This document is for institutional use only and redistribution is expressly prohibited. Outsourcing...

This document is for institutional use only and redistribution is expressly prohibited.

Outsourcing Trends in NonprofitInvestment ManagementIPA/GIFT Finance & Investment Deep Dive Day

November 4, 2015

Outsourcing Trends in Nonprofit Investment Management 2

Agenda

• Governance

• Outsourcing Considerations

• Outsourcing – Landscape and Trends

Presenter

William F. JarvisExecutive Director, Commonfund Institute

November 4, 2015

Governance


Nonprofit Investment Management Governance Model

VOLUNTEER ROLES

Board

InvestmentCommittee

FinanceCommittee

AuditCommittee

STAFF ROLES

CEO

CIOCFO

CDO

CONSULTANT/MANAGER ROLES

External Resources

InvestmentConsultant

Auditor/ CustodianPortfolio

Manager

Finance Committee• Report to Board• Develop financial strategy and oversee financial operations• Review and monitor financial operations • Maintain financial records• Present financial information to Board• Approve capital budgets and debt issuance• Communicate with and educate Board on financial mattersInvestment Committee• Report to Board• Develop investment policy• Develop and oversee asset allocation / Policy portfolio• Develop and oversee spending policy• Set risk tolerance and oversee risk management• Monitor investment performance (manager / portfolio)• Direct hiring / compensation of managers and consultantsAudit Committee• Report to Board• Select and hire independent auditor• Manage and oversee audit process• Review audit findings and management letter with auditors• Present financial statements and auditors’ recommendations

to Board• Oversee business office processes• Oversee conflict-of-interest and whistleblower policy

Investment Consultant

• Report to CIO/ Investment Committee

• Educate / inform Investment Committee

• Assist with development and review of investment policy statement and policy portfolio

• Conduct asset allocation studies

• Implement manager search process

• Conduct ongoing manager evaluation and reporting

• Provide Investment Committee with research / analysis

Portfolio Manager

• Report to CIO / Investment Committee

• Conduct investment strategy as contracted

• Provide regular written reports and risk-adjusted performance attribution

• Provide educational materials and economic / market analysis

Auditor/ Custodian

• Auditor reports to CFO / Audit Committee

• Custodian reports to CIO / Investment Committee

• Provide audit / custody services

• Reporting, fund accounting

• Transfer agent

• Compliance

• Legal counsel

Chief Financial Officer (CFO)

• Report to CEO and Finance Committee

• Prepare and manage annual budget

• Recommend and manage debt policy

• Oversee audit of organization, including investment portfolio

• Optimize cash flow

Chief Investment Officer (CIO)

• Report to CEO and Investment Committee

• Execute investment policy

• Maintain asset allocation / policy portfolio

• Oversee and recommend manager / security selection

• Oversee performance reporting and attribution

• Recommend and implement risk management

• Recommend and conduct portfolio rebalancing

• Conduct tactical asset allocation within policy portfolio

Chief Development Officer (CDO)

• Report to CEO and Finance Committee

• Develop and oversee major and annual gift strategy

• Develop and oversee planned gift strategy

• Supervise development staff

• Possess knowledge of endowment management best practices

November 4, 2015


Legal & ComplianceInvestment Teams Risk Management

• Vet Investment process

• Manager selection

• Monitor manager to guidelines & process

• Monitor leverage

• Stress test fund portfolio

• Replace/Rebalance among managers

• Custodian/Administrator oversight

• Asset verification

• Valuation policy guidelines

• Proxy voting guidelines

• Manager advisory agreement

• Review and negotiation of terms: fees, liquidity, transparency, significant events notice, etc.

