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Principles of Nonprofit Investment Management

The key issues facing trustees and financial officers

A publication of Commonfund Institute

For the Nonprofit Community

Commonfund Institute is dedicated to the advancement of investment knowledge

and the promotion of best financial management practices among nonprofit orga-
nizations. It serves educational institutions, foundations, health care institutions
and other types of charities.

The Institute’s programs and services are designed to serve financial practitioners,
fiduciaries, and scholars. Its programs include seminars and roundtables on such
topics as nonprofit investment and treasury management, publications, and special
events such as the Commonfund Forum. Annually, the Institute undertakes
proprietary and highly comprehensive research among institutions to study the
practices and performance of nonprofit investment management. The research
results are published in the Commonfund Benchmarks Studies and are widely
used by institutions to measure their individual results against a body of peers.

We are grateful to our advisory panel members whose experience and dedication
to the nonprofit world helped make this brochure possible. Those we want to
thank in particular are Jennifer Neppel, Director of Cash and Investments for
Denver’s Catholic Health Initiatives; Laurance Hoagland, Jr., Vice President and
CIO of the William and Flora Hewlett Foundation; and Linda Strumpf, Vice
President and CIO of the Ford Foundation and member of the investment
committee of Penn State University.
The financial world has changed covered in Commonfund Institute’s comprehensive approach to nonprofit
dramatically since the first edition of Monograph, “Governance. Your investment management that all
this brochure was published in 2001. Board: Dynamic or Dysfunctional?” concerned can share: both the financial
Well-publicized stories of corporate (See References, page 30.) professionals and those with less exper-
scandals, dubious trading schemes, tise; both the trustees, who establish
Those responsible for the management
public dissensions and individual fraud policy, and the officers who execute it.
of a nonprofit investment fund bear a
have spilled out of the media into our
special burden, which is both ethical This publication identifies and
offices and homes. Rigorous new
and legal, for they are charged with defines the seven key issues governing
legislative and administrative rules have
the preservation of capital and the nonprofit investment management.
been established. It would be a great
responsibility to fund the institution’s These are the issues that you must
mistake to think that these changes
mission. And there is no universal focus on as you assume your responsi-
affect only the corporate sector.
measure of what these responsibilities bilities in managing your institution’s
Increased public scrutiny has placed
are and how long they will endure; investment assets. These time-tested
even more intense pressure on all
appropriate time horizons can range principles outline a clear and rational
boards to rigorously discipline their
from one year to perpetuity. way for you to make sound investment
financial operations and fiscal integrity.
decisions while providing your board
The breadth of these changes as they The roles and responsibilities of the
with best practices on setting objectives
affect the nonprofit world has been investment committee members and
and policies for your investment
staff of a nonprofit are varied and
complex. For that reason, we at
Commonfund Institute have created
this publication. In the following
pages we endeavor to summarize a

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3 Basics Principles 26 Principle Six: Costs

Beginning at the beginning, this A relatively simple guide to Keep asking, “Can we get the
page tells what a nonprofit invest- nonprofit investment manage- same results at lower cost?”
ment fund is, what importance it ment, summarized in seven key 28 Principle Seven: Responsibilities
has for the institution, and the principles: Define the roles of the trustees,
questions it raises for trustees and 4 Principle One: Objectives investment committee, staff, and
other policy makers. Based on the mission of the fund, consultants – in writing.
briefly state the objectives of the
investment funds and create a
statement of investment policies, 30 References and Resources
which include the time frame In a brief brochure, we cannot
over which the assets need to be presume to provide a thorough
employed. education. For further informa-
8 Principle Two: Payout Policy tion and guidance, a bibliography
Decide how much of the invest- is included in the back of this
ment funds must be available to book. We also invite you to take
support the institution’s mission. advantage of the decades of
experience accumulated by
14 Principle Three: Asset Allocation Commonfund in the course of
Determine the optimum balance advising nonprofit institutions
of the portfolio to achieve the tar- of many kinds and sizes. Our
geted level of return at an accept- address and phone number
able level of risk. are shown on the back cover for
20 Principle Four: Manager Selection your convenience.
Select the right investment special-
ists for each part of your diversified
portfolio. 32 About Commonfund

24 Principle Five: Risk Management

Systematically search for risks in
every facet of the investment

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The very existence of a nonprofit investment
fund poses a number of difficult questions
that the institution’s policy makers must
continually reconsider.

To start, we will define a few basic and limited partnerships. Investment or causes, specified research activities
terms and describe basic connections. “income” in a modern portfolio can or disease treatment centers, athletics,
Different types of institutions use be comprised of capital appreciation as arts, or expansion of facilities.
different terminology. Educational insti- well as traditional income, i.e., interest,
Inherent in this brief description you
tutions and foundations generally refer dividends, rents and royalties. In the
can sense a number of difficult ques-
to their long-term investment funds as U.S., investment of endowment funds
tions that the trustees and investment
their endowments, while health care is generally governed by the Uniform
committee members, as the policy
organizations typically use long-term Management of Institutional Funds
makers for the institution, must face:
operating funds to describe their long- Act (UMIFA), introduced in 1972
term investments. We will use these and now enacted in most states. What is the real objective of the
terms somewhat interchangeably. It is endowment? How should the endow-
What benefit does the endowment
important to note that this brochure ment relate to the institution’s mission?
bring to the institution? In the short
does not deal with pension funds, How much should it contribute to the
term, a portion of its annual return
insurance reserves, or short-term cash, operating budget? How can an invest-
on investment can be transferred to
although many of the principles apply. ment fund’s value be preserved for the
the institution’s operating budget.
future? How should it be invested for
A nonprofit investment fund can be
Many institutions can realize their maximum return? How to control
defined as a portfolio of assets donated
missions and achieve a high quality investment risks? Who should make
to a nonprofit institution to aid in its
level in their programs only because the decisions? Who should assume
support. In their medieval origins,
of endowment income. which responsibilities in managing
endowments consisted of farmland
the investments?
donated to churches, which would Institutions may periodically run
earn rental income from the land’s capital campaigns to attract new Generally, six of the seven investment
tenant farmers. contributions to their endowments. principles speak to all types of institu-
Depending on the wishes of the tions. The exception is Principle Two,
In modern times, endowment assets
donors, gifts may include restricted as Payout Policy, which is dealt with
are held in a variety of financial instru-
well as unrestricted funds, the former specifically for each type of institution.
ments, which may include real estate
limited to such purposes as faculty
compensation, community programs

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he governing board, through its investment committee, must
define the investment objectives that will best support the
nonprofit’s philanthropic mission. The committee should write
the objectives into an investment policy statement and use it continually
as a guide for its investment managers and its own decisions.

