[mdiegert]

I recently retired as CFO from a $20 million human services agency. We had approximately $1.5 million in reserves that came mostly from bequests and unexpected items like retroactive rate adjustments on state contracts.

We worried that perhaps we shouldn’t be in the securities markets, but with the help of a savvy board treasurer we concluded that it was a necessity to guard against inflation. I think it’s helpful to think about nonprofit investing a bit like retirement investing. Even in retirement, it is not unusual to have IRAs in high quality, diversified stock and bond portfolios.

Our agency put out a request for proposals to area money managers and wound up with a regional company that has a family of mutual funds with varying levels of risk. We put the majority of our money in a high quality fund with an asset allocation of 30% stock and 70% fixed income. The historical rate of return was around 5% – far better than less than 1% for a savings account – and the turnaround time for withdrawals was a couple of days.

We also had an endowment made up of donor-restricted and quasi-endowment funds. Again, with the help of our board, we learned that we could add a portion of our reserves to our endowment assets but had to label that portion “quasi-endowment” since it could be dissolved at any time with board action. Since endowments, by definition, are long-term assets, we invested this money in a less conservative fund with a 50-50 asset allocation.

[Director]

We also have invested our reserves in a short term investment pool that is 70% a low-duration bond fund and 30% in an S&P 500 index fund.

We use a local community foundation for our investing.

[Kate.Barr]

That seems like a good approach, Dick. Did you have a process for choosing the community foundation to manage the funds, or has that been a long established relationship?

[Ruth.McCambridge]

Dick, How does that contract work with the community foundation? what are the parameters of such a contract?

[Mark_Hager_Forum_Moderator]

Hire professionals? This has at least got to be in the discussion.

I like to manage investment of my own household money. I think I do okay, and I resist all the marketing calls to hire somebody to do it for me. My father-in-law, who has a lot more money than I ever will, DOES hire people to manage his household money. Could I do substantially better if I hired somebody to invest and manage my money? Maybe. Probably. But I’m cheap.

A couple examples make me think nonprofits also can benefit from hiring money people to invest their money (if they’re not cheap).

I’m amid a contract to do some research for the Council on Foundations. One project is to study compensation in grantmaking foundations. I found more than 50 people with salaries over $1 million. More than half of those people have the word “investment” in their job title. The highest several salaries are investment officers. In many cases, investment officers out-earn the foundation president. The nonprofit sector’s money (private foundation corpuses) hires professionals to manage its growth.

The other example is Harvard. That famous $53+ billion endowment throws off $2+ billion each year to fund one-third of Harvard’s operations. They have an office called the Harvard Management Company that’s staffed by serious money people who work daily to maximize the endowment’s value.

I manage my own household money because “it’s not rocket science.” On the other hand, rocket scientists have a lot better chance of getting to the moon than I do.

[Wade_Rogers_Forum_Moderator]

I work primarily with very small organizations (up to $2M budget) who are mostly taking baby steps toward building reserves – once we establish what that word means to them (another thank you for the last webinar!). These boards are squeamish about going beyond traditional interest-bearing deposit accounts and it has been quite a sell to even move toward laddering CDs. In all cases, they are holding fast to the need to remain within FDIC limits. Fortunately (for this situation), interest rates are on the rise.

I appreciate the earlier responses regarding strategies to go beyond liquidity and to begin considering placing funds in the markets, albeit conservatively. It really does boil down to understanding the different layers of capital and which may be appropriate for long-term growth.

[Mark_Hager_Forum_Moderator]

Wade: I’d love to hear more about this. Being responsible with money is laudable, but sticking it in a mattress isn’t good stewardship. You’ve found boards really reluctant to invest?

[Wade_Rogers_Forum_Moderator]

Mark, I would only say they’re reluctant to invest the small amount of money that is being held as an emergency fund, say 3-6 months of operating expenses. The few groups that I have who have started to build or have been awarded an endowment are of course entering the market, typically following the strategies that respondents have been describing in this forum.

[Mark_Hager_Forum_Moderator]

That’s helpful, thanks. Right, I’d always support keeping emergency reserves in something very liquid and safe. And with the fed rate hikes, some basic accounts are paying upwards of 4% now. But for an investment corpus, I’m on the side of letting the historical returns of the market (hopefully) work in our favor.

[Kate.Barr]

The current market environment for liquid accounts is so much better now than it was a year and two ago (although the context for that is higher rates for borrowing, of course.) Many organizations kind of gave up on trying to get better returns on their liquid funds so it’s good to be reminded to pay attention again and ask your bank or other advisor for the options for liquidity. Money market accounts and laddered certificates of deposits are a pretty good option now.