Investment Peer Analysis – A Definitive “Best Practice”

Our research suggests that the returns of more than 80 percent of the investment portfolios of small and mid-size foundations, endowments and nonprofit organizations have NOT maintained their inflation adjusted purchasing power (net of spending and investment expenses) over the past decade.¹ Furthermore, we estimate that more than two-thirds of such organizations’ investment portfolios have underperformed their market index benchmarks in recent years.² These challenging odds suggest that we as fiduciaries have an increasing obligation to be better informed and to make better investment decisions. 

As fiduciaries of the perpetual investment portfolios of foundations, endowments and nonprofit organizations, we are tasked with the responsibility of overseeing the prudent investment and deployment of the assets that have been entrusted to the organizations we serve. This responsibility is governed by a duty of loyalty to the intent of donors in support of the needs and objectives of the organizations these funds are intended to support. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) requires that “each person responsible for managing and investing an institutional fund shall manage and invest the fund in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”

Fortunately, UPMIFA does provide additional clarifying guidance as to how institutions and their fiduciaries are to conduct themselves in investing such funds but it does not specifically and succinctly define “ordinarily prudent”, “like position” or “similar circumstances.”  Indeed, the organizations that we serve have engaged professional legal and investment counsel to help us negotiate these treacherous waters, but this is ultimately our responsibility as fiduciaries. We have a responsibility to understand the specific “position” and “circumstances” of our institutions relative to other institutions and to oversee our organizations’ funds with the benefit of this context and perspective.   

As individuals and across most modern organizations, comparative analysis is generally used to support the pursuit of improved and effective decision-making. Prior to the proliferation of advanced computing technology and high-speed communication, this effort was largely limited to the collection of anecdotal experiences from various constituencies in the form of “asking around.”

Today, the use of “peer analysis” is commonly accepted as a “best practice” across industries, sectors and disciplines. In the investment industry, peer analysis is a central component of most standard benchmarking frameworks. It is broadly accepted and utilized in analyzing companies, industries, sectors, markets, separate account managers, mutual funds and alternative investment funds. The governing fiduciaries of most large institutional investment funds have adopted the use of peer comparisons to complement their analyses of total fund investment results and to provide context and perspective for their strategic investment policy, investment implementation process and investment adviser selection and oversight. A recent review of the largest university endowments in the US revealed that at least nine of the ten largest of these funds not only utilize peer analysis as a component of their benchmarking process, but most of them publicly disclose their relative peer rankings to their donors and constituents. 

In the southeastern US alone, we estimate that there are more than 4000 foundations, endowments and nonprofit organizations with investment portfolios between $2 million and $200 million.³ While the practice of including investment peer analysis as a critical benchmarking tool has been broadly endorsed by large institutional investment funds, data availability and procedural headwinds have historically limited the adoption of this “best practice” among smaller organizations. Though the practice is growing, we estimate that less one-fifth of smaller organizations have integrated portfolio-level peer analysis as a component of their investment benchmarking and fiduciary oversight processes. 

Peer analysis should not dictate investment decision-making.  Rather, it should be viewed as a tool to inform decisions regarding investment policy, process and oversight. Our stewardship of the funds we oversee on behalf of the organizations we serve (in support of the intentions of donors) requires that we prudently and objectively design, implement and monitor productive investment programs.  Consideration of the practices and results of other organizations “in a like position … under similar circumstances” provides important and necessary context and perspective.

Well-designed peer analysis that is consistently integrated into an ongoing, strategic investment process should help fiduciaries reduce the risk of episodic, inconsistent and short-term focused decision-making. It provides context and perspective to inform fiduciary investment design, implementation and monitoring activities. At the very least, our experience suggests that investment peer analysis should take the following factors into consideration:

• Portfolio Size (Total value of the portfolio)
• Portfolio Asset Allocation (Compared to similarly positioned portfolios.)
• Organization Type (Family foundations may view their portfolios differently than operating nonprofits.)
• Organizational Structure (Endowments may view their portfolios differently than operating foundations.)

Furthermore, peer analysis should be viewed in the context of longer-term time periods and across multiple time horizons. Like any time-series analysis, peer analysis focused on shorter-term time horizons can be end-point dependent. Peer analysis that is reviewed only once a year or once every three or five years risks this unintended consequence. Organizations that implement consistent monitoring of their processes by integrating peer analysis into their ongoing investment program design reduce this risk and encourage a systematic framework for assessment.

Investing well is critical to our ability to fulfill our organizations’ long-term objectives. They (and the donors who have committed their funds to them) expect and deserve nothing less than informed diligence and prudent oversight by us as investment stewards and fiduciaries.

Notes: ¹ClearView analysis based on the reported ten year annualized returns (net) of 382 foundations, endowments and nonprofit organizations with $250mm in investments or less as provided by the MSCI InvestorForce Foundation and Endowment Universe for the period ended 9/30/16. Assumes an average spending policy of 4% and an average annual Consumer Price Index of 1.945%. Assumption of a higher spending policy would result in an even smaller percentage of portfolios keeping up with inflation, net of fees and spending.
²Based on ClearView analysis of a sampling of small and mid-size foundations, endowments and nonprofit organizations as reported by the advisers of those organizations.
³This analysis is based on a review of the IRS Form 990 filings of tax exempt institutions in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Virginia as reported by the National Center for Charitable Statistics in 2014.

To learn more about the ClearView Fiduciary Alliance, please contact:

Larry D. Coats, Jr.

919.614.3335

LCoats@ClearViewFiduciary.com

Larry D. Coats, Jr. is President and CEO of ClearView by KDI, LLC, the sponsor of the ClearView Fiduciary Alliance. With three decades of investment industry experience, Larry has served as a Board member and on the Investment Committees of multiple foundations and endowments and has also served as a Trustee for an SEC-registered mutual fund. 

About ClearView – The ClearView Fiduciary Alliance is a membership-based service of ClearView by KDI, LLC. ClearView’s mission is “to help foundation, endowment and not-for-profit Boards and Executives make better investment decisions” by being more informed and better educated. ClearView is not an investment adviser and it does not provide investment management services. It is a resource for Executives and Board members who are focused on being better investment fiduciaries. Its core offering is a robust, web-based system that provides its Members with independent, objective and confidential quarterly peer investment performance and portfolio allocation analysis specifically targeted to small and mid-size foundations, endowments and not-for-profit organizations.  With a base of more than 35 regional Members (representing more than $1.1 billion) and a database of nearly 800 similar portfolios from across the country, ClearView is uniquely positioned to help Boards and Investment Committees understand and analyze their investment programs and the results of their investment advisers and consultants.

Copyright ClearView by KDI, LLC/ClearView Fiduciary Alliance (December 14, 2016)