural rebalancing of global economic growth following the financial crisis.

  • Tactical positioning - capitalizing on near-term opportunistic over-weights and under-weights across traditional and nontraditional asset classes.

  • Investment selection - focusing portfolio construction on quality to limit down-capture during market sell-offs.

The performance track record for all models is available upon request.

U.S. Trust
U.S. Trust, Bank of America Private Wealth Management is a leading private wealth management organization providing vast resources and customized solutions to help meet clients' wealth structuring, investment management, banking and credit needs. Clients are served by teams of experienced advisors offering a range of financial services, including investment management, financial and succession planning, philanthropic and specialty asset management, family office services, custom credit solutions, financial administration and family trust stewardship.

U.S. Trust is part of the Global Wealth and Investment Management unit of Bank of America, N.A., which is a global leader in wealth management, private banking and retail brokerage. U.S. Trust employs more than 4,000 professionals and maintains 140 offices in 32 states as of March 31, 2013.

As part of Bank of America, U.S. Trust can provide access to a broad range of banking solutions for individuals and businesses, and an extensive retail banking platform.

Bank of America
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Institutional Investments and Philanthropic Solutions (Philanthropic Solutions) is part of U.S. Trust, Bank of America Private Wealth Management (U.S. Trust). U.S. Trust, Bank of America Private Wealth Management, operates through Bank of America, N.A., and other subsidiaries of Bank of America Corporation. Banking and fiduciary activities are performed by wholly owned banking affiliates of BAC, including Bank of America, N.A. Brokerage services may be performed by wholly owned brokerage affiliates of BAC, including MLPF&S.

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