• Compliance review and check of manager policies

• Background checks of sub-advisors

• Enterprise related risk monitoring

• Counterparty risk

• Manager’s credit risk

• Collateral monitoring

• Risk metrics & modeling

• Independent due diligence

Your Organization’s

Board of Trustees

Commonfund Strategic

Solutions

Quarterly• Investment policy statement (IPS)• Purpose of endowment fund• Investment spending and asset allocation policy• Risk constraints, liquidity, and other guidelines• Conflicts of interest & ethics policies• Roles and responsibilities • Evaluation• Asset allocation modeling and peer benchmarking• Implement investment plan• Risk management process• Rebalance/Tactical analysis & trade execution• Liquidity budget • Report to Board: performance, analysis and recommendations

IDEA Committee

(Trustee/Staff)

Annually• Strategic Planning• Long-term execution• Oversight

Operations

Fiduciary ChecklistInvestment Management Governance

November 4, 2015

Outsourcing Considerations


Evaluation of OCIO Capabilities and ServicesAccount Management and Analytic Resources

Portfolio Management AnalyticsReporting and Accounting

Financial Operations

Board of Trustees

Chief Investment Officer Relationship Management

Investment Teams

Account Management and Analytics

Risk Management

Legal & Compliance

OCIO Team

Staff

Operations

Account ManagementTrading and Compliance Analytics

November 4, 2015


Considerations | Roles and Responsibilities Example

Trustees/ Committee

Investment Office OCIO Roles and Responsibilities

● Report to Board of Directors

● ● Develop Investment Objectives and Policies

● ● Establish “target portfolio” and strategic asset allocation

● ● Oversee risk management and report to Board

● Oversight of Commonfund Strategic Solutions

● ● ● Formal annual review of Investment Policy Statement and Asset Allocation

● Liaison between IC and Strategic Solutions

● Develop cash budget and communicate cash needs each month

● ● Monthly portfolio rebalancing – varies based on level of discretion

● Portfolio risk measurement and monitoring

● Customized online reporting

● Manager due diligence and on-going monitoring

● Execute subscription documents for illiquid programs

November 4, 2015


Considerations | DiscretionDetermining Committee investment discretion and control

Source: Casey Quirk - The New Gatekeepers: Winning Business Models for Investments Outsourcing, December 2008

Minimal Discretion Partial Discretion Full Discretion

• Outsourcing provider makes formal recommendations to investment committee

• Asset allocation

• Risk budget

• Strategy execution


• Investment committee approves all investment decisions

• Investment committee sets asset allocation, risk budget, and investment policy ranges

• Investment outsourcing provider advises on policy and implements portfolio decisions

• Defines strategy execution

• Conducts manager searches

• Investment instruments

• Flexibility to make tactical investment decisions within policy ranges

• Investment outsourcing provider responsible for investment policy decisions

• Asset allocation

• Risk budget

• Strategy execution


• Depending on provider, may not tailor allocation/risk to individual clients

Committee Time/Resources Dedicated to Portfolio Management

MinimalExtensive

November 4, 2015


Reasons to Consider OutsourcingCriteria for considering differs from reasons to select outsourcer

Source: 2015 Outsourced-Chief Investment Officers Buyer’s Guide, February 27, 2015, Chief Investment Officer

November 4, 2015

Lack of Internal Resources

Better Risk Management

Additional Fiduciary Oversight

Faster Implementation and Decisions

Cost Savings

Need to Increase Returns

Desire for Strategic Partnership


Reasons for Selecting OutsourcingCriteria for selection differs from reasons to consider outsourcing

Source: 2015 Outsourced-Chief Investment Officers Buyer’s Guide, February 27, 2015, Chief Investment Officer

November 4, 2015

Breadth of Capabilities and Services

Experience of Top Management

Reputation and Peer Referral

Client Service

Willingness to be a Fiduciary

Price


The Outsourcing ModelWhat are your expectations?Ask questions to understand your needs

November 4, 2015

The process for engaging an OCIO provider begins with an understanding of your expectations and reasons for change.

• How do you currently govern and manage the portfolio?

• What deficiencies or gaps exist in the current governance and management structure?

• How involved are Trustees in the governance and management of the portfolio? What level of control or discretion do they exercise over the management of the portfolio?

• What is the catalyst for change?

• What do you hope to gain or achieve with a change?

• How would you engage an OCIO – as an Outsourced Chief Investment Officer or Outsourced Chief Investment Office? Why?


