The 2022 List Issue, Part 5: 4 Steps for Non-Profit Fiduciaries to Consider This Year

Rougher seas lie ahead for non-profit fiduciaries as the COVID-19 pandemic stretches into 2022 and refuses to retreat quietly into the night. Empty university lecture halls, shuttered libraries and museums, canceled concerts and shows, tightened budgets, slimmer staff resources and mounting demands on community support have become all-too familiar yet unsustainable fixtures for non-profits in recent years. Non-profit fiduciaries continue to wrestle with difficult decisions when it comes to building and managing their investment programs as a lever to support their spending needs and their communities, while faced with dwindling resources and a potentially challenging future market environment. Record-high equity markets, rising interest rates and the threat of higher inflation mean non-profits also need to balance spending plans with lower forecasted investment returns.

With these challenges in mind, here are four key themes and action items that we believe non-profit fiduciaries should discuss at the board and investment committee level this year, in order to position their portfolios for investment success.

1. Reassess—and, if possible, revise—your spending policy

The economic consequences of the COVID-19 pandemic, including revenue shortfalls, inflationary pressures, staff shortages and high unemployment have impacted spending for many non-profits, many of whom need to spend a minimum amount in order to meet their communities’ needs both in the present and future.

Public charities, endowments and foundations may have more flexibility when it comes to adjusting their spending budgets, which means they could adopt lower spending rates that would shore up support for future beneficiaries but also allow them to support current beneficiaries sufficiently. However, there are organizations that don’t have flexibility in their spending, such as private foundations that have to adhere to the IRS’ minimum spending requirement of 5% or community foundations whose very mission is to help those impacted by economic hardships. We recommend that these organizations review their investment strategy to determine whether it supports their spending goals, and if so, decide whether they’re comfortable with the risk required to achieve the return goals. If they are comfortable with the illiquidity risk, they may consider increasing the allocation to strategies such as private markets, to help ensure the portfolio generates a return that supports a higher level of spending.