Advisors wanting to position themselves for growth in the substantial nonprofit segment of institutional investment may want to have a look at a recent SEI poll on nonprofits and their increasing fondness for risk management.
According to the survey on investment challenges and practices, more nonprofits are turning to risk management as a means of preserving the longevity of their organizations and missions. Almost half of the survey respondents (46 percent) said that, when evaluating the success of investments, positive risk-adjusted returns were much more important than overall portfolio returns.
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Even though nonprofits are placing so much more emphasis on risk management, that doesn't mean they're satisfied with what they've achieved so far; 44 percent were not confident that assessments of potential market shocks and their effects on a budget or mission were adequate. Even more, nearly half (49 percent), were not even sure that their investment committees had successfully identified top portfolio risks.
Of particular interest to advisors may be one finding in the SEI survey, as related by Mary Jane Bobyock, director of nonprofit advisory team, SEI's institutional group. In a statement, Bobyock said, "Nonprofits today face an increasingly challenging investment landscape. Many are taking steps to improve their risk-return balance through risk analysis and portfolio diversification."
She added, "An increased level of due diligence and risk assessment is needed in managing these more complex investments. Our survey found that 48 percent of nonprofits are currently using or considering the use of an outsourcing provider to help manage the portfolio. The top two reasons given for using an outsourced approach are the ability to 'more promptly take advantage of market changes' and 'improve overall risk management.'"
Nonprofits are also working to use their investment committees more strategically, by better aligning portfolios with spending needs (40 percent), better use of the committee in the organization's financial planning (21 percent), and making donors feel more confident about investment strategies (23 percent).
And with alternative investments playing a prominent role in nonprofit portfolios, that means more fiduciary oversight is necessary. More than half of nonprofits (58 percent) have 11 percent or more of their portfolios in alternatives, and another 24 percent had 10 percent or less. Only 18 percent had none.
All that focus is apparently paying off, according to a report by BNY Mellon Investment Strategy and Solutions Group. Endowment and foundation funds topped predictions by 1 percent in June, and are ahead of their year-over-year target by 8.2 percent.
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