upcoming events at the council - council on foundations · managing fiduciaries cio or outsourced...
TRANSCRIPT
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Upcoming Events at the Council
COF Cross-Sector Events
• Endowment & Finance Summit
Washington, DC – SEPT 6-7
• HR Summit
Denver, CO – SEPT 12-13
• Inclusive Economic Prosperity
Midwest
Minneapolis, MN — AUG 28-29
Community Foundation Events
• Legal Matters for CFs Workshops,
Milwaukee, WI — JUN 28
Raleigh, NC — JUL 24,
• CFE Fundamentals
(SOLD OUT) Baltimore, MD— JUL 18-19
Jacksonville, FL— OUT 24-25
Upcoming Webinars
• Three Legged Stool: Evaluation,
Monitoring, and Feedback
JUNE 13
• Lunch with Legal Counsel: Issues
for Private Philanthropy
JUNE 20
Visit cof.org/events/webinar-
upcoming to Register!
Leading Together 2019
– Call for Sessions!To submit your session
ideas on
• Bridging Divides
• Inclusive Economic
Prosperity
• Climate Impacts and
Vulnerability
by TODAY, visit
cof.org/leading-together-
2019
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Developing an
Investment Strategy
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Introduction
David D. Center, CFA
Senior Vice President
• Investment professional since 2001
• FEG team member since 2014
Education:
• MSIA (MBA) in Finance & Strategy, Carnegie Mellon University
• BS in Electrical Engineering, Lehigh University
Experience:
• Cardinal Investment Advisors – Consultant
• New Leaf Capital Consulting – Managing Director
• Hammond Associates – Senior Consultant
• Entergy Services – Treasury Manager
Memberships:
• Krewe of the Rolling Elvi – Founder and Mission & Vision Committee Member
• CFA Society of Cincinnati – Member
• CFA Society of St. Louis – Former Board Member
• CFA Society of Louisiana – Former President
• Greater New Orleans Council of Campfire – Former President
513.827.3185
David has worked with Community Foundations since 2003 and is a champion of FEG’s annual Community Foundation Survey.
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Tim has worked with Community Foundations since 1999 and is Chair of FEG’s Response Investing Committee.
Introduction
Timothy P. O’Donnell, CAIA
Senior Vice President
• Investment professional since 1995
• FEG team member since 1999
Education:
• BA in History and Political Science, Miami University
Experience:
• Robert W. Baird & Co. – Research Assistant
Memberships:
• Bikes Belong
• Hoosier Environmental Council
• Hoosier Mountain Bike Association
• US SIF – The Social Investment Forum
• The Sierra Club
• CAIA Association
317.615.7454
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Agenda
1. Understanding Roles and Responsibilities
2. Developing an Investment Policy Statement (including hurdle rate
and spending)
3. Asset Allocation
4. Selecting Investment Managers & Implementation
5. Ongoing Monitoring
6. Integrating Donor Designated Funds
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Roles &
Responsibilities1.
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Governance structure
Adapted from: Pension Fund Excellence, Keith P. Ambachtsheer and D. Don Ezra.
2-TIER 3-TIER
Governing
FiduciariesBoard/Investment Committee,
Staff, and
Consultant (Supporting
Fiduciary)
Board/Investment
Committee
Managing
Fiduciaries
CIO or Outsourced CIO
(Consultant), and Staff
Operating
Fiduciaries
Investment Managers
Custodian
Actuaries
Other Vendors
Investment Managers
Custodian
Actuaries
Other Vendors
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Managing fiduciaries
Source: FEG.
RESPONSIBILITY
CONSULTING
(Non-discretionary)
OCIO
(Discretionary)
Spending Policy
IPS Development
Asset Allocation
Portfolio Strategy
Manager Selection
Day-to-Day Supervision
Trading
Rebalancing
Risk Management
Performance Analysis
Reporting
Service provider recommends and monitors; client approves and implements.
Service provider executes and monitors; client notified.
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Operating fiduciaries
Source: FEG.
