News and analysis
May 28, 2013

Many Small Groups Don’t Have Investment Guidelines

Nearly 40 percent of small and midsize charities and nonprofit associations do not have guidelines to ensure that their investment reserve is diversified, and nearly 20 percent have no policy at all for governing how their reserve is managed, according to a new study of investment practices at 156 nonprofit organizations.

Almost half of the nonprofit groups—48 percent—had not formally specified a benchmark against which to evaluate investment results, the study found.

The study was commissioned by Raffa Wealth Management, an investment-advisory company that works primarily with nonprofit groups and foundations.

“We saw a lot of groups that aren’t doing some of the basic things that can help mitigate risk,” says Dennis Gogarty, the company’s president. Mr. Gogarty and Mark Murphy, a portfolio manager at Raffa, analyzed the data in the survey, which was conducted by Amplitude Research.

Benchmark for Small Charities

Mr. Gogarty says he plans to conduct the survey annually so small and medium-size nonprofit groups will have better data to evaluate their practices.

He says Raffa decided to start the survey—known as the Study on Nonprofit Investing—after being asked repeatedly by clients at small nonprofits to compare their asset allocation and investment returns against data in an annual endowment survey conducted jointly by the National Association of College and University Business Officers and-Commonfund. Such comparisons make little sense, Mr. Gogarty says, since asset levels and investment practices at most smaller charities are nothing like those at the colleges and universities in the Nacubo study.

“Small and medium-size charities aren’t 40 percent invested in alternative assets,” Mr. Gogarty says. “Comparing those organizations to college and university endowments is not apples to apples.”

About 30 percent of the groups in the Raffa survey made policy changes in 2012 related to how they invest their assets—and those groups underperformed others in the survey by two full percentage points, earning a return of just 7.24 percent in 2012, compared with a 9.25-percent return for the groups that made no changes.

Mr. Gogarty suspects that many of the organizations that made changes did so to reduce the riskiness of their assets, due to wariness about whether the political stalemate in Washington would add to the country’s budget woes.

“Changing your policy based on external influences and factors is not likely to improve your outcome,” Mr. Gogarty says. “It’s more likely to hurt the organization in the long term.”

Conservative Investors Lag

About 60 percent of the groups in the survey were associations. The rest were primarily charities. The associations outperformed the charities, which tend to invest more conservatively and thus are likely to lag in rising markets.

A majority of the organizations in the survey were from the Washington, D.C., area, where Raffa is based; the rest were spread throughout the country.

The median budget of organizations in the survey was $5.7-million, although 10 percent had budgets of $33-million or more, and 10 percent had budgets of $600,000 or less. Mr. Gogarty says he hopes at least to double the number of participating charities next year.