Nonstop Nonprofit-Dedicated OCIO

April 12, 2014 |
4 minute read
|

Why an OCIO that's dedicated to serving nonprofits may be preferable to a general practitioner

As the OCIO model has evolved and expanded in recent years, a number of financial providers have entered markets they may not fully understand—markets such as nonprofit institutions. Their arrival has served to spotlight the differences between generalist practitioners and specialists dedicated to nonprofits.

In our experience in the OCIO arena, we have found that nonprofit institutions are often better served by an OCIO provider with a full staff of professionals who are focused solely on nonprofits than by a generalist with a nonprofits practice among several other competing business units. A critical reason: Consider that a primary variable in any OCIO relationship is the nonprofit investor itself. Each endowment—be it an academic institution or a foundation—has its own mission, strategic needs, and obligations.

It is the OCIO’s responsibility to conduct due diligence to determine the interplay among each of those factors, understand the issues and develop a strategy to meet objectives.  Accordingly, it’s often a financial provider whose entire culture is driven by a solid and single-minded focus on the unique requirements of this highly specialized marketplace that may best serve nonprofit clients.

This is not to say that there aren’t commonalities between generalists and nonprofit-dedicated OCIOs. Both typically begin with investment policy, develop an investment plan, construct a portfolio, rebalance it regularly, and notify the client of those adjustments.


Generalist providers tend to view issues and data through a generalist’s financial lens, while nonprofit-dedicated OCIOs view the same from the institution’s perspective.


What often differentiates a nonprofit-dedicated OCIO: integrating the unique circumstances of the nonprofit institution with that of an investment plan designed by those with nonprofit experience. That knowledge can extend to governance and fiduciary responsibility. When working with a nonprofit-dedicated OCIO, governance expertise is always at hand, simply because nearly every team member is a governance expert. These in-house professionals—who are members of foundation boards and can relate “trustee-to-trustee”—are readily available as part of the OCIO relationship.

Driving decisions, executing strategies

Most OCIO providers can develop and present a portfolio strategy. But when it is time to make decisions to execute that strategy—to gain consensus from the investment committee, for example—a provider with a sole focus on nonprofit institutions may be best suited to navigate that often challenging path.

The consensus culture of committee behavior, time constraints of agendas and a limited number of meetings (among other factors) is a combination that does not lend itself to making decisions. An OCIO knowledgeable about nonprofits can help frame discussions to effectively and efficiently execute strategies to take advantage of market opportunities or dislocations.

We believe that a nonprofit-dedicated OCIO could also be valuable when the meeting concludes and a strategy must be implemented. Investment committees that meet three or four times a year to discuss investment strategy may experience a breakdown between strategy and execution. IC and board members have other duties, responsibilities, and commitments. (In addition, institutions’ finance departments are often understaffed and overtaxed, making it difficult for them to assume responsibility for strategy implementation).

When the meeting ends and IC members go their separate ways, a nonprofit-dedicated OCIO familiar with this landscape should be able to implement the strategy in a nimble fashion.

A purely nonprofit perspective

Another potential advantage of a nonprofit specialist lies in how OCIOs may process and interpret institutional information. Often, generalists tend to view issues and data through a generalist’s financial lens, while nonprofit-dedicated OCIOs view the same from the institution’s perspective.

An OCIO with years of singular focus on nonprofit institutions may be able to bring a keen nonprofit perspective to the table. So, as much as they are thinking like an investment adviser, they may be better than a generalist at thinking like the institution.

Moreover, when that OCIO takes a holistic approach, they may assume the role of more than just a financial adviser. This means potentially developing custom solutions designed to address an institution’s unique concerns and priorities, and making adjustments as conditions change.

It could also mean that the OCIO will proactively ask the right questions and intuitively recognize problem areas that generalists may overlook.

It's what they do and all they do

A final consideration: A financial generalist with a nonprofit practice may not be dependent on that group for the success of the overall organization. Should the nonprofit’s practice underperform, other facets of the organization can pick up the slack.

Not so with a nonprofit-dedicated OCIO. Since the nonprofit space is their central and sole focus, their livelihood depends on being highly effective. In my opinion, that can tend to be quite an incentive to achieve success 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?

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