Nonprofits lag on investment policies

Many nonprofits lack key investment guidelines and many made changes to their asset allocation policies in 2012 that likely caused dips in returns and may have been in reaction to short-term market trends and not to the organizations’ strategic needs, a new study says.

Among over 150 finance executives at trade associations, public charities and other nonprofits participating in a survey conducted in February for a third-party research firm and analyzed by Raffa Wealth Management, 38 percent lack guidelines that require sufficient levels of diversification and 43 percent neglect to indicate the degree of discretion given to outside advisers.

“We were most surprised by how many organizations lacked clear investment guidelines on benchmarking, diversification and even guidelines to address who is ultimately responsible for investment decisions,  Dennis Gogarty of Raffa Wealth Management says in a statement.

Roughly 30 percent of organizations surveyed made changes to asset allocations in 2012, most of them to be more aggressive, and those organizations reported lower returns on investment than those that did not make changes.

“Timing the markets gets expensive and is something that is more likely to happen when you don’t have clear investment policies and decision making procedures,” Gogarty says.

While the nonprofit sector generally is sound in terms of reserve ration, overall average returns on investments lagged traditional indexes by 1 percent to 2 percent, says the inaugural Study on Nonprofit Investing by Raffa Wealth Management.

Seventy percent of organizations surveyed reinvested all their dividend income in 2012, and only 3 percent used it all for their operational budget.

Charities held more reserves in cash and other fixed income assets, and their portfolios as a result underperformed other types of nonprofits, the study says.

Smaller organizations held more reserves in cash than did larger organizations and posted a lower overall return on investment.

Larger organizations were much more likely to invest in alternative investments, most commonly in real estates, although shifts to alternative investments in 2012 generally were not advantageous, the study says.

Portfolios with higher allocations to equity performed better in 2012.

Todd Cohen

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