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.
Agenda
• Governance
Presenter
• Outsourcing Considerations
William F. Jarvis
Executive Director, Commonfund Institute
• Outsourcing – Landscape and
Trends
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Outsourcing Trends in Nonprofit Investment Management
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Governance
Nonprofit Investment Management Governance Model
Board
CEO
CIO
CONSULTANT/MANAGER ROLES
VOLUNTEER ROLES
STAFF ROLES
External Resources
Finance
Audit
Committee Investment Committee
Committee
CDO
CFO
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
practices
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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Auditor/
Investment
Consultant Portfolio Custodian
Manager
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
analysis
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
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Fiduciary Checklist
Investment Management Governance
Your Organization’s
Board of Trustees
IDEA Committee
(Trustee/Staff)
Commonfund Strategic
Solutions
Investment Teams
• Vet Investment process
• Manager selection
• Monitor manager to guidelines
& process
• Monitor leverage
Operations
• Custodian/Administrator
oversight
• Asset verification
• Valuation policy guidelines
• Proxy voting guidelines
• Stress test fund portfolio
Annually
• Strategic Planning
• Long-term execution
• Oversight
Quarterly
• 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-
advisors
• Enterprise related risk
monitoring
• Counterparty risk
• Manager’s credit risk
• Collateral monitoring
• Risk metrics & modeling
managers
• Independent due diligence
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Outsourcing Considerations
Evaluation of OCIO Capabilities and Services
Account Management and Analytic Resources
Board of Trustees
Staff
Chief Investment Officer
OCIO Team
Account
Management
and Analytics
Investment
Teams
Trading and
Compliance
Portfolio Management
Legal &
Compliance
Relationship Management
Risk
Management
Account Management
Analytics
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Operations
Analytics
Financial Operations
Reporting and
Accounting
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Considerations | Roles and Responsibilities
Example
Trustees/
Committee
Investment
Office
●
●
●
●
●
●
OCIO
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
Allocation
Liaison between IC and Strategic Solutions
Develop cash budget and communicate cash needs each month
●
Monthly portfolio rebalancing – varies based on level of
discretion
●
●
●
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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Considerations | Discretion
Determining Committee investment discretion and control
Minimal Discretion
• Outsourcing provider makes formal
recommendations to investment
committee
• 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
Extensive
• Investment outsourcing provider
responsible for investment policy
decisions
• Asset allocation
• Risk budget
• Strategy execution
• Manager selection
• Depending on provider, may not
tailor allocation/risk to individual
clients
Minimal
Committee Time/Resources
Dedicated to Portfolio Management
Source: Casey Quirk - The New Gatekeepers: Winning Business Models for Investments Outsourcing, December 2008
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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
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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
Price
Source: 2015 Outsourced-Chief Investment Officers Buyer’s Guide, February 27, 2015, Chief Investment Officer
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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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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
reports?
―What is the timing of monthly/quarterly reports?
―What type of performance/financial reports are provided? What’s the frequency?
Customization?
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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?
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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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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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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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It’s Your Money | Ask Your Advisors About Performance
Are they comparing equivalent structures?
•
•
•
Discretion
Size
Objectives
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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Assessing OCIO Fees
What are you assessing?
•
Total costs
•
Impact on recommendations
•
Components
Lack of standardization and regulation among OCIO models makes assessment difficult
Components
•
OCIO advisory fee
•
Other expenses
>
Direct expenses
>
Performance fees
>
Base asset manager fees
>
Other
What resources and services are included?
Each institution is unique, services to be provided should be as well
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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?
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Select Competitor Data and Models
Little consistency among providers
Strategic Solutions
OCIO Provider of
Large Asset Manager
Consultant/ OCIO
provider
OCIO Provider
Single Fund Provider
Minimum
Investment
$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
Fees
0.50% up to
$100 million;
───────────
0.35% $100m to $500
million;
───────────
negotiable thereafter
0.60% up to
$100 million
0.40% on assets up to
$500 million;
───────────
0.15% on assets over
$500m
0.75% on 1st
$100 million;
──────────
negotiable
thereafter
0.75% up to
$100 million;
─────────
0.675% > $100 million and
< $250 million;
─────────
0.60%
> or equal to $250 million.