POSITIONGENERAL
RESPONSIBILITYSPECIFIC TASKS
Investment
Managers
Executes
investment
guidelines for
externally managed
assets
▪ Complies with the Investment Policy, Investment
Guidelines, and restrictions
▪ Produces desired return/level of risk
▪ Generates performance reports for their specific
mandate
▪ Supports Investment Committee requests
Note: These guidelines are different and rather limited
for mutual funds, commingles funds, and ETFs.
Custodian
Bank(s)
Safeguards specified
financial assets
▪ Controls access to assets
▪ Settles trades efficiently
▪ Collects investment income and principal
▪ Collects and disseminates investment portfolio
information
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Developing an IPS2.
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What’s in an IPS?
• Benchmarks
• Performance and
Manager Monitoring
• Risk Management
• Definition of Duties
• Enterprise / Mission
• Investment Goals / Spending
• Conflicts of Interest
• Asset Class Rationales
• Asset Allocation Guidelines
• Risk Tolerances
• Portfolio Construction
• Dynamic Asset
Allocation
• Manager Selection
OBJECTIVES
OVERVIEW
STRATEGY
IMPLEMENTATION
ONGOING MANAGEMENT
ACKNOWLEDGEMENT
CONTENTS
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Know thyself
☐ Consider the market environment, investment considerations, and
enterprise considerations when determining your objectives
ENTERPRISE CONSIDERATIONS
▪ Agencies / Supporting Orgs
▪ Level of Operating Support
▪ Spending Policy
▪ Fundraising
▪ Impact Investing Goals (i.e. SRI, ESG)
▪ Donor Designated Funds
Partnerships
INVESTMENT PROFILE
▪ Risk Tolerance / Appetite
▪ Liquidity
▪ Experience
▪ Other Restrictions
▪ Return Objective
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What is your hurdle rate?
☐ It is important to carefully consider liquidity tolerances
☐ The degree to which a community foundation asset pool includes
supporting organizations’ assets impacts tolerance for illiquidity
Hurdle Rate = Spending + Administrative Fees + Inflation
☐ A community foundation’s hurdle rate is the overall investment
return objective for the portfolio
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Comparing spending policy rates
Source: FEG 2017 Community Foundation Survey. Answers below 4% were grouped. To factor the average and median, numbers
greater than 5% were figured as 6%. N=88.
5
26
1
8
1
17
2
25
3
0
5
10
15
20
25
30
< 4.00% 4.00% 4.15% 4.25% 4.40% 4.50% 4.75% 5.00% > 5.00%
Num
ber of R
esp
onses
SPENDING POLICY RATE (EXCLUDING ADMINISTRATIVE FEES)
Average – 4.47%
Median – 4.50%
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Portfolio structure
☐While two community foundations’ objectives and asset allocations
may vary, each foundation’s approach to portfolio construction
should comply with two fundamental principles:
✓ Long-term focus
✓ Diversification
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Asset Allocation3.
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Universe of options
GLOBAL EQUITY
☐ U.S. & International
☐ Market Cap & Style
☐ Private & Public
☐ Equity Hedge Funds
GLOBAL FIXED INCOME & CREDIT
☐ Investment Grade
☐ Structured Debt
☐ TIPS
☐ High Yield
☐ Bank Loans
☐ Private Debt
☐ Credit Hedge Funds
REAL ASSETS
☐ Real Estate (Public & Private)
☐ Natural Resources
☐ Commodities
☐ Infrastructure
DIVERSIFYING STRATEGIES
☐ Macro Hedge Funds
☐ Event Driven Hedge Funds
☐ Relative Value Hedge Fund
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Framing your objectives
U.S. Equity
Int’l Large Cap
Developed
Emerging Markets
Global
Hedged Equity
Private Equity
Core
(Investmen…
High Yield
Public Real
Estate
Commodities
Private Debt
Private Energy
Private Real
Estate
MLPs
Diversifying
Strategies
U.S. Inflation
0%
2%
4%
6%
8%
10%
12%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Expected R
eturn
Expected Standard Deviation
&
Source: FEG. As of December 31, 2017. FEG Capital Market Assumptions are hypothetical based on asset category. Please refer
to the Disclosures for full disclosures.
