American non-profits need to abandon traditional investment strategies in order to tackle chronic underfunding in the current environment of low yields, high volatility, fewer donations and stricter regulations, argues a new U.S. Trust report.
“By adhering to traditional strategies that have not kept pace with changing market dynamics, many [non-profits] have been unable to benefit from emerging and rebounding growth opportunities,” explains Christopher Hyzy, chief investment officer of U.S. Trust, a wealth management entity within Bank of America.
The typical non-profit portfolio lost a quarter of its value in 2008, the height of the financial meltdown. While other individual and institutional investors have recovered many of their losses, a number of hospitals, colleges, charitable foundations and other non-profits continue to struggle—at a time when the needs of their beneficiaries have increased.
U.S. Trust suggests that to improve their goals-based funding, non-profit entities need to diversify their portfolios. Including global and alternative investments such as real estate, private equity, commodities and hedge funds in the mix would help to manage risk and drive incremental return, U.S. Trust argues.
It says that tactical asset allocations that increase or decrease exposure to near-term market changes for the purpose of additional returns would also be a good idea.
Additionally, non-profits should eliminate excess liquidity, according to the report. “Because cash on hand is forecast to earn a negative return when inflation and fees are taken into account, excess liquidity in a low-return environment can be detrimental,” U.S. Trust says. “Non-profits that have not yet analyzed liquidity needs relative to the distinct mission of the organization may be sacrificing additional return opportunities.”
Outsourcing to mitigate risk and maximize resources is yet another of many measures that U.S. Trust sees as desirable. Since members of the board and the investment committee absorb the fiduciary risk, many of them can be ambivalent about whether they want to manage their organization’s investment portfolios. If they outsource that investment function, boards can reduce risk and gain access to professional investment managers, according to the report.