NFP Investing – Control the Controllables



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Cast your mind back to 2016 for a moment. It was a year full of surprises – Britain voted to leave the EU and Donald Trump was elected president. Few anticipated these results and when the outcomes were known, most forecasters were wrong again in predicting dire consequences for financial markets.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain

And so the forecasts continue in 2017 as commentators coin neat new phrases like global political crisis and Trumponomics. They’re good at it because they have lots of practice – unexpected events happen every year. Volatility is the norm, not the exception.

At Perpetual Private, we’ve been managing money long enough to know crystal balls aren’t crystal clear. No-one can predict the future or anticipate how markets will respond to surprise events. The trick is to focus on what you can control.

With this in mind, for not-for-profit organisations reviewing investment strategies, there are three areas of control to consider:

  1. Diversification
  2. Responsible investing
  3. Spending policy

Diversify against volatility

One of the factors you can influence is the diversification of your portfolio. You don’t want all your eggs in one basket because it concentrates risk. It’s a simple concept but the devil is in the detail – you may not be as diversified as you think.

Consider an investment portfolio comprising Australia’s leading companies. On face value it may seem diversified but look a little deeper at the key sectors dominating the ASX. Take financials as an example – this sector is dominated by the big four banks. In fact, the banks take the top four spots on the entire ASX 200 list by Market Cap*. So if this is a key sector in your investment portfolio, your risk is concentrated. The same applies to other sectors like telecommunications, where Telstra is the leading company, coming in at sixth place by Market Cap.

It’s important to review your portfolio with a fine tooth comb for true diversification. This is something we advise our not-for-profit clients on every day – diversifying across traditional assets and going further to consider alternative asset classes. These alternative investments fall outside traditional share and bond markets and their performance is largely determined by different factors.

Recognising responsible returns

Protective strategies like diversification are crucial in volatile investment markets. But the expectations placed on not-for-profit organisations extend beyond the financial as more people place emphasis on responsible investing. 

“Not-for-profit boards are conscious of aligning their investment strategy to their mission and the expectations of stakeholders and communities. This isn’t limited to the balance of risk and return. A commitment to ethical and responsible investing is a strong consideration,” says Scott Hawker, Perpetual’s National Manager, Not-for-Profit Endowments.

Socially responsible investing is a broad and evolving investment strategy. Its origins were in screening out companies in controversial industries like tobacco or gambling. From there it extended to positive screening for companies with a commitment to social and environmental issues. Now it encapsulates new areas like impact investing that can involve investment in community projects or financing businesses with a clear social purpose. 

“Not-for-profit boards can use their mission statements to frame the investment restrictions placed on their portfolio. While this may address ethical considerations, the level of restriction will limit the range of potential investments, which concentrates risk and may be reflected in lower returns. It’s a delicate balance. There are numerous, interrelated elements to consider when creating a portfolio tailored to the individual requirements of a not-for-profit,” says Scott.

Setting spending policies

As well as determining the diversification and social framework of investments, not-for-profits can develop policies to control how capital and returns are spent, particularly in cases where an endowment is established. Spending policies should balance the provision of funds to current operational requirements whilst ensuring sufficient funds are left to sustainably fund future needs.

“There are a number of ways to structure spending – meet the mission, spend income only, spend a portion of the capital base or create a hybrid solution. Boards need to balance predictable income – government grants – with less predictable revenue in the form of donations and bequests. The expense of running the funds and the variation of returns during investment cycles are other key factors for consideration,” says Scott.

Bringing it all together

Despite the market noise and unpredictable reactions to big events, not-for-profits still have control of their investment strategy and spending policy. The trick is bringing all of the elements together cohesively, given their interdependencies.

“The right investment solution is the one that ties complex factors together in a cohesive strategy that is aligned with the organisation’s purpose. Ultimately you want current and future stakeholders to be satisfied with the clarity of thought, extent of foresight and independence of thinking that has been brought to the development of the investment policy. Professional financial advice is an important component in assisting you to achieve this,” says Scott.   

Strategy is, “foreseeing the outlines of the future and preparing to deal with it.” 
Winston Churchill

To find out more, contact our not-for-profit specialists on 1800 501 227 or visit our NFP webpage.

*Source: 1 March, 2017

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Perpetual’s Philanthropic Services are provided by Perpetual Trustee Company Limited (PTCo), ABN 42 000 001 007, AFSL 236643. This publication has been prepared by PTCo and may contain  information contributed by third parties. It contains general information only and is not intended to provide you with advice or take into account your personal objectives, financial situation or needs. The information is believed to be accurate at the time of compilation and is provided by PTCo in good faith. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. PTCo does not warrant the accuracy or completeness of any wording in this document which was contributed by a third party. Past performance is not indicative of future performance.