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All involved in nonprofit governance have relevance to the management of ◆ The liquidity required to cover
and management certainly know their a nonprofit’s investment fund. But in distributions and expenses over a
organization’s mission and – at least in a nonprofit environment, success has reasonable time frame
general terms – the kinds of programs very different implications.
◆ The level of risk the board members
most likely to realize its goals. But
The board, usually through its invest- believe they can tolerate, including
when it comes to assuring the financial
ment committee, exercises that respon- definition of acceptable (and unac-
resources to support those programs,
sibility by defining the objectives that ceptable) types of investments
different perspectives and expertise
will guide its assigned investment
are required. ◆ Formal documentation of the
experts. While the statement of the
decision-making process, and
Members of the governing board who objectives should be clear and simple,
responsibility, accountability and
came of age in the private sector may the process of formulating – as well
authority, including which invest-
tend to think of ultimate objectives in as maintaining – those objectives is
ment decisions, if any, should be
terms of net profit, return on invest- never simple.
delegated to outside consultants,
ment, and shareowner value, all of
The committee has to weigh several advisors, or investment managers
which are measurable. In their non-
potentially vexing issues that can affect
profit roles, however, they have to ◆ Special characteristics of the non-
how the mission will be translated into
cope with more subjective goals. profit’s programs, distributions, and
investment policy. The issues may
other financial decisions that can
These goals must be understood first include:
affect spending or tax exposure
in terms of the social and intellectual
◆ The role of the fund in supporting
utility of the institution, however ◆ Special limitations on investment
the institution’s mission, as well as in
intangible that may seem. Ultimately, imposed on portions of the fund by
maintaining a healthy balance sheet
the board must view the pools of assets donors or by particular constituen-
that support the mission within the ◆ The total real return goal needed cies, such as a community nonprofit’s
context of the entire organization and from investment activities governance requirements
the optimization of its mission. What ◆ The additional bequests and/or ◆ The impact of policy decisions on
can create confusion is that the terms donations that can be expected future giving
employed resemble those used in
business; profit and growth certainly
◆ The legal requirements affecting ◆ The strengths and weaknesses of
the fund the institutions, the investment
committees, staff and any outside
◆ How much of the endowment’s
return should be spent, and how
much reinvested, and how this
should be calculated

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The committee’s deliberations will such deliberative body, conclusions Another nonprofit might be commit-
almost inevitably provoke some argu- inevitably depend on compromise. ted to supporting educational missions
ment. Members must be cautious of that are presumed to be perpetual.
One very important consideration is
impasse, delays or compromises that That nonprofit might allot a portion
that a nonprofit’s mission, and the way
can weaken their decisions. It will help of its portfolio to a variety of higher
it is translated into investment policy,
smooth the process if the committee, risk investments with the potential for
makes a fundamental difference in its
at the outset, establishes a timetable, higher returns in the future. Yet
investment strategy. If needed, exper-
final deadline and a few ground rules another might be managing its funds
tise can be obtained through outsourc-
for resolving disagreements, and to build a particular set of physical
ing. But the fundamental responsibility
achieving resolution. facilities and opt for a portfolio of
remains with the nonprofit’s governing
guaranteed returns providing liquidity
These deliberations are best carried board – the responsibility for preserv-
at the key points in the construction
out in a formal manner, with the ing, growing and allocating the funds
resulting policy expressed in a written that will be needed.
statement. An informal or hurried
One nonprofit might be facing an
approach risks confusion, misunder-
urgent humanitarian challenge or an
standing, second-guessing, and delay.
imminent construction project that
The members of the committee, after
demands large near-term distributions.
all, represent various backgrounds,
In such a situation, the nonprofit may
points of view, and priorities. As in any
have to invest all or a large portion of
its funds in short-term, fixed-income
instruments to minimize any value
fluctuations during the period of
heavy disbursements.

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Time horizons create a key considera- All of these considerations need to character of the nonprofit. The
tion for many endowments and a be examined and codified by the investment committee presents the
powerful definition of their manage- committee, as well as legal considera- statement to the full governing board
ment requirements. The length of time tions that may apply to given funds for approval. The statement should
between a defined term and perpetuity or to an endowment as a whole. The then be used continually as a guide
creates important considerations in output of the committee’s deliberations for investment manager selection and
management perspective. There is an will be a written document: the invest- investment strategy decisions.
enormous difference between the dura- ment policy statement.
At least once a year, the board should
tion of a construction project to build
The written statement brings the review the statement critically against
a new hospital wing and a mission to
tensions of the varied perspectives changing realities and make necessary
provide services in perpetuity. But for
to a resolution, opening the way for revisions.
anyone sharing responsibility for a
action – at least until the next round.
nonprofit investment fund, the term You’ll find further discussion of some
The writing style should be clear and
“capital preservation” takes on incom- of these in the following pages.
plain enough – free of jargon or tech-
parable gravity; it can mean safeguard-
nicalities – to be understandable by
ing assets during a period of market
everyone concerned, inside and outside
decline so as to be able to finish a con-
the nonprofit’s organization. The use
tracted-for construction project, or it
of numbers and specifics helps achieve
can mean preservation forever.
the needed clarity.

The statement should be as short as

possible but as long as necessary to
cover all relevant points. The final
document should reflect the unique

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Payout Policy

he board and the nonprofit’s management should budget the
total amount the nonprofit will spend in the next few fiscal years.
Their decision process should take into account the nonprofit’s
time horizon and any other considerations such as special requests from
management, other constituents, or any legal payout requirements.