No
0.50% + 5% over an
agreed upon index
3.0% annually of net
profits in excess of 10%
return
Yes - negotiated
individually
Yes - negotiated individually
Commingled (manager
and CF) funds and
separate accounts
Commingled funds and
separate accounts
Third party investment
managers and pooled
funds
Commingled
funds and
separate accounts
Single fund or funds
Performance
Fee
Investment
Vehicles
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
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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
―Technology
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
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Appendix
Important Notes
Outsourced Investment Solutions
ADVISORY SERVICES
NO OFFERING
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
controlled affiliates are collectively referred to as “Commonfund Group”).
Investors in these services enter investment advisory agreements with
Commonfund Asset Management Company, and are provided with copies of
Part II of its filing with the SEC on Form ADV (copies of this document are
available to prospective investors on request to your Commonfund
Relationship Officer).
This presentation is not an offer to sell or a solicitation of an offer to buy
securities. The Commonfund Group funds are offered only by means of
disclosure documents, prospectuses or similar materials made available to
investors for consideration at the time of investment. Prospective investors
are encouraged to review these materials with care prior to investing or
sending money. Commonfund Group funds offered by means of private
placement will be offered only to qualified and eligible investors.
All interests in Commonfund Group Funds are offered through Commonfund
Securities, Inc., a member of FINRA
INVESTMENT PERFORMANCE
COMMONFUND MULTI-ASSET PROGRAM
The “Commonfund Multi-Asset Program” described in this presentation
provides to qualifying investors who invest significant portions of their assets
in Commonfund Group commingled funds the described web portal and
associated reporting services, as well as incidental consulting from investors’
relationship officers (who are affiliated with Commonfund Securities, Inc., a
broker-dealer member of FINRA). These services do not include direct
investment advisory services (although the Commonfund Group funds in
which such investors place their assets do receive advisory services from
Commonfund Asset Management Company). In particular, investors in the
Commonfund Multi-Asset Program should be aware that Commonfund Group
has no obligation, as well as no authorization from such investors, to engage
in ongoing continuous management with respect to such investors’ overall
portfolios or asset allocations, or specifically to rebalance such investors’
allocations among Commonfund Group funds without specific directions from
such investors delivered in accordance with the underlying funds’ current
procedures.
November 4, 2015
Unless otherwise noted, any investment performance of funds maintained by
Commonfund Group included in this presentation reflects net total returns.
Returns for periods of one year or more are annualized.
It is possible that investors may lose money on investments in any
investments in Commonfund Group funds, or in any investments in stocks,
bonds, or other instruments to which this presentation may relate, directly or
indirectly. Past performance is not necessarily a guide to future performance.
Income from investments may fluctuate.
Securities offered through Commonfund Securities, Inc., a member of
the FINRA
Outsourcing Trends in Nonprofit Investment Management
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Important Notes
ELIGIBLE INVESTORS ONLY
The Common Fund for Nonprofit Organizations (“Commonfund”) was established in
1971 and manages investment funds primarily for nonprofit institutions and other
qualified investors.
The following Commonfund affiliate organizations are registered with the Securities
and Exchange Commission (“SEC”) as investment advisers: Commonfund Asset
Management Company, Inc. (“Comanco”), Commonfund Capital, Inc. (“CCI”), and
Commonfund Realty, Inc. (“CRI”)
Additional information regarding Commonfund and its affiliates’ policies and
procedures for calculating and reporting performance is available upon request.
This document is intended only for qualified, pre-existing investors in CCI, CRI, and
Comanco programs, Members of The Common Fund For Nonprofit Organizations
(“Commonfund”), or other eligible institutional investors approved by Commonfund
Securities, Inc. (a broker-dealer affiliate of CCI, CRI and Comanco) . It is not intended
to constitute an offer to sell, nor the solicitation of an offer to buy, securities. Any such
offerings will be made only by means of information memoranda and related
subscription documents that will be made available by Commonfund Securities, Inc.
only at the time an offering is in progress and only to investors qualified and eligible to
invest. When soliciting transactions, Commonfund Group employees may be acting as
registered representatives of Commonfund Securities, Inc.
