Hi Everyone,
I am on the board of a non-profit with about 1.5 million in reserve funds that needs to be conservatively managed. (Everyone is still freaked out about 28% (paper) loss in 2008-2009, even though the funds have recovered since.) Currently, the funds are invested 50/50 stocks/bonds in ETFs through a management company that charges 0.5%. The allocation is static, meaning they will only shift funds around to bring the allocation back to the designated split.
I am wondering if there are any investment management firms that use some kind of dynamic allocation. I've been reading with interest the postings here about different asset allocation models that look at momentum or volatility or risk parity. At least in backtests, these models seem to avoid big drawdowns. I contacted Vanguard, but they only do a static allocation with periodic rebalancing (and for a higher fee).
Can anyone recommend an investment manager who uses dynamic allocation?
Thanks in advance,
lrwilliams
Comments
But then, would you be managing CONSERVATIVELY? I understand you're looking for a professional outfit that will do the managing, rather than yourself, or the entire Board, together. (Ugh! As a retired minister, I can tell you that management-by-committee is a recipe for making you want to pull your hair out and randomly cluck like a chicken through the day.)
Maybe I'm old-fashioned. I'd just see to it that some proper, reliable funds with great histories and reputations in various market sectors get chosen, both with equities and bonds. (Or use "balanced" funds including some proportion of stocks and bonds.) Then trust the funds' own managers. THEN: Leave it alone. It will work, so don't fix it. OK, I'll shut up.
That would entail a lower stock allocation, maybe a larger bond allocation, and adding inflation-related assets (commodities, REITs, EM currencies and local currency bonds, etc.) of 20% or so. Your investment committee could go over the options of specific etf's with your advisor, and then it could be pretty much hands off from there.
I'm curious if you try to match projected need for the reserves with duration of the investment portfolio, which of course is difficult to do with true reserves. Coincidentally, I'm on a task force starting to work on an investment plan for a non-profit I'm affiliated with.
Regards,
Ted
In that regard, what are your thoughts about PELBX?
I am in PEBIX, but am looking to add this fund. A concern I have is it can be considerable more volatile than PEBIX.
Mona
The most important thing you can do (and must do) is creat an Investment Policy Statement for the account(s). This should outline the goals for the account(s), the income needed and the frequency it will be taken, the risk profile, the kinds of investments you will use, and those that you will not (some non-profits have specific exclusions in the kinds of investments they can own), who is going to manage the account(s), the kind of reporting that will be done and how the account(s) will be monitored and re-balanced.
One of the non-profits we currently work with has three accounts: an emergency fund, a cash & capital fund, and a development fund. The first two have been restricted to CDs and investments in various kinds of U.S. government securities. We are working to have that restriction amended for obvious reasons. The third is a very diversified mix of non-commission funds including domestic & foreign bonds, domestic & foreign stocks, and alternative investments that use 40-Act funds. The organization has another RIA who monitors the accounts to be sure the investments are appropriate and fall within the policy statement guidelines and allocation targets. We meet with the board's investment committee quarterly to look at the numbers and report our observations. We have discretionary authority to make changes. This has worked out really well.
We have a potential new client in another non-profit. They just want to give us a large chunk of dollars and get it invested. We told them it does not work that way. They may decide to work with someone local (we are in Ohio, they are in California) who will shortcut the process, but I hope for their sake they do not. Managing a non-profits dollars requires everything to be done with a fiduciary understanding. If these folks cut corners and do not get their ducks lined up, the organizations members would have good cause to press legal action if things turn sour with the accounts.
Our church's endowment accounts were at one time managed by the trustees. That was a real mistake. As another poster noted, managing by committee is just asking for trouble. At my suggestion and insistence, we interviewed three RIA firms and hired the one that took the long process very seriously. That was more than 10 years ago, and they are still handling the church's dollars.
My advice, forget about managing the dollars yourselves. Pay a qualified firm to do it right and then monitor the process and results. We charge our non-profits a much lower fee than other clients, and that seems fair. Search out 2-3 companies with experience doing this, interview them, ask good questions (like the policy statment requirements), make a decision, and move on. A good company will ask how much of the total might be needed in the next 12-36 months and invest that accordingly. And for Pete's sake, don't work with anyone who is going to be paid by commission. The opportunities for conflict of interest are too great.
I hope this helps.
But there are several EM local-denominated debt funds to consider; the only one I've ever owned is the etf ELD, which is investment grade debt and so pretty muted in volatility for a local currency fund. IMHO, that's a pretty good risk tradeoff: lower-risk investment grade debt combined with some currency risk.
But add up your other stock and bond funds first; you may already have more foreign currency exposure than you think.
PEBIX is similar to DBLEX and TGEIX in that all three are US dollar denominated, but have the ability to purchase local currency bonds; up to a small percentage.
PELBX is only local currency bonds.
Mona
Thanks for all the great advice. I agree that we should not try to manage the money ourselves. We do have an investment policy. We do have a cash reserves account equal to one year's worth of operating costs that is invested in money markets and CDs. (Our main activities are an annual conference and a journal, both of which are self-supporting). The goal for these long term reserve funds is to be able to withdraw 4% per year for extras -- like special initiatives or student travel grants.
I'm new to the organization's board so I don't know how much interaction there has been in the past with the current investment advisor. They may be just fine. I was just wondering if there might be something else out there that we should consider. Sounds like the answer is not really.
Thanks again. Love this forum.
Leah