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Payout Policy

We define “payout” as the total determine the time frame for payout. board decides how much to distribute
amount of money distributed from If the pool is perpetual, the liability in the coming years, taking into con-
the nonprofit’s investment fund to stream associated with the pool is sideration the claims on its resources
support current programs. We use the difficult to predict. In most cases, and the level at which the institution
term payout policy for all types of the objective will be to maintain a can and will respond. Income defined
institutions, but there are significant stream of distribution that grows by as capital gains, dividends and interest
differences among the ways various the rate of cost increases impacting alone is not a complete determinant
types of institutions create and execute the mission. of payout policy or rates, because for
their policies. quite some time income-oriented
Ultimately, the payout rate will prove
investments have failed to keep pace
For those nonprofits covered by the to have a great effect on investment
with economic growth.
UMIFA, there is no specificity as to strategy and the longevity of the
what the payout percentage should be; nonprofit. Experience has shown When the total payout rate has been
the nonprofit’s governing board still that a payout in excess of 5 percent tallied, the board or its financial team
bears the burden of that decision. challenges the ability to achieve main- must consider the level of liquidity
Certain rules of thumb, however, tenance of purchasing power. it will need in its asset base and
have become apparent from surveys what strategies to use in its cash
This is why budgeting the payout for
of general practice. management.
the next few fiscal years is essential.
The overriding objective of the pool of Obviously, the payout rate will have a This being said, it must be recognized
assets is to create a stream of cash flow crucial effect on the formulation of that the types of institutions covered in
to fund programs consistent with investment strategy and vice versa. this brochure have very different influ-
the nonprofit’s mission. The establish- ences affecting their payout policies, as
The process of developing the budget
ment of the objective of the pool will described on the following pages.
requires a number of definitions and
decisions; some of them are fine points
that can try the patience of the unwary.
In fulfilling the nonprofit’s mission, the

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Payout Policies for Educational phenomenon can be found in the 2004 In certain states, spending from under-
Institutions TM
Commonfund Benchmarks Study water funds is restricted to “income” –
Educational institutions have a signifi- in which 22 percent of respondents interest, dividends, rents and royalties
cant degree of latitude in setting their increased their spending rate with – per the old trust law definition.
own payout policies, as there are no 17 percent increasing the dollar In others, spending may be forbidden
statutory mandates dictating minimum amount; 25 percent decreasing their altogether. But, in many cases, the
payout levels. However, there are spending; and 17 percent decreasing programs endowed by these restricted
certain practical considerations their dollar spending. Overall, only funds continue, such as the support
affecting payout policies, as these 51 percent held their spending rate needed to underwrite an endowed
institutions are generally dedicated to stable year-over-year. professorship, and the shortfall must
fulfilling their educational missions in be met from other sources. The 2004
Recently, there has been much
perpetuity. Therefore, a balance must Commonfund Benchmarks Study
discussion about spending levels and
be struck between building the value found that 54 percent of respondents
methods. There has been an increasing
of the endowment to provide for the reported having underwater funds.
use of formulas that use cost increases
needs of future generations and con- Of these, 35 percent were no longer
as part of the determination of the
tributing to the quality of education spending from these funds, while 25
new distribution amounts. Many
in the present by supporting staffing percent were spending “income” only.
institutions that have converted to
levels and programs. Ten percent had asked the original
this method use the Consumer Price
donor for additional funds so that the
Traditionally, the popularly accepted Index plus a percentage of the Higher
programs supported by the fund could
formula has been “5 percent of a three- Education Price Index compiled by
be continued.
year moving average of market value.” Commonfund Institute.
However, the recent bear markets have The volatility of markets in recent
Another consideration concerns
exposed the weakness of this approach years – euphoric gains followed by
spending from restricted funds for
as many schools saw their returns crushing declines – means that invest-
which the market value has fallen below
plummet, creating shortfalls in the ment committees must take a more
their “historic dollar value.” These are
funds available to support their active role in managing their spending
referred to as “underwater funds.”
operating budgets. An example of this to deal with the tension created by
Once this has occurred, endowment
balancing the needs of today’s students
managers must refer to applicable laws
and those of future generations.
in their state (most states have adopted
the UMIFA for guidance on whether
spending of any sort can be continued
from these funds).

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Payout Policy

Payout Policies for Foundations ing. The items allowed in computing Many foundations spend down their
the statutory spending level include assets in about fifteen years. A founda-
Foundations have very special legal
payments to support the operating tion that aspires to a longer time
requirements concerning their
budget, distributions to grantees, the horizon or to perpetuity, unless it will
minimum payout level, currently a
cost of services the nonprofit may receive further infusions, is driven to
minimum of 5 percent of the endow-
provide grantees, and the overhead take a more conservative payout policy
ment value (subject to possible legisla-
and administrative costs incurred in – and a more aggressive investment
tive change as this is being written).
running the nonprofit. strategy.
Further, there are fairly technical
requirements as to what types of The relatively high spending rate of It appears that a large proportion of
spending may be counted against the 5 6 percent is also due to a number of the nation’s foundations are striving to
percent minimum. In the most recent other factors, including the effect of restrain payout and project a long time
Commonfund Benchmarks Study, 39 lower market values of the underlying horizon. But the distribution goal does
percent of foundations responding – funds during a prolonged bear market. not encompass all payout. Investment
the largest proportion – indicated that Multi-year commitments to grantees costs must be counted outside the pay-
they set their spending rate by target- and an unwillingness to reduce the out. Whether you count those costs as
ing the 5 percent distribution require- volume of new grants to increasingly a deduction from total return or an
ment. In other words, it appears that hard-pressed charities has also played a addition to payout, they are weighing
the most they plan to spend is the min- part in keeping spending rates higher against mission.
imum required by law. than the legal minimum, in spite of the
Foundations often face the challenge
declared policy of many foundations to
However, in practice the 5 percent of managing a large amount of the
spend no more than 5 percent.
target is often exceeded. The same donor’s stock and developing an
Benchmarks Study found that the aver- In deliberating and managing its pay- acceptable diversification process.
age spending rates for all foundations out rate, the board navigates through In addition, in the course of making
was about 6 percent, ranging from rocks and shoals. Are there legal or their decision concerning payout
6.1 percent for the largest foundations regulatory changes ahead? Might policy, boards must keep in mind the
to 5.5 percent for foundations with environmental or societal changes prevailing definition of “distribution”
between $50 million and $100 million create pressures to modify the founda- and the current legal restrictions under
in assets. tion’s mission? Are the number of which their foundations function.
grantees and their needs increasing?
Several factors account for the differ-
ence between the traditional targets of A community foundation is likely to
5 percent and the actual level of spend- have a regular fundraising program
that, in good times, can make up the
difference. A private foundation may
receive further donations, in time,
from the founding family.

