2015 1104 Outsourcing Trends in Nonprofit (Jarvis)

Outsourcing Trends in Nonprofit
Investment Management
IPA/GIFT Finance & Investment Deep Dive Day
November 4, 2015
This document is for institutional use only and redistribution is expressly prohibited.
• Governance
• Outsourcing Considerations
William F. Jarvis
Executive Director, Commonfund Institute
• Outsourcing – Landscape and
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
Nonprofit Investment Management Governance Model
External Resources
Committee Investment Committee
Chief Financial Officer (CFO)
• Report to CEO and Finance Committee
• Prepare and manage annual budget
• Recommend and manage debt policy
• Oversee audit of organization, including investment portfolio
• Optimize cash flow
Chief Investment Officer (CIO)
• Report to CEO and Investment Committee
• Execute investment policy
• Maintain asset allocation / policy portfolio
• Oversee and recommend manager / security selection
• Oversee performance reporting and attribution
• Recommend and implement risk management
• Recommend and conduct portfolio rebalancing
• Conduct tactical asset allocation within policy portfolio
Chief Development Officer (CDO)
• Report to CEO and Finance Committee
• Develop and oversee major and annual gift strategy
• Develop and oversee planned gift strategy
• Supervise development staff
• Possess knowledge of endowment management best
Finance Committee
• Report to Board
• Develop financial strategy and oversee financial operations
• Review and monitor financial operations
• Maintain financial records
• Present financial information to Board
• Approve capital budgets and debt issuance
• Communicate with and educate Board on financial matters
Investment Committee
• Report to Board
• Develop investment policy
• Develop and oversee asset allocation / Policy portfolio
• Develop and oversee spending policy
• Set risk tolerance and oversee risk management
• Monitor investment performance (manager / portfolio)
• Direct hiring / compensation of managers and consultants
Audit Committee
• Report to Board
• Select and hire independent auditor
• Manage and oversee audit process
• Review audit findings and management letter with auditors
• Present financial statements and auditors’ recommendations
to Board
• Oversee business office processes
• Oversee conflict-of-interest and whistleblower policy
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Consultant Portfolio Custodian
Investment Consultant
• Report to CIO/ Investment Committee
• Educate / inform Investment Committee
• Assist with development and review of investment policy
statement and policy portfolio
• Conduct asset allocation studies
• Implement manager search process
• Conduct ongoing manager evaluation and reporting
• Provide Investment Committee with research / analysis
Portfolio Manager
• Report to CIO / Investment Committee
• Conduct investment strategy as contracted
• Provide regular written reports and risk-adjusted
performance attribution
• Provide educational materials and economic / market
Auditor/ Custodian
• Auditor reports to CFO / Audit Committee
• Custodian reports to CIO / Investment Committee
• Provide audit / custody services
• Reporting, fund accounting
• Transfer agent
• Compliance
• Legal counsel
Outsourcing Trends in Nonprofit Investment Management
Fiduciary Checklist
Investment Management Governance
Your Organization’s
Board of Trustees
IDEA Committee
Commonfund Strategic
Investment Teams
• Vet Investment process
• Manager selection
• Monitor manager to guidelines
& process
• Monitor leverage
• Custodian/Administrator
• Asset verification
• Valuation policy guidelines
• Proxy voting guidelines
• Stress test fund portfolio
• Strategic Planning
• Long-term execution
• Oversight
• Investment policy statement (IPS)
• Purpose of endowment fund
• Investment spending and asset allocation policy
• Risk constraints, liquidity, and other guidelines
• Conflicts of interest & ethics policies
• Roles and responsibilities
• Evaluation
• Asset allocation modeling and peer benchmarking
• Implement investment plan
• Risk management process
• Rebalance/Tactical analysis & trade execution
• Liquidity budget
• Report to Board: performance, analysis and recommendations
Legal & Compliance
• Manager advisory agreement
• Review and negotiation of
terms: fees, liquidity,
transparency, significant events
notice, etc.
