Bert W. Feuss, VP, Investments,
Silicon Valley Community Foundation

June 19, 2015

Agenda
1. Fiduciary Duty & Prudent Investment Standards
2. Aligning Investments with Organizational Goals
3. Investment Governance & Policy
4. Investment Options for Nonprofits
Q&A

What is your role?
1. CEO / Executive director
2. CFO / Finance director
3. CDO / Fund raising officer
4. Board member

What is the size of your investment assets?
1. Less than $250,000
2. $250,000 to $1 million
3. Over $1 million
Investment assets = reserves and endowment

Do you have an Endowment?
Do you have an investment policy in place?

Agenda
1. Fiduciary Duty & Prudent Investment Standards
2. Aligning Investments with Organizational Goals
3. Investment Governance & Policy
4. Investment Options for Nonprofits

The primary duty of a fiduciary is to manage a prudent investment process without which the components of an investment plan cannot be defined, implemented or evaluated.

Being a good fiduciary means applying personal experience, judgment and knowledge in concert with understanding the legal framework for prudent investment and endowments.
• Apply same degree of care, skill and diligence that a prudent person would use in handling corporate affairs.
• Act in best interest of nonprofit
• Act in good faith
• Avoid conflicts of interest
• Comply with fiduciary law
• Maintain the nonprofit’s mission

Key events in fiduciary history
South Sea
Company
King v.
Talbot
Ford Foundation
Studies
UPIA
1720 1830 1869 1952 1969 1972 1994 2006
Harvard v. Amory
Modern Portfolio
Theory
UMIFA UPMIFA
Source: The Vanguard Group

UPMIFA defines Standard of Care:
• Duty to act in good faith and with the care of an ordinary prudent person
• Duty to diversify investments
• Duty to incur only appropriate and reasonable costs
• Duty to analyze investments in the context of the total portfolio and overall risk-reward objectives
• Duty to verify facts relevant to the management and investment of the fund
• Allows investment of any kind that is not inconsistent with the standard of care

What is an Endowment?
Donor : a gift of money to a charity with only the “income” being spent and “principal” being preserved
Nonprofit : an aggregation of endowment gifts that comprises the organization’s “endowment”
Accountant : a fund which is “permanently restricted”
Lawyer : an institutional fund not wholly expendable on a current basis under the terms of the gift instrument

What is a “True” Endowment?
True endowment : established or created by a donor.
Also know as a donor-restricted endowment.
Quasi-endowment : funds that the charity designates as endowment. Also known as a board-designated endowment.
Gift instrument includes:
 Any record or records from donor
 Institutional solicitation or documents
 So long as donor/charity were, or should have been, aware of its terms

Which gifts are subject to UPMIFA?
General endowment Donor restricted endowment spending restrictions : Subject to UPMIFA
No spending restrictions :
Specific spending restrictions : e.g., spending formula
Board designated endowment
Not subject to UPMIFA
Donor restricted endowment
Not subject to UPMIFA

How much of an Endowment can a charity spend?
• Does away with the concept of “historic dollar value”
• Allows charity to spend or accumulate an amount determined to be prudent for the purposes for which the fund was established
• Trustees must consider:
1. Duration and preservation of fund
2. Purposes of institution and the fund
3. General economic conditions
4. Possible effect of inflation or deflation
5. Expected total return from income or appreciation
6. Other resources of the institution
7. Investment policy of the institution
• Rebuttable presumption of imprudence for spending > 7%

Agenda
1. Fiduciary Duty & Prudent Investment Standards
2. Aligning Investments with Organizational Goals
3. Investment Governance & Policy
4. Investment Options for Nonprofits

The goal of all governing boards and administrative directors is a well-financed organization with good fiscal management policies and procedures with the capability of generating the necessary funds for short and long-range objectives .

Liquidity Adaptability Durability
Adequate cash to meet short-term operating needs.
Flexible funds to allow for intermediateterm adjustments.
Access to funds to address longterm future needs.
Source: Nonprofit Finance Fund


Capital Type
Working
Short Term
Reserves
Long-Term
Reserves
Facilities &
Equipment
Function
Allows the organization to bridge revenue timing gaps
Absorbs unforeseen funding losses or unexpected, extraordinary expenses
Fund changes in business model or deficits until programs and operations can support themselves
Addresses
Liquidity
Adaptability
Adaptability
&
Durability
Supports acquisitions, upgrades or future facility and equipment needs
Durability
Spending
Horizon
Investment
Objective
6+ months Preservation
1-3 years
3-7 years
3-15 years
Preservation and
Income
Conservative
Growth
Moderate Growth
Endowment
Provides ongoing operating funds through investment gains
Durability Perpetuity
Growth to maintain purchasing power of distributions
Adapted from Nonprofit Finance Fund


Discourages
Investment Risk
Portfolio Considerations
Finite time horizon
High spending needs
High liquidity needs
No future contributions
Organizational Profile
Low risk tolerance
Few income sources
Low inflation rate
Limited resources
Portfolio
:
Long-Term Reserves
Allows
Investment Risk
Portfolio Considerations
Perpetual time horizon
Low spending needs
Low liquidity needs
Ongoing contributions
Organizational Profile
High risk tolerance
Multiple income sources
High inflation rate
Significant resources
Source: The Vanguard Group