The Outsourcing ModelWhat are the implications for staff?Ask questions to understand the partnership

November 4, 2015

Once an OCIO is engaged, what does it mean for Staff?

• How are duties delegated?―What current responsibilities of Staff will be delegated to the OCIO?―What additional duties will Staff take on as a result of hiring an OCIO?

• What reporting is available?―Do you have the ability to deliver custom performance/executive summary/audit

reports?―What is the timing of monthly/quarterly reports?―What type of performance/financial reports are provided? What’s the frequency?

Customization?


The Outsourcing ModelWhat are the implications for staff?Ask questions to understand the partnership (continued)

November 4, 2015

Once an OCIO is engaged, what does it mean for Staff?

• What analytical tools are available?―Who is responsible for cash flow/liquidity management? What is the staff’s role? ―How frequently will asset allocation and investment policies be reviewed?―Who undertakes special analytical requests?

• What other services are included in the OCIO program?―What is the OCIO involvement or assistance provided during the audit process? Will

there be an increase in costs as a result?―Who is responsible for portfolio rebalancing and what is the frequency? ―What type of ongoing training is provided to staff and trustees? Does the provider

offer CE credits for industry professionals (i.e., CFA’s, CPA, etc.)―What other services are provided under the OCIO program?

Outsourcing | Landscape and Trends


OCIO Landscape and Trends

November 4, 2015

Naming convention – OCIO/Fiduciary Manager

Few Barriers to Entry - < 45 to > 75+ Providers

Little Standardization – Fees, Performance and Services

• Pressure on Fees – base plus incentives

• Seek similar size and objective performance results

• Services match the needs of the organization

Cottage Industry – OCIO Consultants

Investor Demands Increasing – Beyond Investment Management and Advice

Difficult to Evaluate


Assessing OCIO Performance

November 4, 2015

Assess means to measure, evaluate and judge

What do you assess?

Nominal returns, gross and net of fees

• Risk-adjusted returns

• Other, more qualitative, factors such as “fit”

Lack of standardization among OCIO models makes assessment difficult

Each institution is unique


Assessing Performance

November 4, 2015

Defining performance, either gross or net of fees, is challenging:• Nominal Returns• Risk – Adjusted Returns• Other - Qualitative

Performance is an outcome

• There is no one, standard portfolio• Portfolio choices reflect:

• The purpose of the institution• Objective (risk/return) guidelines

These and other factors govern portfolio construction

By definition then…

• Each institution’s performance will be unique


It’s Your Money | Ask Your Advisors About Performance

November 4, 2015

Are they comparing equivalent structures?• Discretion• Size• Objectives

How are the performance benchmarks determined?

Is the performance a measure of a model portfolio or composite?

Can the OCIO provide both asset class and client portfolio level performance?

How can you compare their performance with that of other providers?


Assessing OCIO Fees

November 4, 2015

What are you assessing?

• Total costs

• Impact on recommendations

• Components

Lack of standardization and regulation among OCIO models makes assessment difficult

Components

• OCIO advisory fee

• Other expenses

> Direct expenses

> Performance fees

> Base asset manager fees

> Other

What resources and services are included?

Each institution is unique, services to be provided should be as well


It’s Your Money | Ask Your Advisors About Fees

November 4, 2015

Again, are they comparing equivalent structures?

• Discretion

• Size

• Objectives

Are there additional charges? For what purposes?

Are all similar clients treated the same for fee purposes?

Does the OCIO provider share fees with underlying managers or through proprietary management?

How can you compare their fees with those of other providers?


Select Competitor Data and Models

Strategic SolutionsOCIO Provider of

Large Asset ManagerConsultant/ OCIO

provider OCIO Provider Single Fund Provider

Minimum Investment

$25 million None noted $250 million $50 million $200 million

Client Base US/non-US non-profits US and non-US individual and

institutional clients

US non-profits US and non-US individual and

institutional clients

US and non-US individual and institutional clients

Fees 0.50% up to $100 million;

───────────0.35% $100m to $500

million;───────────

negotiable thereafter

0.60% up to $100 million

0.40% on assets up to $500 million;

───────────0.15% on assets over

$500m

0.75% on 1st $100 million;

──────────negotiable thereafter

0.75% up to $100 million; ─────────

0.675% > $100 million and < $250 million; ─────────

0.60% > or equal to $250 million.