FEG 7- TO 10-YEAR CAPITAL MARKET ASSUMPTIONS
7% Hurdle
(2% CPI + 4.5%
Spend + 0.5%
Admin)
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Comparing asset allocations
COMMUNITY FOUNDATION ASSET ALLOCATION
1Cash / Other. Source: FEG 2017 Community Foundation Survey. Asset Allocation shown as median of survey responses, thus may
not add up to 100. Answers that were more than 20% off a total of 100 were removed. See disclosures for equal-weighted averages.
DOMESTIC EQUITIES
INT’L DEV.
EQUITIES
EMERGING MARKETS
COREFIXED
INCOME (FI)
CREDIT SENSITIVE
FI
PUBLICREAL
ASSETS
PRIVATE INVESTMENTS
HEDGE FUNDS / LOW
VOLATILITY
SHORT-TERM
SECURITIES1
Overall Median
37 17 6 18 2 4 5 11 3
(<) $25 million
44 16 4 19 0 4 1 2 3
$25 - $50 million
42 18 7 20 1 6 3 8 3
$51 - $100 million
39 15 4 18 1 5 4 15 2
$101 - $250 million
33 18 6 17 4 4 6 12 2
(>) $251 million
31 17 7 12 3 2 6 12 1
N=87 N=82 N=71 N=86 N=60 N=60 N=71 N=70 N=75
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Selecting
Investment
Managers4.
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Active and passive
Pure Indexing
SmartBeta
Pure Active
PASSIVE ACTIVE
Market Return Manager SkillDETERMINANTS OF RETURN
Source: FEG.
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Sentiment: active and passive
(<)25MM
$25 - $50MM
$51 – 100MM
$101 - $250MM
(>) $250MM
AVERAGE COMMUNITY FOUNDATION PERCEPTION
ACTIVE (1) NEUTRAL (3) PASSIVE (5)
Overall 2.7
3.3
2.5
2.5
2.9
2.2
Source: FEG 2017 Community Foundation Survey. N=82.
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Manager due diligence
CONVICTIONStrong belief in the investment philosophy; willing to put investment decisions
ahead of business decisions; invests alongside of clients, aligning interests.
CONSISTENCYStability of organizational structure, composition of the investment professionals,
and the investment philosophy and process.
PRAGMATISMUnderstand core strengths and have the ability to capitalize and sustain their
competitive edge.
INVESTMENT
CULTURE
Strong ethical foundation, passionate about investing; proper organizational and
compensation structure; culture pervades across organization.
RISK CONTROLNot blind risk takers, but risk conscious; acknowledge mistakes; robust and
effective risk mitigation.
ACTIVE RETURNAbility to identify and profit from investment opportunities; successful track
record.
FEG’S SIX TENETS FOR MANAGER REVIEW
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Expect periods of
underperformance
☐ Investors in active management should expect periods of
underperformance and need to have patience to weather the storm
0%
20%
40%
60%
80%
100%
Large Cap Value Large Cap Growth Small Cap Value Small Cap Growth
Outperformance > 10% Underperformance < -10%
PERCENTAGE OF MANAGERS WITH AT LEAST A SINGLE PERIOD OF 1-YEAR
OUT-/UNDER-PERFORMANCE OF 10%, 2007 – 2016
Source: Lipper as of December 31, 2016.
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Consideration beyond stocks and
bonds
2.6%
5.3%
0%
2%
4%
6%
8%
10%
12%
14%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Expected Real Return Long-term Average
EXPECTED RETURN OF A TRADITIONAL “70/30” PORTFOLIO
Data source: Robert Shiller and Standard & Poor's, adapted from AQR. U.S. stocks expected real return calculated from 50% of the
earnings yield*1.0107 plus 50% dividend yield + 1.5% to account for real earnings growth. U.S. bond yield is the government rate -
FEG's 10-year inflation forecast. Please see Disclosures for full disclosure.
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Sentiment: alternative investments
(<)25MM
$25 - $50MM
$51 – 100MM
$101 - $250MM
(>) $250MM
AVERAGE COMMUNITY FOUNDATION PERCEPTION
ALTERNATIVES (1) NEUTRAL (3) NON-ALTERNATIVES (5)
Overall 3.3
3.7
3.8
3.2
3.0
2.6
Source: FEG 2017 Community Foundation Survey. N=83.
