Businesses and nonprofit organizations often have large asset pools, like cash or reserves, that aren’t yet designated for a specific goal or need. Typically, these rainy-day funds have grown over time and can represent a significant component of an organization’s overall financial structure. When properly managed, they may be a healthy source of capital growth.
Institutional Asset Pools, or IAPs, are usually managed by an internal investment committee or a third-party investment advisor. Some of these pools are managed conservatively with the goal of capital preservation. In other cases, the portfolio manager will aim to maximize an IAP’s earning power, which can serve to backstop an organization’s outstanding debt. A few examples of IAPs are:
not-for-profit hospital operating reserves,
self-insurance trusts,
captive insurance company assets,
nuclear decommissioning trusts, or
debt financing pools established from the sale of bonds.
Investing Institutional Cash and Asset Pools
Depending on the type of organization and the state where it operates, each institution may be subject to different regulations regarding fiduciary responsibilities. But even if the organization is not defined as a fiduciary, companies still have an ethical responsibility to manage assets prudently. Here are a few best practices to follow when considering whether and how to invest an IAP.
First, remember to keep your organization’s specific goals and needs in mind. Capital preservation in a highly conservative strategy may be the right choice, or it may be a good idea to explore opportunities for growth. What’s important is that leaders and committee members understand both the upside potential and the risks involved in investing an IAP, so that the organization can make informed decisions with appropriate short- and long-term perspective.
Second, consider how quickly your organization might need to deploy the capital. Will it need access to this money in the next month, in the next one to three years, or on a much longer time horizon? Understanding the organization’s cashflow needs and vulnerabilities will help determine which asset pools may be good candidates for investment.
Third, make sure to manage risk over time. Work to understand how the organization may be impacted by changes in IAP values before making any investment decisions. Many organizations seek to maintain certain internal capital or financial ratios. Others may be required to do so through bond indentures or covenants. Regardless, understanding how IAP investment decisions will impact the organization’s financial risk will help its leaders make better decisions.
And fourth, take time to document key investment decisions and the reasoning behind them. For organizations that do not have a formal investment policy statement, this is a good time to write one. And for those that do, remember to review it at least once a year. These checkups will help ensure that current policy still aligns with the organization’s needs and objectives. At times, an investment committee or financial advisor may be managing institutional assets that have liabilities attached. In this case, organizations should create models that explain the conditions under which it may be appropriate to take risk, and when it is best to remain conservative.
By following these practices, organizations that are independently managing their IAPs can deliver on their fiduciary responsibilities, whether legally mandated or not. However, for organizations that want assistance, managing institutional asset pools is an easy add-on to a trusted relationship with an existing financial advisor. Whichever path you choose, organizations that manage their IAPs well are better positioned to not only protect their assets but also potentially grow them over time.
To learn more about institutional asset pools, call CAPTRUST. We’re here to help.
As financial advisors to retirement plan sponsors across the country, we know the value of financial wellness for employees. CAPTRUST at Work is designed for employers who want to help their employees reach their financial wellness goals and maximize their employee benefits. Learn more by watching this video.
Nonprofits are increasingly opting for CIO outsourcing–in other words, looking beyond their organization for a chief investment officer to manage their portfolios. Here’s why it may be a good idea to consider these nonprofit investment advisors.
Transcript: An increasing number of endowments and foundations are now delegating their investment management to an outsourced chief investment officer, OCIO.
An OCIO can be especially helpful to nonprofits with limited staff, limited investment expertise, or highly specialized investment needs. But it’s important to know the benefits and considerations before deciding whether OCIO is the right choice for your organization.
An outsourced chief investment officer is a professional advisor or advisory firm hired by a nonprofit to manage its investment portfolio and make strategic investment decisions on the organization’s behalf. Typically, an OCIO provides day-to-day management of the organization’s investment program, allowing nonprofit leaders to focus on their mission. The OCIO has investment discretion and is directly accountable for performance. That’s why you might hear the OCIO relationship described as discretionary portfolio management.
Most nonprofits have a limited number of, or sometimes no, full-time staff who can focus on investments. So it can be hugely helpful to have a professional investment manager working on your behalf. As a co-fiduciary, the OCIO is bound to act in the best interest of organizations and their beneficiaries. The OCIO services often include portfolio analysis, management, and trading, investment policy statement development, research and selection of investment managers, regular performance reporting, and tactical or strategic asset allocation. For many nonprofits, handing these tasks over to a trusted partner is a welcome sigh of relief.
However, engaging in OCIO might not be the right move for every nonprofit organization. For instance, institutions with a strong, capable, and well-resourced internal investment team might not need one. And institutions that prefer to have direct control over their investment decisions will probably find an OCIO less appealing.
If you decide to engage in OCIO, due diligence is key. Research multiple firms, explore their fees, reporting schedules, track records, and stability. Institutions with highly specialized investment requirements will need an OCIO with robust industry expertise to meet their specific needs. You may also want to gauge how well the OCIO will integrate with your organization’s existing governance structure and communication channels. Ultimately, the decision to hire an OCIO should be based on careful evaluation of your organization’s needs, objectives, and resources. Making a well-informed decision can lead to more efficient and effective portfolio management that is better aligned with your institution’s short and long-term objectives.
To better understand whether an OCIO is right for your organization, call CAPTRUST. Our nationwide team of institutional advisors can help you decide the next steps forward.
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