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Nonprofits Struggle To Meet Mission With Traditional Investing Strategies, Finds U.S. Trust Report

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“The implications of negative return years and market volatility on spending are particularly problematic for mission-driven organizations,” said Joe Curtin, head of U.S. Trust’s Institutional Investments Group. “Nonprofits are finding ways to do more with less, but if they want to expand their mission and sustain it for future generations, they need to embrace more creative responses to new market realities.”

“While U.S. Trust’s mission-based investment approach is an important strategy for maximizing success, institutions must also focus on operational efficiencies and productivity. For the last few years in particular, institutions have been challenged in these areas due to uneven markets, growing competition for contributions and donor loyalty, increased demand for services and accountability to both their constituency and donor base. U.S. Trust Philanthropic Solutions has extensive experience working with nonprofits to navigate such complexities and draws on this experience to provide a unique, integrated set of portfolio management, strategic planning, administrative and governance advisory solutions to aid in each institution’s success,” according to Gillian Howell, head of U.S. Trust’s Philanthropic Solutions Group.

Roadmap for a changing market: Goals-based strategies

In its paper, U.S. Trust outlines a new roadmap, with goals-based strategies nonprofit for organizations to consider in order to add long-term value and build resources that will support the organization’s mission. Some key advice for nonprofits:

  • Rethink strategic asset allocation. Strategic asset allocation should marry two critical components of goals-based investing: forward-looking market expectations and selection of asset classes in appropriate proportions to generate incremental returns through good and bad markets.
  • Diversify portfolio to manage both risk and return. Optimal asset allocation strategies should include diversification with global and nontraditional investments such as real estate, private equity, commodities and hedge funds, not only to manage risk, but to drive incremental return. Diversification cannot ensure a profit or guarantee against loss.
  • Employ tactical asset allocation. By actively managing asset allocation and manager selection, nonprofits can generate additional return through tactical adjustments that increase or decrease exposure to near-term market changes.
  • Analyze cash flow needs and set appropriate liquidity levels. Because cash on hand is forecast to earn a negative return when inflation and fees are taken into account, excess liquidity in a low-return environment can be detrimental. Nonprofits that have not yet analyzed liquidity needs relative to the distinct mission of the organization may be sacrificing additional return opportunities.
  • Adjust spending rate and investment strategy to meet both present and future goals. Proper spending rate is a critical factor in a nonprofits long-term sustainability. Boards have a fiduciary responsibility to balance the immediate needs of the organization and current beneficiaries with the expected needs of future generations.
  • Measure goals versus benchmark performance. The most relevant measure of success for nonprofit organizations is not rate of return, but rather, how much money the organization has to support its mission.
  • Strengthen board governance. Well-crafted board governance increases the likelihood that investment decision making is nimble, proactive and aligned with the goals and mission of the organization. Members of the investment committee are now expected to be active participants in formulating overall strategy as well as the selection and assessment of advisors.
  • Outsource to mitigate risk and maximize resources. With fiduciary risk falling squarely on members of the board and investment committee, many investment committees are reassessing their ability and willingness to manage the organization’s investment portfolio. By outsourcing the investment function, boards mitigate risk, use resources more efficiently, gain expertise and have access to the best professional investment managers.

A full copy of U.S. Trust’s paper “The Endowment Challenge” is available for download at

U.S. Trust also achieved a successful five-year performance track record for its Global Portfolio Solutions models. Performance of the models is attributed to three key factors:

  • Strategic asset allocation - benefitting from the structural rebalancing of global economic growth following the financial crisis.
  • Tactical positioning - capitalizing on near-term opportunistic over-weights and under-weights across traditional and nontraditional asset classes.
  • Investment selection - focusing portfolio construction on quality to limit down-capture during market sell-offs.

The performance track record for all models is available upon request.

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