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They could then calculate the payout Meanwhile, another factor enters the overhead expenses, e.g., administrative
rate as a percentage of the investment board’s deliberations about its distribu- salaries, space costs, and expenses of
fund’s total net asset value. The over- tion rate: the excise tax that the federal the board and investment committee.
riding consideration is the relevant government imposes. The tax amounts
Inevitably, ambiguity arises. Some
section of the Internal Revenue Code to 2 percent of annual net investment
administrative expenses are not clearly
stipulating that foundations must income and realized gains, unless total
classifiable as part of either distribu-
distribute at least 5 percent of their distribution reaches a certain tipping
tion, administration or investment
assets every year if they are to preserve point which then brings the tax rate
management: certain costs of research,
their status as tax-protected entities. down to 1 percent. Because the for-
for instance, or conferencing. If a foun-
mula used to determine qualifications
The calculation of the 5 percent is dation sponsors a forum for grantees,
for the reduced rate is so complicated,
based on the average of the market is that counted as part of the 5 percent
relatively few foundations apply for
value of the foundation’s portfolio at distribution requirement?
the reduction. The new legislation
the end of each month of the previous
proposes to reduce the rate to 1 In recent years, new federal legislation
calendar year. Once that is known, the
percent overall. has been proposed (the timing of
pressure is on to debit at least 5 percent
possible passage is unclear) that could
of that average from the foundation’s As it has stood, the two-and-one
eliminate the attributable administrative
balance sheet and to make sure the percent excise-tax formula has tended
and overhead expenses that can now be
money has been spent – deposited into to motivate foundation decision
included in the 5 percent total. Such a
the bank accounts of qualified grantees makers to raise their distribution rate
law would tend to accelerate the rate of
– by the end of the current year. higher than they might have otherwise;
total payout of most foundations, possi-
Making this calculation even more better to pay more to grantees and less
bly bringing some of them to depletion
complex are the regulations concerning in tax. The old tax formula could also
somewhat sooner than they would have
attribution of administrative and over- influence decisions about when to
planned or wished.
head expenses, as well as excise taxes. take investment gains or losses.
Aside from these pressures, a founda-
The calculation must be timely enough And so, the foundation’s financial
tion may be impelled by its mission to
to facilitate accounting and execution. team determines its optimum course,
distribute more than 5 percent of its
Overhead and all other expenses must weighing income, distribution and
assets. The needs of its grantees and the
be precisely defined to determine tax issues.
urgency of their work may demand it.
which are attributable to distribution.
To be sure, distributions are not the A foundation so inclined must recog-
Program expenses and staff time spent
only payout impacting a foundation’s nize it may ultimately be limiting its
in grant making may be included.
life expectancy. Expenses related to time horizon.
management of the foundation’s
investments are counted outside of
the distribution allotment.

These include not only fees paid to

outside consultants and investment
managers but also related investment

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Payout Policy

Payout Policies for Health Care remodeling of the physical structure, organization. For example, an AA-rated
information technology, etc. Most health care organization typically has
Health care organizations differ from
health care organizations review their 175 days cash on hand or greater. Many
endowments both in how assets are
capital needs on an annual basis and consider it advantageous to obtain the
obtained and how funds are spent.
then determine which projects will highest rating possible as the best-rated
First, health care organizations gener-
be funded. Projects can be funded health care organizations typically pay
ate revenue from the services provided.
through cash generated from opera- a lower interest rate on debt.
These funds are obtained from insur-
tions, issuing tax-exempt bonds,
ance companies, government programs Another important indicator is the
fundraising initiatives and/or with-
and patients. Additionally, some health debt-to-capitalization ratio. This ratio
drawing funds from the long-term
care organizations receive donations is also closely monitored by the rating
investment assets. Typically, a mixture
from individuals or organizations that agencies to ensure that the health care
of these funding sources is used to
wish to support overall operations or to organization does not utilize unreason-
pay for the capital expenditure.
assist in funding a specific project (i.e., able amounts of leverage to pay for its
a cancer wing). Both of these funding While there is no predetermined capital expenditures. A health care
sources serve to build the long-term ‘‘payout policy” for health care organi- organization with a AA rating, for
investment assets of the organization zations, one important consideration is example, normally has a debt-to-
and are needed to support the mission how the funding method impacts the capitalization ratio of 30-40 percent.
of providing health care services. overall strength of the organization’s
The next section, Principle Three –
balance sheet. One way to measure this
Health care organizations typically Asset Allocation, discusses the key
strength is by the number of ‘‘days cash
have significant capital requirements. issues in managing investment strategy.
on hand.” A day of cash on hand is
The capital is spent on items such as
equal to the amount of money it takes
medical equipment, construction or
to operate the health care organization
for one day and is indicative of the
liquidity of the entity.

Days cash on hand is one of many

indicators used by the rating agencies
(e.g., Moody’s, Standard & Poor’s, etc.)
to assign a rating (i.e., AA) on the tax-
exempt debt issued by the health care

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Asset Allocation

llocation of the portfolio among the principal asset classes
is the committee’s most crucial investment strategy decision.
Considering the nonprofit’s mission, the investment committee
must weigh the investment risks the nonprofit can afford to take in
seeking the return needed to support its obligations.