• Compliance review and check
of manager policies
• Replace/Rebalance among
Risk Management
• Background checks of sub-
• Enterprise related risk
• Counterparty risk
• Manager’s credit risk
• Collateral monitoring
• Risk metrics & modeling
• Independent due diligence
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Outsourcing Trends in Nonprofit Investment Management
Outsourcing Considerations
Evaluation of OCIO Capabilities and Services
Account Management and Analytic Resources
Board of Trustees
Chief Investment Officer
and Analytics
Trading and
Portfolio Management
Legal &
Relationship Management
Account Management
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Financial Operations
Reporting and
Outsourcing Trends in Nonprofit Investment Management
Considerations | Roles and Responsibilities
Roles and Responsibilities
Report to Board of Directors
Develop Investment Objectives and Policies
Establish “target portfolio” and strategic asset allocation
Oversee risk management and report to Board
Oversight of Commonfund Strategic Solutions
Formal annual review of Investment Policy Statement and Asset
Liaison between IC and Strategic Solutions
Develop cash budget and communicate cash needs each month
Monthly portfolio rebalancing – varies based on level of
Portfolio risk measurement and monitoring
Customized online reporting
Manager due diligence and on-going monitoring
Execute subscription documents for illiquid programs
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Outsourcing Trends in Nonprofit Investment Management
Considerations | Discretion
Determining Committee investment discretion and control
Minimal Discretion
• Outsourcing provider makes formal
recommendations to investment
• Asset allocation
Partial Discretion
Full Discretion
• Investment committee sets asset
allocation, risk budget, and
investment policy ranges
• Investment outsourcing provider
advises on policy and implements
portfolio decisions
• Risk budget
• Strategy execution
• Defines strategy execution
• Manager selection
• Conducts manager searches
• Investment committee approves all
investment decisions
• Investment instruments
• Flexibility to make tactical
investment decisions within
policy ranges
• Investment outsourcing provider
responsible for investment policy
• Asset allocation
• Risk budget
• Strategy execution
• Manager selection
• Depending on provider, may not
tailor allocation/risk to individual
Committee Time/Resources
Dedicated to Portfolio Management
Source: Casey Quirk - The New Gatekeepers: Winning Business Models for Investments Outsourcing, December 2008
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
Reasons to Consider Outsourcing
Criteria for considering differs from reasons to select outsourcer
Lack of Internal Resources
Better Risk Management
Additional Fiduciary Oversight
Faster Implementation and Decisions
Cost Savings
Need to Increase Returns
Desire for Strategic Partnership
Source: 2015 Outsourced-Chief Investment Officers Buyer’s Guide, February 27, 2015, Chief Investment Officer
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
Reasons for Selecting Outsourcing
Criteria for selection differs from reasons to consider outsourcing
Breadth of Capabilities and Services
Experience of Top Management
Reputation and Peer Referral
Client Service
Willingness to be a Fiduciary
Source: 2015 Outsourced-Chief Investment Officers Buyer’s Guide, February 27, 2015, Chief Investment Officer
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
The Outsourcing Model
What are your expectations?
Ask questions to understand your needs
The process for engaging an OCIO provider begins with an understanding of your
expectations and reasons for change.
• How do you currently govern and manage the portfolio?
• What deficiencies or gaps exist in the current governance and management structure?
• How involved are Trustees in the governance and management of the portfolio? What level of
control or discretion do they exercise over the management of the portfolio?
• What is the catalyst for change?
• What do you hope to gain or achieve with a change?
• How would you engage an OCIO – as an Outsourced Chief Investment Officer or Outsourced
Chief Investment Office? Why?
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Outsourcing Trends in Nonprofit Investment Management
The Outsourcing Model
What are the implications for staff?
Ask questions to understand the partnership
Once an OCIO is engaged, what does it mean for Staff?
• How are duties delegated?
―What current responsibilities of Staff will be delegated to the OCIO?
―What additional duties will Staff take on as a result of hiring an OCIO?
• What reporting is available?
―Do you have the ability to deliver custom performance/executive summary/audit
―What is the timing of monthly/quarterly reports?
―What type of performance/financial reports are provided? What’s the frequency?
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Outsourcing Trends in Nonprofit Investment Management
The Outsourcing Model
What are the implications for staff?
Ask questions to understand the partnership (continued)
Once an OCIO is engaged, what does it mean for Staff?
• What analytical tools are available?
―Who is responsible for cash flow/liquidity management? What is the staff’s role?
―How frequently will asset allocation and investment policies be reviewed?
―Who undertakes special analytical requests?
• What other services are included in the OCIO program?
―What is the OCIO involvement or assistance provided during the audit process? Will
there be an increase in costs as a result?
―Who is responsible for portfolio rebalancing and what is the frequency?
―What type of ongoing training is provided to staff and trustees? Does the provider
offer CE credits for industry professionals (i.e., CFA’s, CPA, etc.)
―What other services are provided under the OCIO program?
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
Outsourcing | Landscape and Trends
OCIO Landscape and Trends
Naming convention – OCIO/Fiduciary Manager
Few Barriers to Entry - < 45 to > 75+ Providers
Little Standardization – Fees, Performance and Services
• Pressure on Fees – base plus incentives
• Seek similar size and objective performance results
• Services match the needs of the organization
Cottage Industry – OCIO Consultants
Investor Demands Increasing – Beyond Investment Management and Advice
Difficult to Evaluate
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Outsourcing Trends in Nonprofit Investment Management
Assessing OCIO Performance
Assess means to measure, evaluate and judge
What do you assess?
