We define sustainability as the maintenance over extended periods of a portfolio’s purchasing power, provide an overview of ways nonprofits can meet their fiduciary responsibilities and cover a variety of important issues, including:

  • The toll taken by a “lost decade” of reduced fixed income yields, along with increased equity market volatility both provide reasons to revisit asset allocation and spending policies.
  • Changes to the U.S. Tax Code have increased the stress on nonprofits by reduced contributions and sustainable spending concerns, which in turn heightens the imperative to reassess, reevaluate, and return to fundamentals of governance, spending policy, investment, and operations.
  • Sophisticated portfolio modeling capabilities, available to Wilmington Trust clients, can illustrate the projected impact of changes to sustainability as far as spending policy, asset allocation, and investment strategy.

In this paper, we offer practical guidance for nonprofit executives, boards, and investment committees to help them meet their fiduciary responsibilities. We review the current environment, assess various options, offer our analysis of a way to look at spending levels and fund sustainability, and present the powerful potential of sophisticated portfolio modeling capabilities. We define sustainability as the maintenance over extended periods of a portfolio’s purchasing power—that is, its real value.

Present state

Nonprofit organizations that seek to exist in perpetuity face an eternal dilemma: how to balance the desire to provide meaningful support for causes today while ensuring their own long-term viability. Aside from the need to preserve and grow principal, purchasing power must be maintained while funds are spent at a given inflation-adjusted rate over time, often without an end point. As an added hurdle, many nonprofits have experienced simultaneous reductions in donations and increased demand, either on the part of beneficiaries or due to budgetary issues. These pressures often manifest themselves in debates over philanthropic spending and sustainability. Furthermore, audit and regulatory concerns and “fiduciary fatigue” are driving increased demand for outsourced investment solutions. The imperative to reassess, reevaluate, and return to fundamentals of governance, spending policy, investment, and operations is heightened accordingly.

Today, surmounting all of these challenges is particularly daunting. Many boards, chastened by market risk in the wake of the financial crisis, resorted to or continued on with overly conservative portfolios comprised of high fixed income allocations. And now, 10 years later, a good number of these boards still cling to that which seems lower risk and remain hesitant to wade back into equities’ waters—let alone the deeper but potentially richer seas that are alternative investments.

On the opposite end of the spectrum, a number of nonprofits have voted to increase their hedge fund exposure following a model popular with large Ivy League endowments which had thrived in the more traditional market environment seen earlier in the last decade. Post crisis, however, when economies and markets suffered major shocks and were not functioning normally, hedge fund manager skill—usually the chief determinant of returns—was overall unable to surmount those challenges.

Whether too conservative out of fear or too aggressive in an effort to make up for lost time, neither extreme is prudent going forward. It’s essential to take a step back and revisit what it means to be intelligently diversified if a nonprofit is to be sustainable in today’s world. Another challenge is the expectation for lower returns across asset classes. Still, there are strategic and investment management actions within a board’s control that can help maximize success beyond mission adjustment, lowering spending, or raising more money.

Please see important disclosures at the end of the article.

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