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A s set Allocation

The inevitable ebb and flow of low-risk, low-volatility strategy. Historically, prudence was a legal
markets pose a special challenge to Nonprofits with urgent distribution requirement of fiduciary responsibility
nonprofits, whether they are striving to commitments and shorter time and fostered a highly conservative
preserve their capital base over the long horizons, such as international relief investment bias. In some early com-
term or concentrating their distribu- organizations, might well concentrate mon law rulings, common stock were
tions within a limited time period. a portion of their portfolios in fixed- deemed “per se” imprudent. The expe-
income investments of short duration rience of the 1930s, however, proved
Anyone faintly aware of the behavior
and high liquidity, a strategy that that bonds could be risky, too. The
of the stock and bond markets from
minimizes volatility. century-old legal principle, popularly
the early 1990s into the early 2000s
known as “the prudent man rule,”
has seen how extreme and rapid the On the other hand, nonprofits with a
then became the pervasive guide for
ups and downs can be, and how unpre- long time horizon may find that risk
trustees, giving them greater discretion
dictable. Even within short time frames avoidance has a very significant cost.
in selecting investments, but still
– single trading days, for instance – Over the long term, high returns gen-
requiring them to invest for current
market volatility has become more erally come as the reward for taking
income rather than total return.
extreme than in almost any time in the greater risks. And, with rising payout
past century. pressures, nonprofits certainly need
higher returns.
Nonprofits obliged to make relatively
frequent withdrawals from their port- Either way, nonprofits face difficult
folios may naturally wish for some decisions in investment management.
semblance of consistency in their Obviously this challenge calls not
investment results. This suggests a only for financial expertise but also
for great prudence in managing the
investment process.

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Since the introduction of the UMIFA But in the post-World War II decades, and down a fixed 66 ⅔ percent of the
in 1972 broadened the “prudent man the concept of prudence changed from time – in the course of arriving at its
rule” into a “prudent investor rule,” one of avoiding risky investments mean return over a given time period.
fiduciaries are permitted to take into altogether to one of balancing the Investments with higher standard
account many of the new develop- risks of various kinds of investments deviations will generally produce
ments that have changed the landscape against one another. greater gains over the long term.
of the investment world during the Therefore, if you aim to get the most
This change in attitude was encouraged
past half century. The so-called out of your investments long term, you
by the theoretical work, often referred
“prudent investor rule” permits them have to own some that have a higher
to as “modern portfolio theory,” that
to consider the expected total return degree of risk.
won Nobel Prizes for the economists
(i.e., capital appreciation as well as
who originated it. Their aim was a But you can offset their volatility by
income) of the institution’s invest-
better understanding of the relationship also holding investments that perform
ments. They could then calculate
between investment risk and return. differently – whose performance has a
the payout rate as a percentage of the
A highly simplified summary of these low degree of correlation with the rest
investment fund’s total net asset value.
ideas might go as follows: of your holdings. The volatility of one
Most nonprofits now use this approach.
investment tends to lower the volatility
The degree of risk entailed in an
of a portfolio without impairing the
investment can be expressed as its
combined return potential. Combining
volatility, which can be calibrated
risky assets can lower the overall
statistically. This measurement, called
volatility of the portfolio.
the “standard deviation,” indicates in
percentage terms the degree to which
an investment’s value has varied – up

- 16 -
A s set Allocation

This thinking widened investors’ focus Commonfund conducts Benchmarks funds, private equity, venture capital,
from the selection of individual securi- Studies covering educational institu- equity real estate, distressed debt
ties to include the design of their tions, foundations and health care strategies, commodities, and energy
overall portfolios, as reflected in the organizations that measure a variety and natural resources. In general, the
proportions of stocks to bonds to cash of different practices among them. performance of alternatives tends
they held in their portfolios. In fact, The following table compares the asset to have a reduced correlation to that
the allocation of the portfolio among allocations made by educational of publicly traded investments (stocks
principal asset classes has been shown institutions, foundations and health and bonds); many nonprofits have
to be the main determinant of invest- care organizations, which are derived been increasing the proportion of
ment success. from three Commonfund Benchmarks alternatives they hold.
Studies conducted recently. It should
Increasing diversification within each A huge accumulation of historic data
be noted that there is a significant
of the principal asset classes can further on portfolio performance has provided
amount of distribution around
dampen volatility. A well-diversified the basis for suggesting a point of
the allocations averaged out in the
portfolio may include small-capitaliza- optimum portfolio balance for each
survey data.
tion stocks as well as large-cap stocks, of various long-term return targets at
international stocks as well as U.S.- Generally, these Commonfund surveys given standard deviations. Laid out
based stocks, corporate bonds as well have found that institutional asset on a graph, these optimal allocations
as Treasury bonds, short-term fixed allocations have moved strongly away appear as a rising convex curve, known
income as well as long- and intermedi- from fixed income in favor of equities as “the efficient frontier.”
ate-term, and so forth. (both U.S. and international) and
toward alternative investments, a broad
category that encompasses hedge

Asset Allocation Dollar Weighted

Equities are the largest asset class for all types of institutions, but the largest variations are found in
Fixed Income and Alternative.

Type of U.S. International Fixed Alternative Cash

Institution Equity Equity Income

Education* 32% 14% 19% 33% 2%

Foundation** 48% 10% 24% 14% 4%

Health Care 1*** 37% 10% 43% 9% 1%

All long-term operating funds
Sources: Commonfund Benchmarks Study – Education 2004
Commonfund Benchmarks Study – Foundation 2003
Commonfund Benchmarks Study – Health Care 2003

- 17 -
Many such analytical tools are available complex statistical process, the model As a further guide for their decision
to institutional investors to aid them uses “Monte Carlo simulation” to making, investors are also advised to
in making asset allocation decisions. randomly generate a thousand differ- take a hard look at the present environ-
Their utility, of course, varies. Those ent yield curves for next year and then ment, consider what the economic and
models that use the concept of the projects how each of these is likely to market outlook might be for the next
efficient frontier must, by definition, affect the results of each of nineteen few years and what that suggests for
assume the predictive validity of his- asset classes. investment strategy.
toric data. But it’s axiomatic that past
For each of the thousand scenarios, No matter how sophisticated the
performance does not necessarily pre-
the model then generates another planning tools employed, the future
dict future results. Economic and
thousand yield curves for the second is unknowable. Ultimately, it comes
financial events often swing far outside
year and again projects the probable down to human judgments about
of past ranges, and the ranges are not
results for those nineteen asset classes. what could happen, based on the best
always reflected clearly in the averages
The model runs these simulations for information available at the time.
(e.g., the average temperature of a man
each of twenty years into the future. Sometimes basic questions can tip the
sitting on a cake of ice with his feet in
balance. For example, in an environ-
a stove). Having processed so many different
ment of rising interest rates, shouldn’t
possible values for each variable, the
The allocation planning model used you be underweighting your bond
model’s output will show not just a
at Commonfund factors in many allocation? When the returns of the
mean outcome but also a distribution
different economic scenarios to project broad indexes are expected to be
of possible outcomes for each projected
a very wide range of possible outcomes comparatively modest, shouldn’t you
investment period and the probability
for any given asset allocation. In a be giving greater emphasis to skillful
of each of those outcomes. This
stock picking and opportunistic tactics
approach, as you can see, goes beyond
to help achieve the returns needed to
historically based averages and looks
cover payout and inflation rates?
at what economic and financial
conditions might really turn out to
be down the road. It also allows for
the examination of risk in the tails
of potential outcomes beyond one
standard deviation.