Nominal returns, gross and net of fees
• Risk-adjusted returns
• Other, more qualitative, factors such as “fit”
Lack of standardization among OCIO models makes assessment difficult
Each institution is unique
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Outsourcing Trends in Nonprofit Investment Management
Assessing Performance
Defining performance, either gross or net of fees, is challenging:
Nominal Returns
Risk – Adjusted Returns
Other - Qualitative
Performance is an outcome
There is no one, standard portfolio
Portfolio choices reflect:
The purpose of the institution
Objective (risk/return) guidelines
These and other factors govern portfolio construction
By definition then…
Each institution’s performance will be unique
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Outsourcing Trends in Nonprofit Investment Management
It’s Your Money | Ask Your Advisors About Performance
Are they comparing equivalent structures?
How are the performance benchmarks determined?
Is the performance a measure of a model portfolio or composite?
Can the OCIO provide both asset class and client portfolio level performance?
How can you compare their performance with that of other providers?
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Outsourcing Trends in Nonprofit Investment Management
Assessing OCIO Fees
What are you assessing?
Total costs
Impact on recommendations
Lack of standardization and regulation among OCIO models makes assessment difficult
OCIO advisory fee
Other expenses
Direct expenses
Performance fees
Base asset manager fees
What resources and services are included?
Each institution is unique, services to be provided should be as well
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
It’s Your Money | Ask Your Advisors About Fees
Again, are they comparing equivalent structures?
• Discretion
• Size
• Objectives
Are there additional charges? For what purposes?
Are all similar clients treated the same for fee purposes?
Does the OCIO provider share fees with underlying managers or through
proprietary management?
How can you compare their fees with those of other providers?
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
Select Competitor Data and Models
Little consistency among providers
Strategic Solutions
OCIO Provider of
Large Asset Manager
Consultant/ OCIO
OCIO Provider
Single Fund Provider
$25 million
None noted
$250 million
$50 million
$200 million
Client Base
US/non-US non-profits
US and non-US
individual and
institutional clients
US non-profits
0.50% up to
$100 million;
0.35% $100m to $500
negotiable thereafter
0.60% up to
$100 million
0.40% on assets up to
$500 million;
0.15% on assets over
0.75% on 1st
$100 million;
0.75% up to
$100 million;
0.675% > $100 million and
< $250 million;
> or equal to $250 million.
0.50% + 5% over an
agreed upon index
3.0% annually of net
profits in excess of 10%
Yes - negotiated
Yes - negotiated individually
Commingled (manager
and CF) funds and
separate accounts
Commingled funds and
separate accounts
Third party investment
managers and pooled
funds and
separate accounts
Single fund or funds
US and non-US US and non-US individual and
institutional clients
individual and
institutional clients
NOTE: All fees reflected are indicative of direct fees charged by Provider; and are not indicative of fees charged by underlying investments or sub-advisors which may be higher.
Source: 2015 Outsourced-Chief Investment Officers Buyer’s Guide, February 27, 2015, Chief Investment Officer ; OCIO ADV Brochures
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
OCIO Landscape and Trends
The Future
No standardization = difficult to evaluate
― Will remain so for foreseeable future
― Importance of references
Define your circumstances and expectations (allow for relationship “matching or fit”)
Investors continue to demand more beyond investment management and advice
Fees will compress – greater standardization
Larger institutions to consider outsourcing
―Staff turnover
Institutions seek a partner not a provider
Market providers will contract – survivors will be strategic partners and guide clients to
understand what is needed to generate strong performance
November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
Important Notes
Outsourced Investment Solutions
Advisory services described under the trade names “Commonfund Strategic
Solutions” and “Commonfund Custom Investment Office” in this presentation
are provided by Commonfund Asset Management Company, Inc., a SECregistered investment adviser that is a controlled subsidiary of The Common
Fund for Nonprofit Organizations (“Commonfund”; Commonfund and its
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Investors in these services enter investment advisory agreements with
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Part II of its filing with the SEC on Form ADV (copies of this document are
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All interests in Commonfund Group Funds are offered through Commonfund
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The “Commonfund Multi-Asset Program” described in this presentation
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November 4, 2015
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Securities offered through Commonfund Securities, Inc., a member of
Outsourcing Trends in Nonprofit Investment Management
Important Notes
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November 4, 2015
Outsourcing Trends in Nonprofit Investment Management
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November 4, 2015
Outsourcing Trends in Nonprofit Investment Management