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Ongoing
Monitoring5.
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Benchmarking performance
☐ Benchmarking is measuring the performance of a portfolio relative
to an index or a stated return target
☐ It is important to keep a long-term perspective in mind; often,
committees expect an investment manager to exceed its
benchmark over a full-market cycle (typically quoted as a 5-7 year
period)
☐ Best practice to maintain performance reporting and analysis at the
individual manager, asset class, and total portfolio levels
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Holistic monitoring
☐ It is also important to holistically and individually monitor:
▪ Style and correlation analysis
▪ Attribution
▪ Risk (beta, standard deviation, tracking error, etc.)
▪ Fees
▪ Liquidity
Don’t forget about your
donor designated funds!
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Integrating Donor
Designated Funds6.
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Donor designated funds –
outside advisors
Increase56%
Stay the Same41%
Decrease 3%
ANTICIPATED DONOR DESIGNATED
FUNDS AMOUNT IN FUTURE
Yes55%
No31%
No donor directed funds
14%
ALLOW DONOR DESIGNATED
FUNDS MANAGED BY OUTSIDE
ADVISOR
Source: FEG 2017 Community Foundation Survey. N=89 (left). N=88 (right).
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Donor designated funds –
minimums
ALLOW DONOR DESIGNATED FUNDS MANAGED BY OUTSIDE ADVISORS
Source: FEG 2017 Community Foundation Survey. N=49.
10
76
1
5
2
18
0
4
8
12
16
20
$0 < $100,000 $100,001 -
$250,000
$250,001 -
$500,000
$500,001 -
$750,000
$750,001 - $1
Million
> $1 Million
Minimum for Externally-Advised Pool
Num
ber of R
esponses
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Donor designated funds –
restrictions
RESTRICTIONS PLACED ON DONOR DESIGNATED FUNDS
* Specific to external advisor.
Source: FEG 2017 Community Foundation Survey. N=48.
Num
ber of R
esponses
30
12
3 3
0
5
10
15
20
25
30
35
Follow IPS Guidelines of
Primary Pool
Follow Unique IPS
Guidelines*
No Restrictions Other
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Questions?
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Conclusion
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Takeaways
☐ Building a holistic investment program is important
☐ Alignment with the foundation’s long-term goals is critical
☐Well-defined roles and responsibilities documented in a thorough
investment policy statement is a key first step
☐ Various asset classes and types of investment managers provide
investment opportunities
☐ Foundations can extend their investment philosophy to donor
managed accounts
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2018 survey results coming soon!
FEG’s Tim O’Donnell will be leading a concurrent session on Responsive Investing.
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Disclosures
This was prepared by Fund Evaluation Group, LLC (FEG), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended,
providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a
certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain
an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directed to: Fund Evaluation Group, LLC, 201 East Fifth
Street, Suite 1600, Cincinnati, OH 45202 Attention: Compliance Department.
The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third
parties. The information in this report is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or
to advise on further developments relating to it.
Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities. Net
Returns – Returns net of fees may or may not include the reinvestment of all dividends and income.
Past Performance is not indicative of future results.
This presentation is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular
needs of any person who may receive this report.
Index performance results do not represent any managed portfolio returns. An investor cannot invest directly in a presented index, as an investment vehicle
replicating an index would be required. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted
from the performance shown.
For further information on indexes and definitions please contact [email protected].
Any return expectations provided are not intended as, and must not be regarded as, a representation, warranty or predication that the investment will
achieve any particular rate of return over any particular time-period or those investors will not incur losses.
Investments in private funds are speculative, involve a high degree of risk, and are designed for sophisticated investors.
The data is obtained from the proprietary FEG 2017 Community Foundation Survey. The study includes a survey of 90 U.S. Community Foundations as of
April 7, 2017. The data from this survey was divided into five categories based on assets of the community foundation with assets ranging from less than
$25 million to greater than $250 million. The information in this study is based on the responses provided by the participants and is meant for illustration
and educational purposes only.