- 18 -
A s set Allocation

In the fast-moving world of nonprofits, In any scenario, the determination The theory underlying asset allocation
where investment returns can be so of the asset allocation target must be strategy prescribes periodic rebalancing
crucial, a detailed point of view about carried out in a disciplined manner. At to bring the portfolio back into tar-
the trends in the economy and markets the outset, the investment committee, geted ranges. This means selling
is essential. or the full board, ought to agree on some of the appreciated assets and
a moderator and an agenda for the reinvesting the proceeds in asset
For all the information and analytic
discussion. Every member should have categories that have declined.
tools used to guide decision makers,
the opportunity to express his or her
the asset allocation decision still For the inexperienced, selling success-
concerns and expectations. Allow each
remains difficult; it involves more than ful investments may seem counter
one to propose the level of risk he or
numbers. For nonprofits, this decision to long-held beliefs. But, looked at
she considers tolerable.
must embody the philanthropic mis- another way, it forces action that gets
sion and perhaps deeply held feelings In writing its investment policy state- to the very essence of successful invest-
of founders and members of governing ment, the committee should include ing – buying cheap and selling dear.
boards, their risk tolerance, their sense a rationale for the asset allocation on
The investment committee must
of the nonprofit’s time horizon, and which it has decided. A brief, well-
maintain oversight of the portfolio
any number of policy issues that can- stated explanation could help achieve
through all the cycles of the investment
not be expressed in numbers alone. the concurrence of the full board and
markets. But for implementation of
founder or founding family and help
Private nonprofits, established on the its asset allocation policy it employs
guide portfolio managers in imple-
stock of the founder’s company, remain professional investment managers.
menting investment strategy.
in a highly risky predicament until And that is the subject of the next
the portfolio can be diversified. That In time, as markets change, the section, under Principle Four.
in itself needs careful planning – portfolio’s actual asset allocation will
assuming that liquidation is allowed. deviate from the targets set down in
the policy statement. This is a natural
consequence of the markets granting
higher returns to certain asset classes
than to others. Therefore, adjustments
must be made on a regular basis.

- 19 -

Manager Selection

he investment committee or investment staff hires an array
of investment managers to implement the plan presented in the
investment policy statement. The selection of managers requires
a diligent investigation of each candidate’s entire set of qualifications,
not just past performance and philosophy.

- 20 -
Manager Selection

An asset allocation plan calling for investment committee or staff can institutions. The following discussion,
a diverse selection of investments comfortably handle. Furthermore, while admittedly based on our
requires a diverse selection of invest- the character of the institution may approach to managing managers, is
ment managers. Expertise is needed also dictate policies for manager not consciously intended to promote
for each type of investment. selection, such as avoiding tobacco our own services.
and alcohol-related securities, focusing
Recent Commonfund Benchmarks What makes manager selection so
on socially responsible companies, or
Studies found a wide range in the complicated? Start with the fact that
other qualitative criteria.
number of managers used by nonprofit there are thousands of managers to
institutions, with the greatest diversifi- Selecting investment managers is itself choose from and new firms crop up
cation to be found among educational a specialized capability. The process regularly. Local sources, though
institutions. includes not only selection of candidates convenient for face-to-face meetings,
but negotiating the engagement and do not necessarily provide the best
A nonprofit’s investment policy
monitoring the managers on a continu- match. And the well-known stars are
statement might indicate the kinds
ing basis. That is why nonprofits often not necessarily the best choice.
of specialized managers needed, and it
outsource the entire selection process.
might state their required qualifica-
tions. But the actual selection process In the interest of full disclosure, we
usually turns out to be more than the must point out that selecting and
managing investment managers consti-
tutes one of the chief occupations of
Commonfund. We manage managers
for many hundreds of nonprofit

Numbers of Managers Used

The number of managers increases with fund size.

Endowment Size
Type of All Over $1 $500-999 $200-499 $100-199
Institution Institutions Billion Million Million Million

Education *
13 81 30 14 14

Foundation** 13 35 16 10 10

Health Care*** 8 15 11 6 5

Sources: Commonfund Benchmarks Study – Education 2004
Commonfund Benchmarks Study – Foundation 2003
Commonfund Benchmarks Study – Health Care 2003

- 21 -
Selecting investment specialists has For each specialization, the selection A key resource of the manager of
itself become a specialized skill. goes forward step by step: managers is the database of the
Candidates must be investigated in expanding world of investment
◆ Compiling an initial list of candidates
depth. Performance data alone can managers. The information collected
prove misleading, especially if they ◆ Gathering basic information about on any one manager covers every
cover only a short term – less than five each one aspect of that firm’s business. In our
years. Performance in less than one manager information template at
◆ Narrowing the list
market cycle could tell more about the Commonfund, the questions alone
firm’s luck than skill. And past perfor-
◆ Conducting preliminary due diligence take up twenty-three pages.
mance alone has never provided a ◆ Selecting the finalists You must also be aware of possible
reliable prediction of future success.
◆ Completing due diligence and conflicts of interest. Does the firm have
comprehensive portfolio attribution any connection with any member of
analysis your board or management?

