We had the opportunity recently to talk with Tavan Pechet, the President of Pechet Advisors. He has advised clients from entrepreneurs to inheritors to widows, controlling assets from $20 million to over $5 billion. Given that amazing background and knowledge, we wanted to pick his brain on non-profit investment management.
How should a non-profit organization or foundation start to think about investment management of their endowment?
From the top down! Don’t start with tactical questions about investment products or even consultants. Regardless of how much money you have, your core investment function will include investment policy, asset allocation and manager selection. You need experience and expertise to design and build that investment function. Ideally you have that on your Board (or can recruit it) and can access conflict-free, buy-side advice from experts willing to donate their time!
What type of board and/or committee is best equipped to govern investment management decisions?
Depending on the nature of the non-profit, the Board may delegate authority to a joint Finance and Investment Committee (e.g., in a small foundation) or to a separate Investment Committee (e.g., in an operating non-profit). That committee should have core experience and expertise in setting investment policy and overseeing your investment operations.
What types of people should organizations look for to fill this role?
You want some specific expertise in these functions. As you phrased it to me once, Marta, there are many slices of finance, and being a banker or broker does not necessarily bring the right investment skills. Ideally they have “buy-side” experience such as investment professionals from another non-profit or a family office, so they are consumers of investment services rather than having something to sell. Then supplement that core expertise with diverse experience. Investing is more art than science, so the Committee should have some great debates fueled by diverse perspectives!
Do you have any tips on how to choose the right investment advisor partner?
I start with the right outsourcing model for your organization, from an expert committee using a consultant’s advice, to hiring investment staff, to (the trend today) using an Outsourced Chief Investment Officer (OCIO) firm. Then define your criteria and source candidates. Good investment advice is a product of the ability to provide good advice, and the incentive to provide good advice. So I look hard at hidden conflicts-of-interest, as well as the right experience, expertise, focus and resources. Today more non-profits are also looking for an advisor with impact investment capabilities to align your portfolio with your mission.
Are there any common issues that all sizes of organizations should be thinking about whether they have $1M or $100M or $1B to invest? And what are the biggest differences these organizations should be aware of?
All organizations must develop a good investment policy (i.e., risk, return and spending), and they all need the experience and expertise to oversee an investment function. In other words, while the answers will be very different for each non-profit, the questions and the process can be similar. On the other hand, smaller organizations tend to use OCIOs while larger organizations can hire their own CIO.
Even if you can afford a complex solution, however, sometimes simple is better! Many of my clients are moving away from sophisticated but risky hedge funds, derivates and venture capital, and toward liquid portfolios based on low-cost passive strategies. Incidentally, that doesn’t mean your advisor isn’t adding real value by simplifying and allocating the portfolio.
For more information on Pechet Advisors, check out their website.
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