Performance Fee

No 0.50% + 5% over an agreed upon index

3.0% annually of net profits in excess of 10%

return

Yes - negotiated individually

Yes - negotiated individually

Investment Vehicles

Commingled (manager and CF) funds and separate accounts

Commingled funds and separate accounts

Third party investment managers and pooled

funds

Commingled funds and

separate accounts

Single fund or funds

Little consistency among providers

NOTE: All fees reflected are indicative of direct fees charged by Provider; and are not indicative of fees charged by underlying investments or sub-advisors which may be higher.Source: 2015 Outsourced-Chief Investment Officers Buyer’s Guide, February 27, 2015, Chief Investment Officer ; OCIO ADV Brochures

November 4, 2015


OCIO Landscape and TrendsThe Future

November 4, 2015

No standardization = difficult to evaluate ― Will remain so for foreseeable future― Importance of references

Define your circumstances and expectations (allow for relationship “matching or fit”)

Investors continue to demand more beyond investment management and advice

Fees will compress – greater standardization

Larger institutions to consider outsourcing―Staff turnover―Technology

Institutions seek a partner not a provider

Market providers will contract – survivors will be strategic partners and guide clients to understand what is needed to generate strong performance

Appendix


Important Notes

ADVISORY SERVICES

Advisory services described under the trade names “Commonfund Strategic Solutions” and “Commonfund Custom Investment Office” in this presentation are provided by Commonfund Asset Management Company, Inc., a SEC-registered investment adviser that is a controlled subsidiary of The Common Fund for Nonprofit Organizations (“Commonfund”; Commonfund and its controlled affiliates are collectively referred to as “Commonfund Group”). Investors in these services enter investment advisory agreements with Commonfund Asset Management Company, and are provided with copies of Part II of its filing with the SEC on Form ADV (copies of this document are available to prospective investors on request to your Commonfund Relationship Officer).

COMMONFUND MULTI-ASSET PROGRAM

The “Commonfund Multi-Asset Program” described in this presentation provides to qualifying investors who invest significant portions of their assets in Commonfund Group commingled funds the described web portal and associated reporting services, as well as incidental consulting from investors’ relationship officers (who are affiliated with Commonfund Securities, Inc., a broker-dealer member of FINRA). These services do not include direct investment advisory services (although the Commonfund Group funds in which such investors place their assets do receive advisory services from Commonfund Asset Management Company). In particular, investors in the Commonfund Multi-Asset Program should be aware that Commonfund Group has no obligation, as well as no authorization from such investors, to engage in ongoing continuous management with respect to such investors’ overall portfolios or asset allocations, or specifically to rebalance such investors’ allocations among Commonfund Group funds without specific directions from such investors delivered in accordance with the underlying funds’ current procedures.

NO OFFERING

This presentation is not an offer to sell or a solicitation of an offer to buy securities. The Commonfund Group funds are offered only by means of disclosure documents, prospectuses or similar materials made available to investors for consideration at the time of investment. Prospective investors are encouraged to review these materials with care prior to investing or sending money. Commonfund Group funds offered by means of private placement will be offered only to qualified and eligible investors.

All interests in Commonfund Group Funds are offered through Commonfund Securities, Inc., a member of FINRA

INVESTMENT PERFORMANCE

Unless otherwise noted, any investment performance of funds maintained by Commonfund Group included in this presentation reflects net total returns. Returns for periods of one year or more are annualized.

It is possible that investors may lose money on investments in any investments in Commonfund Group funds, or in any investments in stocks, bonds, or other instruments to which this presentation may relate, directly or indirectly. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate.

Securities offered through Commonfund Securities, Inc., a member of the FINRA

Outsourced Investment Solutions

November 4, 2015


Important Notes

ELIGIBLE INVESTORS ONLY

The Common Fund for Nonprofit Organizations (“Commonfund”) was established in 1971 and manages investment funds primarily for nonprofit institutions and other qualified investors.

