Providing nonprofits with customized investment strategies and specialized expertise, a nonprofit-dedicated OCIO can ensure mission-aligned financial stewardship. By concentrating on the nonprofit sector, they can foster strategic partnerships that go beyond the capabilities of general practitioners.
As the OCIO model has developed and broadened in recent years, numerous financial providers have ventured into markets they may not fully comprehend—such as nonprofit institutions. Their entry has highlighted the distinctions between generalist practitioners and specialists dedicated to serving nonprofits.
Based on our experience in the OCIO field, we have observed that nonprofit institutions are often better served by an OCIO provider with a dedicated team of professionals focused exclusively on nonprofits, rather than by a generalist with a nonprofit practice among various other business units. A key reason for this is that a primary factor in any OCIO relationship is the nonprofit investor itself. Each endowment—whether an academic institution or a foundation—possesses its own mission, strategic needs, and obligations.
It is the OCIO’s duty to perform due diligence to assess the interaction among these factors, understand the issues, and formulate a strategy to achieve objectives. Consequently, a financial provider whose entire culture is centered on a steadfast and focused commitment to the unique needs of this specialized market is often best positioned to serve nonprofit clients.
This is not to suggest that there are no similarities between generalists and nonprofit-focused OCIOs. Both typically start with investment policy, create an investment plan, build a portfolio, regularly rebalance it, and inform the client of those changes.
A key distinction of a nonprofit-focused OCIO lies in its ability to seamlessly integrate the specific needs of nonprofit institutions with investment strategies crafted by experts in the nonprofit sector. This expertise extends to governance and fiduciary responsibilities. With a nonprofit-dedicated OCIO, governance proficiency is consistently accessible, as nearly every team member is a governance specialist. These internal professionals, who serve on foundation boards and can engage in "trustee-to-trustee" dialogue, are an integral part of the OCIO partnership.
Driving decisions, executing strategies
While many OCIO providers can formulate and present a portfolio strategy, the execution of that strategy—particularly in achieving consensus from the investment committee—often requires the nuanced expertise of a provider dedicated exclusively to nonprofit institutions. The inherent challenges of committee dynamics, constrained agendas, and infrequent meetings create an environment that can hinder decisive action. An OCIO with deep knowledge of the nonprofit sector can adeptly guide discussions to ensure strategies are executed effectively, capitalizing on market opportunities or addressing dislocations.
We assert that a nonprofit-focused OCIO is particularly advantageous when it comes to the implementation phase post-meeting. Investment committees, convening only a few times annually, may encounter a disconnect between strategic planning and execution. Committee and board members juggle numerous responsibilities, and finance departments are frequently stretched thin, complicating their ability to manage strategy implementation.
In such scenarios, a nonprofit-dedicated OCIO, well-versed in the unique challenges of this sector, is positioned to execute strategies with agility and precision.
A purely nonprofit perspective
Another potential advantage of a nonprofit-focused OCIO is their ability to process and interpret institutional information with a deep understanding of the nonprofit sector. While generalists often analyze issues and data through a broad financial lens, nonprofit-dedicated OCIOs approach these matters from the institution's unique perspective.
With extensive experience concentrated on nonprofit institutions, these OCIOs can offer a nuanced nonprofit viewpoint. They not only think like investment advisers but also align closely with the institution's mission and objectives. By adopting a comprehensive approach, they transcend the role of a mere financial adviser, crafting tailored solutions that address the specific concerns and priorities of the institution, while adapting to evolving conditions. This approach enables them to proactively identify critical questions and intuitively detect potential issues that generalists might miss.
It's what they do and all they do
A final consideration: A financial generalist with a nonprofit practice may not rely on that segment for the overall success of the organization. If the nonprofit practice underperforms, other areas of the organization can compensate. In contrast, a nonprofit-dedicated OCIO is entirely focused on the nonprofit sector, making their effectiveness crucial to their success. This focus serves as a strong incentive to deliver exceptional results for their clients.
Thinking like you
For educational institutions, a nonprofit-dedicated OCIO can help address these business issues…
- What is the role of our endowment?
- What are our spending needs for scholarships?
- How do our debt covenants impact restrictions on what we can do to manage our portfolio?
- Has our institution experienced a drop-off in enrollment, or government support, or endowment grants?
- Have we changed our needs-based tuition aid program, affecting our base income and, by extension, our expenses?
- What is the proper balance of how much we can discount tuition and how much we need for a growing expense budget?
- How is the interplay between our endowment and our operations evolving?
- Is our endowment compartmentalized for specific needs (furniture, scholarships, etc.) or structured for broad, unrestricted funding?
- Which comes first – enrollment increases, or budgeting more staff to accommodate those increases? How much of that budget comes from tuition income versus our endowment?
For foundations, a nonprofit-dedicated OCIO can help address these business issues…
- What is our ratio of multi-year grants to annual donor grants? How flexible is our commitment to each?
- How does our mission interrelate with changing economic cycles? How will that impact our cash pool?
- Do we need to revisit our community support strategy in light of a changing economic climate? How will that affect our payout today, tomorrow, five years from now?
- Can our 5 percent payout strategy withstand all economic environments?
- Does our OCIO know the difference between a public foundation and a private one? Between a sunsetting foundation and a perpetual one? Between a grant-based foundation and an operating charity? And more to the point, do they know how to address the distinctions in each?
