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More About This Title Nonprofit Asset Management: Effective Investment Strategies and Oversight
English
Nonprofit Asset Management is a timely guide for managing endowment, foundation, and other nonprofit assets. Taking you through each phase of the process to create an elegant and simple framework for the prudent oversight of assets, this book covers setting investment objectives; investment policy; asset allocation strategies; investment manager selection; alternative asset classes; and how to establish an effective oversight system to ensure the program stays on track.
- Takes you through each phase of the process to create an elegant and simple framework for the prudent oversight of nonprofit assets
- A practical guide for fiduciaries of endowment, foundation, and other nonprofit funds
- Offers step-by-step guidance for the effective investment management of assets
Created as a practical guide for fiduciaries of nonprofit funds—board members and internal business managers—Nonprofit Asset Management is a much-needed, step-by-step guide to the effective investment management of nonprofit assets.
English
MATTHEW R. RICE, CFA, CAIA®, is Chief Investment Officer and a Principal at DiMeo Schneider & Associates, LLC, a Chicago-based investment consulting firm that oversees more than $35 billion in institutional and high-net-worth investment assets. He is a coauthor of The Practical Guide to Managing Nonprofit Assets(Wiley).
ROBERT A. DiMEO, CIMA®, CFP®, is the Managing Director and cofounder of DiMeo Schneider & Associates, LLC. He has been featured in prominent publications such as the Los Angeles Times, Crain's Chicago Business, and Pensions & Investments and is coauthor of numerous books, including The Practical Guide to Managing Nonprofit Assets(Wiley).
MATTHEW P. PORTER, CIMA®, is Director of Research Analytics and a Principal at DiMeo Schneider & Associates, LLC. He has served as consultant to a number of nonprofit and corporate clients and is coauthor of The Practical Guide to Managing Nonprofit Assets(Wiley).
English
Acknowledgments xv
CHAPTER 1The Three Levers and the Investment Policy 1
The Three Levers 1
Investment Policy Statement 5
Statement of Purpose 6
Statement of Objectives 6
Liquidity Constraints 8
Unique Constraints or Priorities 10
Investment Strategy 11
Duties and Responsibilities 14
Investment Manager Evaluation 15
Conclusion 16
CHAPTER 2Asset Allocation 17
Modern Portfolio Theory 17
Capital Market Assumptions: The Building Blocks of Portfolio Construction 20
Shortcomings of Modern Portfolio Theory 20
Probabilistic Optimization Models—The Frontier EngineerTM 24
In the Long Run . . . 26
Strategic, Tactical, and Integrated Asset Allocation Steering Mechanisms 27
The Low Volatility Tailwind 29
Tail Risk Hedging 31
Counterparty Risk 33
Portfolio Rebalancing 34
Conclusion 38
Notes 38
CHAPTER 3Traditional Global Financial Asset Classes 39
Global Fixed-Income Asset Classes 39
Global Equity Asset Classes 55
Conclusion 59
Notes 59
CHAPTER 4Traditional Asset Class Manager Selection 61
Manager Search and Selection 61
Investment Vehicles 67
Active versus Passive Management 68
When to Terminate a Manager 70
Conclusion 72
CHAPTER 5Hedge Funds 73
The Evolution of Hedge Funds 73
Modern Hedge Fund Strategies 74
Why Invest in Hedge Funds? 78
Alpha-Beta Framework, Hedge Funds, and Fees 85
Hedge Fund Indices and Benchmarks 87
Hedge Fund Terms and Structures 88
Fund of Hedge Funds versus Direct Investment 89
Hedge Fund Investment Due Diligence 90
Hedge Fund Operational Due Diligence 92
Hedge Funds in the Post-2008 World 93
Conclusion 94
Notes 94
CHAPTER 6Private Equity 95
Private Equity Investment Strategies 95
Why Invest in Private Equity? 98
Structure and Terms 99
Private Equity Risks 100
Direct Private Equity versus Private Equity Fund of Funds 101
Selecting Private Equity Managers 102
Benchmarks 102
Conclusion 103
Notes 103
CHAPTER 7Real Assets 105
Commodities 106
Equity Real Estate Investment Trusts and Private Real Estate 108
Farmland 109
Energy Infrastructure Master Limited Partnerships 111
Broad Infrastructure Investing 112
Timberland 113
Gold 115
Other Investible Real Asset Categories 116
Conclusion 117
Note 117
CHAPTER 8Performance Measurement and Evaluation 119
Why Monitor Performance? 119
Performance Calculations 119
Benchmarks 120
Market Index Basics 120
Investment Style 121
Major Market Indices 123
Determining the Right Index 124
Peer Group Universes 124
Modern Portfolio Theory Performance Metrics 126
Style Analysis 127
Portfolio Analysis 128
Performance Reporting 128
Conclusion 129
CHAPTER 9Structuring an Effective Investment Committee 131
Procedures 131
Committee Structure 132
Committee Makeup 133
When an Investment Committee Needs Outside Help 134
Effective Use of the Consultant 135
Conclusion 136
CHAPTER 10Outsourced Chief Investment Officer Services 137
Overview 137
Why Outsource? 138
Outsourced Services 139
What Is Done in Conjunction with the Committee? 139
Potential Benefits 139
Finding a Firm 140
Characteristics 140
The RFP 141
Interviewing Finalists 141
Fees 142
The Contract 142
Reporting 143
Conclusion 143
CHAPTER 11Environmental, Social, and Corporate Governance-Focused Investing 145
History and Evolution 145
Negative Screening 146
Positive Screening 146
Shareholder Advocacy 146
Community Investing 147
Strategy Considerations 148
Investment Selection 149
Separate Accounts 149
Mutual Funds 149
Commingled Funds 149
Exchange-Traded Funds 150
Alternative Investments 150
Performance Impact of ESG 151
Incorporating ESG into Investment Policy 151
Conclusion 152
Notes 152
CHAPTER 12Selecting Vendors 153
Custodians 153
Record Keepers and Administrators 156
Broker/Dealers 157
Transition Managers 158
Conclusion 160
CHAPTER 13Hiring an Investment Consultant 161
The Investment Consultant 162
Identifying a Qualified Investment Consultant 162
Effective Use of a Consultant 168
Conclusion 168
CHAPTER 14Behavioral Finance 169
Trying to Break Even 170
Snake Bitten 170
Biased Expectations and Overconfidence 170
Herd Mentality 171
Asset Segregation or Mental Accounting 171
Cognitive Dissonance 171
Anchors 172
Fear of Regret and Seeking Pride 172
Representativeness 172
Familiarity 173
Investor Personality Types 173
Risk-Seeking Behavior 173
Naturally Occurring Ponzi Schemes and Market Bubbles 174
Conclusion 175
Note 175
CHAPTER 15Legal Aspects of Investing Charitable Endowment, Restricted, and Other Donor Funds 177
Nature of Endowment or Restricted Funds 177
Endowments Created by the Board 178
Donor-Created Endowment Funds 178
Donor-Created Restricted Gifts or Funds 179
GAAP Accounting Treatment 179
General Statement about Investing Endowment 179
Context: The Historical Prudent Man Rule 180
Trusts: The Prudent Investor Act 180
Uniform Prudent Management of Institutional Funds Act 181
Private Foundation Rules 184
Conclusion 185
Final Thoughts 187
Takeaways 188
Conclusions 188
Appendix: Case Study: Developing Capital Market Assumptions 189
About the Authors 209
About the Contributing Authors 211
Index 215