Past performance is not indicative of future results. All investments have the potential
for profit and the possibility of loss. Similarly, our access to particular managers may
vary in the future and cannot be guaranteed. Prospective investors should review with
care the confidential offering memorandum or other disclosure documents for each
fund; these pamphlets contain a fuller discussion of applicable risks.
performance of the partnership as disclosed in the Information Memorandum for the
partnership, the Annual Reports of Commonfund Capital, Inc. and the partnership and
the Quarterly Reports of the partnership. Commonfund Capital, Inc. presents return
information for its partnerships on a dollar-weighted (e.g., internal rate of return) rather
than the time-weighted (e.g., annual or other period rate of return) basis, which is used
principally to report performance of publicly-traded securities. The internal rate of
return since inception is the most commonly used calculation methodology used for
presentation of performance in the private capital business.
Comparison of returns calculated on an IRR basis with returns on a time-weighted
basis is not appropriate. For a description of the two return calculation methods see
“Measuring Investment Returns, Time vs. Dollar-Weighted – What’s the Difference?”, a
copy is available from Commonfund Capital.
Gross performance results do not reflect the deduction of investment advisory fees
and other fees as disclosed in Form ADV on file with the SEC.
The information provided in this presentation is confidential, and is presented solely for
the use of the recipient. Commonfund requests that the recipient not copy or make any
further use of this material without its prior written consent.
Important Information About Procedures for Opening a New Account:
To help the government fight the funding of terrorism and money laundering activities,
Federal law requires all financial institutions to obtain, verify, and record information
that identifies each customer who opens an account. What this means for you: When
you open an account, we may ask for documents or information related to: your
principal place of business, local office or other physical location; taxpayer
identification number; and other documents demonstrating your lawful existence such
as certified articles of incorporation, a government-issued business license, a
partnership agreement, or a trust instrument, and other identifying documents.
Returns on funds are presented net of all fees. Performance includes reinvestment of
dividends. Internal Rates of Return should be evaluated in light of information on the
investment program of the partnership, the risks associated therewith, and
November 4, 2015
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Important Notes
MARKET COMMENTARY
Information, opinions, or commentary concerning the financial markets,
economic conditions, or other topical subject matter are prepared, written, or
created prior to printing and do not reflect current, up-to-date, market or
economic conditions. Commonfund disclaims any responsibility to update
such information, opinions, or commentary.
To the extent views presented forecast market activity, they may be based on
many factors in addition to those explicitly stated in this material. Forecasts of
experts inevitably differ. Views attributed to third parties are presented to
demonstrate the existence of points of view, not as a basis for
recommendations or as investment advice. Managers who may or may not
subscribe to the views expressed in this material make investment decisions
for funds maintained by Commonfund or its affiliates. The views presented in
this material may not be relied upon as an indication of trading intent on behalf
of any Commonfund fund, or of any Commonfund managers.
Market and investment views of third parties presented in this material do not
necessarily reflect the views of Commonfund and Commonfund disclaims any
responsibility to present its views on the subjects covered in statements by
third parties.
and risk tolerances of each individual investor. All market outlook and similar
statements are based upon information reasonably available as of the date of
this presentation (unless an earlier date is stated with regard to particular
information), and reasonably believed to be accurate by Commonfund Group.
Commonfund Group disclaims any responsibility to provide the recipient of
this presentation with updated or corrected information.
INVESTMENT PROCESS
Any descriptions involving investment process, portfolio characteristics,
investment strategies, goals or risk management are provided for illustration
purposes only, are not complete, will not apply in all situations, may not be
fully indicative of any present or future investments and may be changed in
the discretion of the investment manager. No representation is made that the
investment manager’s or an investment product’s investment process,
investment strategies, goals or risk management techniques will or are likely
to be achieved or successful.
Securities offered through Commonfund Securities, Inc., a member of FINRA.
Statements concerning Commonfund Group’s views of possible future
outcomes in any investment asset class or market, or of possible future
economic developments, are not intended, and should not be construed, as
forecasts or predictions of the future investment performance of any
Commonfund Group fund. Such statements are also not intended as
recommendations by any Commonfund Group entity or employee to the
recipient of the presentation. It is Commonfund Group’s policy that investment
recommendations to investors must be based on the investment objectives
November 4, 2015
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