Commonfund Institute’s Investment Stewardship Academy (“ISA”), an intensive workshop for institutional investors and leaders that has been convening since 1993, came together on Yale’s campus in New Haven, Connecticut, June 2nd-5th. This year’s program featured presentations from thought leaders and practitioners on the state of nonprofit institutional investing, the most important investment management decisions, governance, leadership, values-aligned investing, and more.
The State of Nonprofit Institutional Investing
Commonfund CEO and CIO, Mark Anson, opened the three-day event highlighting findings from the Commonfund Forum survey of attendees, as well as a presentation on the state of the macro market landscape. The top economic concerns for 2024 according to Commonfund’s Forum survey were the upcoming U.S. presidential election, continued inflation and interest rate adjustments, and war implications. These findings are reflective of an increasingly challenging market landscape that is exceedingly difficult to plan for, while underscoring the importance of proper risk management.
Regardless of what’s happening in the markets, Commonfund’s approach to long-term investing comprises three principles of capital stewardship: equity bias (long-term equity risk premium over bonds is 4.0 percent as of December 2023), diversification (risk management through prudent portfolio construction across and within asset classes), and liquidity premium (long-term liquidity premium is 3.5 percent over and above public markets, as of December 2023).1
One way to deal with increasing market complexity is to consider strategic investment partnership. In a session on just that, Commonfund managing director and head of operations, Amy Harlacker, and James Scheinberg, managing partner and CIO of North Pier Search Consulting, explored considerations for finding the right investment partner, and how to think about shifts in roles and responsibilities when outsourcing. These are increasingly relevant insights as complexity has translated to an increased use of investment partnership, including outsourced chief investment officers (OCIO), which can be seen in Commonfund’s Benchmarks Studies’ data.
The Most Important Investment Management Decisions
In an informal poll of ISA attendees, 100 percent of participants responded that their endowment will need to provide more support to the institution in the future than it does now. Meanwhile, most institutions do not meet the standard return target of “CPI + 5%.”2 Commonfund Institute Executive Director, George Suttles, and President and CEO of Commonfund OCIO, Tim Yates, demonstrated that the difference between top quartile and bottom quartile performers comes down to a few basis points.
What are the factors that optimize endowment returns?
Governance: The 2021 Commonfund-FGA Benchmarking Study of Governance quantified best practices for boards, including once per year board self-assessment and IPS review, and a majority of top performers have between 25-50 percent women on their board, and a minimum of 10 percent board members that are people of color.
Asset allocation: One of the most impactful asset allocation decisions is determining an optimal level of illiquidity. The chart below using data from the NACUBO-Commonfund Study of Endowments shows that institutions with higher asset allocations to private investments outperform those with lower allocations in each time period. Access to top managers was also explored as a key factor in alternatives returns.
Spending policy: While often overlooked, this can be a critical factor in determining whether the endowment will help meet institutional mission while also mitigating market volatility. A majority of institutions utilize a moving average of endowment value to determine the rate of spending, but data show that other methodologies such as a blend of inflation and endowment value can help smooth fluctuations in both spending and drawdowns over time.
Governance, Leadership, and Mission Alignment
Dani Robbins, Director of Governance Strategy at BoardSource, presented on the essential roles of nonprofit institution boards and how to orient them toward institutional mission. Robbins explored BoardSource’s extensive resources, including Leading with Intent: BoardSource Index of Nonprofit Board Practices, and Purpose-Driven Leadership | 4 Principles For Nonprofit Boards, providing ample food for thought regarding board construction and decision-making.
Robbins was joined by Susan Gary, Professor Emerita at the University of Oregon School of Law, and Rosalie Sheehy-Cates, Senior Advisory at Philanthropy Northwest’s The Giving Practice to discuss the role of law and culture in fiduciary decision making. The foundation of this discussion is that, by law, if an investment is mission-related, a lower than maximum return is acceptable. They suggest working with legal partners if questions of fiduciary duty arise, but also using the laws described to ask questions and push back on conventional wisdom.
On that foundation, board and investment committee members can determine the investment strategies that allow them to align any investment with their mission (and not against it) while upholding their fiduciary duty. Eric Horvath, vice president of community-engaged investing at Earlystone Management, explored the spectrum of responsible investing practices, including ESG integration, divestment and engagement, diverse managers, and impact.
Further, this year’s ISA emphasized that investment stewardship is a whole-institution effort, and various speakers highlighted the importance of working with offices and building alignment across the institution, including advancement, procurement, and sustainability offices. For example, one simple takeaway for all board and investment committee members from Crickett Casper, Chief Advancement Officer at Council for Advancement and Support of Education (CASE), is to get to know your chief advancement officer (if applicable) and make sure there is deep partnership and communication between the finance, investment, and fundraising functions.
ISA Now and Future
Commonfund Institute will continue providing essential investment management training and sharing the most important developments in institutional investment stewardship as they arise. For introductory self-study coursework, check out Commonfund Institute Online, an an online learning tool and resource for finance staff, boards and investment committees of nonprofit organizations and other select institutions. Learn more about all Commonfund Institute has to offer here.
If you have any questions on the topics described here or if you would like to inquire about future ISA sessions, please fill in the form below.
- Commonfund Research.
- For example, if CPI is 2.5 precent and effective spend rate is 5.0 percent, the endowment would have to return 7.5 percent to meet the return objective that would achieve intergenerational equity. Meanwhile, based on data from the FY2023 NACUBO-Commonfund Study of Endowments, the 75th percentile for 25-year returns was 7.2 percent, and only institutions in the 80th+ percentile had 25-year returns above 7.5 percent.