Agenda
1. Fiduciary Duty & Prudent Investment Standards
2. Aligning Investments with Organizational Goals
3. Investment Governance & Policy
4. Investment Options for Nonprofits

Key Documents:
1. Investment committee charter
2. Decision making matrix
3. Conflict of interest policy
4. Investment committee diversity matrix
5. Annual assessment survey
6. Investment policy statement

Essential Elements
• Purpose of portfolio
• Responsibilities of committee, consultant, staff and investment managers
• Investment objectives and spending policy
• Target asset allocation and rebalancing
• Performance objectives
• Asset class guidelines or restrictions

Part 1
Portfolio Name:
Assets:
Purpose:
Time Horizon:
Annual Spending:
Contributions:
Risk Tolerance:
Liquidity:
Primary Objective:
Investment Objectives
Long-Term Reserves
$250,000
Absorb shocks, finance change or growth
5-7 years
0%
Unlikely
Moderate
100% readily redeemable
Moderate growth to preserve purchasing power over time

Part 2
Investment Vehicle:
Investment Strategy
Balanced Portfolio
Asset Allocation:
Performance Benchmark:
Return Objective:
Portfolio Cost:
Management Fee:
Total Expenses:
50% equity, 50% fixed income
50% S&P 500, 50% Barclays Aggreg.
6% average over full market cycles
.64%
1%
1.64%

Agenda
1. Fiduciary Duty & Prudent Investment Standards
2. Aligning Investments with Organizational Goals
3. Investment Governance & Policy
4. Investment Options for Nonprofits

There are many options for investing your organizations assets. The right approach depends on your asset size, staff capacity, board expertise, and requires knowing your organization’s unique goals and specific needs.
Finding the right fit is most important.

1. Do It Yourself
Board or committee defines asset allocation, selects investments, monitors performance.
2. Outsource: Non-discretionary
Hire investment advisor or consultant to recommend strategy and investments.
3. Outsource: Discretionary
Hire investment advisor to manage portfolio and transact within portfolio on your behalf.

Provider
Discount Broker
Mutual Fund Company
Bank
Investment Advisor
Community Foundation
Advantages for
Small to Mid-Size Nonprofits
• Low cost, broad product choice
• Choice and low cost options
• Convenience, Relationship
• Personalized relationship
• Access, Oversight, Alignment

Provider
The Vanguard Group
All-in-One Portfolios
• Target Retirement funds
• LifeStrategy funds
• 4% Managed Payout Fund
Silicon Valley
Community Foundation
• Long-Term Growth Pool
• Social Impact Pool
• Balanced Pool
• Short-Term Pool
The Investment Fund for Foundations
• TIFF Multi-Asset Fund
• TIFF Short-Term Fund

Best practice : Full RFP every 5 to 10 years.
Define your selection criteria : What are your top priorities?
• Investment philosophy
• Proven performance
• Competitive fees
• Relationship / Cultural fit
• Nonprofit expertise / Community involvement
• Alignment of interests
Define your process: RFI or full RFP or combination?
• Use RFI for market scan and to cull down options
• Use RFP to compare and contrast a few serious contenders
• Use phone call and/or meeting to narrow to two finalists
• Have finalist(s) present to the board/committee

Criteria
Investment philosophy
Proven performance
Competitive fees
Relationship/cultural fit
Nonprofit expertise
Aligned interests
Community involvement
Total Score
Candidate
A
3
Candidate
B
1
Candidate
C
2
Candidate
D
4
2
1
1
2
2
3
4
3
4
0
2
1
1
2
1
4
3
4
3
0
2
15
4
22
3
13
1
23

1. Your primary duty as a nonprofit fiduciary is to manage a prudent investment process with care, skill and diligence
2. A well-financed organization requires clear objectives and alignment of capital with organizational goals
3. A prudent investment process includes proper governance and policy documents
4. The right investment approach will be unique to each organization’s size, capacity, needs and objectives

The safest way to double your money is to fold it over once and put it in your pocket.
-
Frank Hubbard
U.S. humorist, journalist

Q & A

UPMIFA – The Law of Endowments
• An Introduction to the Law of Endowments, Erik Dryburgh, Adler
& Colvin, www.adlercolvin.com
• Californian Uniform Prudent Management of Institutional Funds
Act (UPMIFA), California Probate Code §18500
Nonprofit Finance Fund
• Financial training and publications
• Financial advisory services
• Nonprofit lending

Community Foundations
• Access to investment pools through agency fund relationship
• May provide sample endowment and investment policies
• May provide workshops and trainings for nonprofit
Vanguard Nonprofit Resource Center
• Fiduciary roles & laws
• Committee charter
• Investment & spending policies
• Governance best practices
• Fiduciary toolkit

Contact Information
Bert Feuss
Vice President, Investments
Silicon Valley Community
Foundation bwfeuss@siliconvalleycf.org
650.450.5414

Nonprofit
Investment Fund
Nonprofit
Endowment Fund
Asset Ownership
Relationship to
SVCF
Distributions
Minimum
Support Fees
Nonprofit SVCF
Agency relationship
At discretion of
Nonprofit
$10,000
1.00% funds < $1M
0.75% funds > $1M
0.50% funds > $5M
Irrevocable gift to SVCF
Annually per SVCF spending policy
$10,000
0.50%