When considering the association investment landscape, it is difficult to know what typical performance is and what makes an association’s investment portfolio an outlier.

How much risk in a portfolio is average? What does performance look like among similarly invested peers? Are investment policies in line with industry best practices?

Association boards have a fiduciary responsibility to be effective stewards of their organization’s assets. They should review components of the investment portfolio—such as net performance, reserve size, and investment fees—and benchmark these indicators against organizations of similar size.

One tool for doing this is the annual Study on Nonprofit Investing (SONI), which contains actionable data about how associations invest their reserves and perform by investment strategy. The study, segmented by budget size, can help an association to verify that its investment policies, fees, and returns are in line with those of similar organizations.

An analysis of the last three years of SONI data for associations identified trends with respect to investment benchmarking, performance, and reserves. And those findings suggest three actions that associations can take to more effectively monitor their portfolios.

Create a benchmark. Year after year, respondents to the survey have expressed uncertainly about how to evaluate the effectiveness of their investment strategy and advisors. A good way to do this is to develop a high-level blended-policy benchmark.

The BPB is a mix of indexes based on your association’s investment policy (for example, the target asset allocation to U.S. stocks, foreign stocks, bonds, and cash). The performance of the BPB is the baseline performance expectation of the portfolio based on market conditions and absent professional advice. Just as in a scientific experiment, the BPB serves as the control. You can then compare the gain or loss resulting from any investment strategy decision or judgment to this control.

The blended-policy benchmark is a mix of indexes based on your association’s investment policy. The performance of the BPB is the baseline performance expectation of the portfolio.

It’s critical that your BPB remain constant unless the organization, not the advisor, directs changes to your investment policy. If your association’s BPB changes to reflect an investment judgment or a change in an advisor’s strategy, comparing your results to your BPB no longer reflects the value of those decisions.

Percentage of Associations With a Formal Investment Policy Benchmark

 

Compare investment returns. To determine whether your association’s investments are performing in line with investments by peer organizations, it’s critical to compare returns. Over the last three years, annual returns for associations of all sizes have been similar. While larger associations outperformed slightly in 2016 and 2017, they also experienced greater losses in 2015.

Net Performance by Calendar Year

Create and maintain a reserve policy. The creation and maintenance of adequate cash reserves are fundamental tenets of sound financial management for associations. However, there is no standard amount that is correct for every organization. Each organization is unique and may experience distinct and unexpected circumstances that affect long-term financial health. Historical data shows that budget-to-reserve ratios fluctuate even among similar-size organizations.

Association Budget-to-Reserve Ratios

Generally, six months of budgeted expenses in reserve is a good target. To quantify the dollars you need in reserve, consider going through a risk and opportunity assessment.

The views expressed herein are opinions reflecting the best professional judgment of Raffa Wealth Management, LLC. This report is for informational purposes only. The information contained has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information. Data analysis was performed by Raffa Wealth Management. When stating “nonprofit” or “association” responses it should be noted that all responses are limited to the nonprofits that participated in the survey. No broader indications should be assumed. There can be no assurance that the future performance of any specific investment or investment strategy referenced in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your nonprofit’s portfolio. Any investment can lose value.

Survey participant responses, including investment performance, have not been verified or audited. All performance data cited is as of 12/31/2015 or SONI 2016, 12/31/2016 or SONI 2017, 12/31/2017 or SONI 2018. Past performance is not an indication of future results and any investment can lose value.