Better Investment Management

March 5, 2015

Why making a move to more professional investment oversight may be the right choice for charities.

Since 2008, Canada’s charities have been finding ways to recover financial losses and build capacity, while also creating strategies that will ensure a sustainable future. Or have they?

It’s been seven years since an unstable marketplace threw the private, public and non-profit sectors into upheaval. In some cases, the economic aftershocks for non-profits in this country were violent and irreparable — starting with withdrawal of charitable services, layoffs of staff and then, finally, a closing of doors. For most organizations, adopting a “survival mode” became the norm as individual donors cut back on their giving, foundations reduced their grants and governments pulled funding to cope with rising deficits.

“ I like to see if an organization can articulate a forward-looking, serious-minded approach to investing as a measure of their ability and viability.”
– Charles Ellis

As recently as 2012, a survey of 1,500 charities by Imagine Canada found that 22% said they were at risk because of the economic downturn, while just under half of respondents said they were having difficulty fulfilling their missions. Even now, in 2015, there are signs of an uncertain global economy that may again result in charities struggling to balance mission delivery with uncertainty in their various revenue channels.

It is a desire to help charities make an important connection between mission fulfillment and investment management that has people like leading investment consultant, Charles “Charley” Ellis, weighing in on the conversation. “It’s a personal opinion, but I’m quite distressed when programs and investment activities are not integrated,” says Ellis. “Donors don’t care much about internal accounting processes, but they care a great deal about whether you’re doing a ‘good job.’ I like to see if an organization can articulate a forward-looking, serious-minded approach to investing as a measure of their ability and viability.”

When it comes to investment strategy, Charley Ellis is a recognized expert. Founder of U.S.-based Greenwich Associates and author of 16 books, Ellis also has served on the board of directors of the Harvard Business School, the Institute of Chartered Financial Analysts and many other financial and not-for-profit organizations.

Making financial endowments a priority

After 2008, savvy charities realized that the cultivation of endowments offered a means to bolster their annual operating budgets, as well as providing many other tangible and intangible benefits in support of long-term mission delivery. An endowment (a donation of money or property to a charity for the ongoing support of that organization) is usually structured so that the principal amount is kept intact while the investment income is available for charitable activities. In some cases, part of the principal may be released each year, allowing for the donation to have an impact over a longer period of time than if it were spent all at once. In either instance, even a small endowment fund can leave an organization less vulnerable to economic cycles and fluctuations.

In Canada, it is often assumed that only the larger, more established academic (i.e., colleges, universities, private schools) or cultural institutions (i.e., museums, libraries, theaters), as well as religious organizations, have the resources to capitalize on the benefits of investments to further their missions. However, the realities of smaller charities often seem to be valid reasons why such organizations can’t devote resources to endowment building. Those very realities justify the need for an endowment.1

For any charity, securing a donation for initiating an endowment fund is only the starting point.

What of the ongoing management and reporting of investments that is also demanded by donors looking for transparency and accountability in the management of the charities they support? This is another lingering effect of increased demands in a tighter giving market.

How is a financially and resource-strapped non-profit expected to manage its investments in an appropriate and fiscally responsible manner? Charley Ellis would suggest that for both large and small charities, bringing in some professional help is the answer.

Outsourcing investment strategy decisions

Fact: There are many non-profits that embrace a traditional investment committee model to manage their own investments.

Fact: While many of these same charities would report competent or successful management of their investments, there is a high risk of unintentional fiduciary breaches due to a reliance on volunteer oversight of the process.
For Ellis, it’s relatively simple. When it comes to investment management, “…’amateur’ leadership is not really doing it well. Any move to professionalizing the process is going to be helpful. There’s a terrific opportunity for improvement everywhere — not just Canada.”

Even large institutions have a need for quality, professional advice and guidance. There are many post-2008 examples of how inappropriate investing has reduced endowments.2 Most notably, large U.S.-based college and university endowments, which had posted significant, highly publicized gains in the 1990s and 2000s, faced significant losses of principal across a range of investments during the 2008 downturn.

The key to maximizing an endowment, whether for the purposes of making up lost revenue or to provide excess funds to address priority needs, is to professionalize the process. One growing trend is to outsource decision-making to a Chief Investment Officer (CIO) and even this, according to Ellis, doesn’t have to be complicated. He likens it to dating:

“The outsourced CIO will have capabilities they can describe and present to you. The outreach might initially come from the CIO firm but the initiative will actually come from those in the institution who know they’re not managing their endowment the right way. You look at those who are admirable and easy to understand on the articulation of why you (the organization) are admirable …a professional investment oversight relationship will refresh the thinking process and has the potential of opening up new opportunities and revenue growth.”

While the economic forecast may remain uncertain, there is every reason for a charity to employ a well-managed investment strategy to bridge fundraising revenues with its mission objectives. article-pixel


1 Hansen Dean, Laura and Kathryn W. Miree. Journal of Gift Planning