The following Commonfund affiliate organizations are registered with the Securities and Exchange Commission (“SEC”) as investment advisers: Commonfund Asset Management Company, Inc. (“Comanco”), Commonfund Capital, Inc. (“CCI”), and Commonfund Realty, Inc. (“CRI”)

Additional information regarding Commonfund and its affiliates’ policies and procedures for calculating and reporting performance is available upon request.

This document is intended only for qualified, pre-existing investors in CCI, CRI, and Comanco programs, Members of The Common Fund For Nonprofit Organizations (“Commonfund”), or other eligible institutional investors approved by Commonfund Securities, Inc. (a broker-dealer affiliate of CCI, CRI and Comanco) . It is not intended to constitute an offer to sell, nor the solicitation of an offer to buy, securities. Any such offerings will be made only by means of information memoranda and related subscription documents that will be made available by Commonfund Securities, Inc. only at the time an offering is in progress and only to investors qualified and eligible to invest. When soliciting transactions, Commonfund Group employees may be acting as registered representatives of Commonfund Securities, Inc.

Past performance is not indicative of future results. All investments have the potential for profit and the possibility of loss. Similarly, our access to particular managers may vary in the future and cannot be guaranteed. Prospective investors should review with care the confidential offering memorandum or other disclosure documents for each fund; these pamphlets contain a fuller discussion of applicable risks.

Returns on funds are presented net of all fees. Performance includes

reinvestment of dividends. Internal Rates of Return should be evaluated in light of information on the investment program of the partnership, the risks associated therewith, and performance of the partnership as disclosed in the Information Memorandum for the partnership, the Annual Reports of Commonfund Capital, Inc. and the partnership and the Quarterly Reports of the partnership. Commonfund Capital, Inc. presents return information for its partnerships on a dollar-weighted (e.g., internal rate of return) rather than the time-weighted (e.g., annual or other period rate of return) basis, which is used principally to report performance of publicly-traded securities. The internal rate of return since inception is the most commonly used calculation methodology used for presentation of performance in the private capital business.

Comparison of returns calculated on an IRR basis with returns on a time-weighted basis is not appropriate. For a description of the two return calculation methods see “Measuring Investment Returns, Time vs. Dollar-Weighted – What’s the Difference?”, a copy is available from Commonfund Capital.

Gross performance results do not reflect the deduction of investment advisory fees and other fees as disclosed in Form ADV on file with the SEC.

The information provided in this presentation is confidential, and is presented solely for the use of the recipient. Commonfund requests that the recipient not copy or make any further use of this material without its prior written consent.

Important Information About Procedures for Opening a New Account:

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each customer who opens an account. What this means for you: When you open an account, we may ask for documents or information related to: your principal place of business, local office or other physical location; taxpayer identification number; and other documents demonstrating your lawful existence such as certified articles of incorporation, a government-issued business license, a partnership agreement, or a trust instrument, and other identifying documents.

November 4, 2015


Important Notes

MARKET COMMENTARY

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund managers.

Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties.

Statements concerning Commonfund Group’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund Group fund. Such statements are also not intended as recommendations by any Commonfund Group entity or employee to the recipient of the presentation. It is Commonfund Group’s policy that investment recommendations to investors must be based on the investment objectives and risk tolerances of each individual investor. All market outlook and similar

statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund Group. Commonfund Group disclaims any responsibility to provide the recipient of this presentation with updated or corrected information.

INVESTMENT PROCESS

Any descriptions involving investment process, portfolio characteristics, investment strategies, goals or risk management are provided for illustration purposes only, are not complete, will not apply in all situations, may not be fully indicative of any present or future investments and may be changed in the discretion of the investment manager. No representation is made that the investment manager’s or an investment product’s investment process, investment strategies, goals or risk management techniques will or are likely to be achieved or successful.

Securities offered through Commonfund Securities, Inc., a member of FINRA.

November 4, 2015

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