◆ Hearing presentations of the finalists And, after all of that, you have to
consider the “alpha” factor – the talent
◆ Making final selections
the manager demonstrates within a risk
◆ Conducting negotiations parameter for achieving results beyond
the average of the market in which he

- 22 -
Manager Selection

or she functions. Effective active It may offer funds that represent par- In evaluating managers, here
are some of the things you need
management – as opposed to passive, ticular strategies. It may also create a
to know:
index-centered management – now fund around a particular manager,
◆ The firm’s investment style and
makes the difference to the financial life using its group-buying position to
of a nonprofit. And your effective man- lower fees and make that manager
agers should now be given the freedom available to smaller investors than it ◆ Actual evidence of its commitment

to maximize investment opportunity as normally accepts. to that philosophy

they know best.

The manager of managers may, in ◆ How the firm’s decision-making
After selection and engagement, the addition, provide related services to process works
manager of managers regularly monitors enhance the institution’s investment
◆ The kinds of internal controls
the “combination effect” of various capabilities; services such as risk man-
the firm uses
managers within a single portfolio. agement, legal oversight, investment
They review performance against education, integrated reporting and ◆ The quality and timeliness of its
benchmarks and remain vigilant for analysis. reporting system
significant changes in any of the
Ideally, the manager of managers ◆ How the firm complements the other
management firms.
develops a working partnership with investment firms working for you
To facilitate portfolio building, a the nonprofit’s investment committee
◆ The firm’s ownership structure
manager of managers may package and consultants, working together
groups of investment managers into to realize the objectives set forth in ◆ The quality of its senior management
specific kinds of investment pools or the nonprofit’s investment policy
◆ The qualifications of its professionals
funds. For instance, it may create a statement.
small-cap fund, grouping managers ◆ The stability of its professional staff
with different investment styles or and management
◆ The size of the firm in terms of staff
and assets under management

◆ How the firm has changed over time

◆ Its fees

◆ Risk management capabilities

- 23 -

Risk Management

ou should think of risk as the possibility of failing to fulfill the
nonprofit’s mission in any way. More immediately, you may be at
risk of failing to meet current financial commitments. You must
establish a discipline to first recognize the risks inherent in every facet of
your investment system and then to control them.

- 24 -
Risk Management

Because so much is at stake, a govern- In the investment industry, the requires taking a skeptical attitude and
ing board must give the subject of risk response to this challenge is a specific asking tough questions, such as:
a permanent place on its agenda. If risk management discipline. While
◆ In whose name are the assets in our
and when losses occur, those involved the board must lead in this effort, the
portfolio being held?
might well wonder if they could have responsibility must become pervasive
been avoided. The answer is often yes, through the investment system. ◆ Where are the securities being held?
if the question had been asked before Ideally, it becomes ingrained in the ◆ Is the valuation accurate?
the losses happened. organization’s culture.
◆ Are we applying all the resources
To make sure the right questions are The practice of risk management starts actually needed to manage
asked at the right time, a systematic by identifying every possible reason effectively?
approach to risk must be built into a why the nonprofit might fail to achieve
nonprofit’s investing process. its objectives. The board, the staff, and
◆ What are the laws and regulations

all relevant outside sources must be for compliance?

In the dictionary sense, “risk” is simply
sensitive to the “galaxy of risks” that ◆ Who is responsible for compliance?
“the possibility of harm or loss.” In the
their decisions and actions might
investing arena, risk commonly refers ◆ What makes us sure we can trust our
entail. All possibilities for failure must
to the effect of market volatility and investment managers and our other
be evaluated and controls put in place.
the possibility that the investor may providers?
have to sell when valuations are down. It’s difficult because it’s contrary to our
One overriding question runs through-
But for a nonprofit, risk has broader natural inclination toward optimism,
out the process: “What can go wrong?”
significance. our reluctance to think the unthink-
And everyone involved should keep
able or ever appear negative.
A nonprofit’s investment risk means asking it.
the possible failure to meet its commit- A matrix approach has proved effective
An emotionally difficult and poten-
ments to beneficiaries. Think of it as for us at Commonfund; it helps pro-
tially controversial process like this
the failure to earn a sufficient return to mote the needed discipline. The invest-
can quickly peter out if it does not
cover this year’s distribution require- ment process is divided into specific
have visible support from the top.
ment or the intended transfer to the steps. For each step you enter every
An experienced risk manager with
operating budget. But the risks do not risk you and your team can think of.
appropriate authority is essential.
stop there. Failures can occur in any The listed risks must be evaluated for
So is the outspoken agreement of the
part of the investment process, internal degree of possibility and seriousness of
board. If the board or staff does not
or external – in operations, in the safe- consequences. For each prioritized risk,
seem to have the wherewithal for an
keeping and accounting of assets, in you consider possible alternatives, con-
integrated risk management program,
legal or regulatory issues, in outright trols, or defenses. And then make sure
you may need consultative support
fraud. Any such failure could reverber- the controls are put in place and
to get you started.
ate for generations. regularly monitored.

With the matrix as your base, you

continually recycle this process, seeking
to sharpen and enlarge the matrix. It

- 25 -


ontinually ask: “Can we get the same results for less?” The costs
of your investment program can quietly undermine returns and
cut into the corpus of the nonprofit’s assets. Make sure you keep
investment costs under control.

- 26 -

Various changes in the investment Controlling the cost of investment But keep in mind that cost reduction
industry during the postwar decades management involves three types itself can have a cost. For instance, you
have helped raise the awareness of of activities: don’t want to compromise the effec-
investment costs. Some argue that cost tiveness of your risk management for
◆ Diligent investigation of alternative
control is the key to investment suc- the sake of cutting costs, or settle for
investment management candidates
cess, since in the long run no invest- less than optimal diversification. Keep
ment can beat the averages. ◆ Tough negotiation of fees the balance.

