Non-Profits: What's Your Strategy if a Recession Strikes?

Executive summary:

  • Different economic regimes impact non-profits differently, depending on what the organization supports and its donor base.
  • Non-profits should consider how their organizational needs may change during a negative growth or inflation shock and factor this into developing their investment and spending policies.

As non-profit investors set their investment and spending policies, it is important to consider their organizational circumstances during a market shock. Because market declines impact investment strategies, an organization's likely reaction to a drawdown helps determine if more protection during a growth or inflation shock would allow the organization to support its objectives better.

We assume that most organizations aim to support current beneficiaries while maintaining purchasing power in perpetuity for future generations. As discussed in a recent research paper, inflation and growth shocks make achieving a CPI1 + return objective more difficult. Still, different portfolio construction decisions would be made if there is a greater need to protect the asset base during a growth or inflation shock. Coupled with the portfolio construction decision that impacts the magnitude of the market loss in a downturn, the spending policy decision will impact the extent to which that investment loss leads to a reduction in near-term spending or a longer-term impairment of the asset base. This article will explore how organizational circumstances might impact a non-profit's priorities and how understanding this can allow for greater confidence in setting investment and spending policies.