Guidelines to help prudent investment committees

Seven guidelines for prudent investment committees emerge from this analysis of the determinants of a foundation endowment’s performance:

1. Delegate responsibility for as many investment decisions as possible to professionals.

It is unreasonable to expect a part time, voluntary committee to deliver the same level of performance achievable by full-time investment professionals. The economies-of-scale of investment management are such that few foundations can manage their investment portfolios themselves. Hiring external managers or using mutual funds is therefore the best practice. Family members who are themselves investment professionals may of course be appropriately employed, with due attention given to potential conflict-of-interests issues.

2. Retain the services of investment consultants who specialize in the endowment field.

Because even large foundations have minimal investment staff and small foundations have none at all, committees may benefit from the expertise of consultants who can provide the research and analysis necessary for allocating assets appropriately and for conducting well informed manager searches. Very small family foundations with assets under $10 million will not be able to meet the minimum asset level required by many consultants, which makes the need for committee members with some investment experience all the greater.

3. Place day-to-day responsibility for investments in the hands of a capable representative.

Consultants produce their best work when guided by a foundation representative able to devote substantial time and thought to the foundation’s investments, and who has a close working knowledge of the foundation’s finances. Given the demands on the time of voluntary investment committee trustees, whenever possible that person should be a qualified staff person, with responsibility for orchestrating the work of the investment committee, consultants, and investment managers. Any foundation with assets of $100 million or more should ensure that a qualified staff member acts as de facto chief investment officer, reporting to the investment committee. Small foundations are typically unable to afford such staff, but may wish to delegate authority to a committee member with the requisite time and expertise.

4. Give clear mandates to hired professionals.

The division of labor among committee members, staff, consultants, and investment managers must be well understood if each is to perform his or her role effectively. Guidelines for managers should include the universe of stocks, bonds, or other securities from which managers may select, as well as agreed-upon performance expectations relative to market indexes.

5. Monitor hired managers’ performance and that of the total endowment vigilantly.

Investment returns for each manager and for the total portfolio should be calculated each quarter and cumulative performance records should be compiled. The investment committee should ensure that analyses of performance are undertaken on a regular basis and that they focus on cumulative returns. The committee should also meet with external investment managers with sufficient frequency to assess each firm’s ability to continue satisfying the rigorous demands on intellect, energy, and time that produce superior long term performance. Two meetings per year are normally sufficient for this purpose, and one of these might be by conference call.

6. Focus on the long term, and never mistake investment committee activity for a measure of diligence.

Committees should resist the common penchant for being over-zealous in hiring and firing managers and for engaging in market timing. Foundations are almost uniquely privileged among investors in their freedom to focus on the distant horizons rather than short term market fluctuations and returns. Trustees should be mindful that a truly long term investment perspective is appropriate for perpetual foundations, and that adhering to a well-considered strategy is almost always the best policy, whatever the current market crisis.

7. Keep the rest of the board of trustees well informed on the investment committee’s strategy for managing the endowment, issues currently requiring attention, and the endowment’s short- and long-term performance record.

Whoever is chosen to make the investment decisions should be expected to explain those decisions to the rest of the board in language that all can understand. The full board should understand the level of risk inherent in the chosen investment strategy. If so informed, board members are likely to maintain their confidence in the investment committee—even during periods of market volatility.