Cost control lacks glamour; no one ◆ Efficient management of the It is also important to recognize that
aspires to the job. It requires detailed management firms different investment products can have
analysis, review and monitoring, both substantially different costs and cost
You need to look at the prospective
before selecting a manager and then on structures. Understanding these
manager’s portfolio turnover rate. In
an ongoing basis. In addition to invest- differences is important in evaluating
other words, how much buying and
ment manager fees, a host of other the costs. Many managers, particularly
selling does the manager do to achieve
investment costs must be watched: in alternative asset classes, have a base
its results? Every transaction incurs
custodial, legal, accounting, consult- fee, plus incentive fees which can be
cost; good management means avoid-
ing, overhead. Cost increases can be substantial. Ultimately, the important
ing needless transactions. Are the man-
surprising and difficult to restrain. issue is total return on the asset net of
agers negotiating the best prices for
the costs.
their investors? Are the managers’ fees
and compensation structure aligned
with their investors’ interests?

You need to continually ask: “Can we

get the same results for less?”

- 27 -


o promote harmonious effectiveness of your investment
program, define the roles of the trustees, the investment
committee, the business or investment officer and staff, key
donors, and your consultants, in writing, and make certain that each
understands and agrees.

- 28 -

Our first six principles have been In allocating responsibilities, it is experience. Among the committees of
concerned with the kinds of planning, important to fully evaluate the a typical board, the investment com-
processes, and controls essential to an strengths and weaknesses of the entire mittee deals with the most complex
effective investment program. The organization and develop a clear and specialized subjects. Special exper-
ultimate issue is execution. And that understanding of the resources needed tise is required, but so is common
depends on allocation of responsibili- for each decision. This is particularly sense and a variety of viewpoints.
ties – our seventh principle. important in setting priorities for
Experience suggests a few pointers for
decision making to assure that the
While you have an array of investment an effective investment committee:
most important decision has the
management firms implementing your
highest level of resources. ◆ Keep it small enough to allow
plan, you must make sure that you
discussion by all members.
have a clear organizational structure for For a foundation, the founder or
decision making and oversight within founding family could pose an organi- ◆ Four or five meetings a year should
your organization itself. zational difficulty. How much responsi- be enough.
bility do they want to take? It should be ◆ When a decision seems too difficult
To avoid slippage or confusion, respon-
spelled out in the document. The fami- to reach, try referring it to a subcom-
sibilities should be spelled out in an
ly’s natural authority could overhang mittee or consult an outside expert.
“investment program responsibilities”
the structure of responsibilities you set
document that should be part of the ◆ Seek knowledge from your invest-
up. Having family members participate
investment policy. ment managers and other outside
actively in development of the responsi-
Completeness and clarity are impor- bilities document could help achieve experts.
tant. Let all players make suggestions. clarification of their own roles. ◆ Strive to maintain continuity
Who’s in charge? Who is responsible of membership, attitudes, and
The investment committee typically
for risk management? Who for liaison philosophies.
plays the key role. The latest
with the investment managers? Who is
Commonfund Benchmarks Study ◆ Keep your board informed.
keeping an eye on investment costs?
indicates six members make up the
What do those individuals have to do As in any group effort, the strength
average investment committee, some-
to prove the success of their efforts? and character of the people involved
what more among community founda-
To whom do they report? How often? make the ultimate difference. We can
tions. In nearly half the nonprofits
The answers, of course, depend on the assume that all responsible participants
surveyed, the investment committee
particular nonprofit and the talents of understand the nonprofit’s mission and
had members who were not trustees;
its people. The difficulties you might are committed to its fulfillment. Still,
among community foundations, 80
encounter are also quite individual. they have to make sure they know how
percent included non-trustees.
to work together.
A diverse membership is desirable, but
you do want to have some members
with investment knowledge and

- 29 -
References and Dow 36,000: The New Strategy for Profiting from the
Coming Rise in the Stock Market. James K. Glassman and
Resources Kevin A. Hassett, Times Books, 1999.

Endowment Management. William T. Spitz, Association of

Governing Boards of Universities and Colleges, Board Basics
Series, 1997.

Endowment Management, A Practical Guide. Jay A.

Yoder, Association of Governing Boards of Universities and
Colleges, 2004.

Endowment: Perspectives, Policies, & Management.

William F. Massy, Association of Governing Boards of
Universities and Colleges, 1990.
Suggested Reading:
Endowment-Spending Policies. Stephen T. Golding and
2004 NACUBO Endowment Survey. NACUBO, 2004. Lucy S. G. Momjian, Morgan Stanley Investment
Management, 1998.
An Unconventional Approach to Institutional Investing.
David F. Swensen. The Free Press, 2000. The Financial Analyst’s Handbook. Sumner N. Levine,
ed., 2nd ed., Dow-Jones Irwin, 1988.
Asset Allocation: A Handbook of Portfolio Policies,
Strategies, and Tactics. Robert Arnott and Frank J. Fabozzi, Financial Responsibilities of Governing Boards. William S.
eds., Probus Publishing Co., 1988. Reed, Association of Governing Boards of Universities and
Colleges, 2001.
The Asset Allocation Debate: All About Alpha.
Commonfund Institute, Monograph Series, 2005. Fixed Income Portfolio Strategies. Frank J. Fabozzi, Probus
Publishing Co., 1988.
The Challenges of Investing for Endowment Funds.
Cathryn E. Kittell, ed., Institute of Chartered Financial Foundation Trusteeship, Service in the Public Interest.
Analysts, 1987. John Nasson, Council on Foundations, 1989.

Classics: An Investor’s Anthology. Charles D. Ellis and Funds for the Future: College Endowment Management
James R. Vertin, eds., Dow-Jones Irwin, 1989. for the 1990s. J. Peter Williamson, The Common Fund in
cooperation with Association of Governing Boards of
Commonfund Benchmarks Study. Commonfund

Universities and Colleges, and National Association of

Institute, Education Report, Foundations Report,
College and University Business Officers, 1993.
Healthcare Report, Revised Annually.
Governance. Your Board: Dynamic or Dysfunctional?
The Complete Guide to Securities Transactions. Wayne H.
Commonfund Institute, Monograph Series, 2005.
Wagner, ed., John Wiley & Sons, 1989.
Guidebook for Directors of Nonprofit Corporations.
Creating and Using Investment Policies: A Guide for
George W. Overton and Jeannie Carmedelle Frey, eds.,
Nonprofit Boards. Robert P. Fry, Jr., Association of
American Bar Association, 2002.
Governing Boards of Universities and Colleges, 1997.
The Handbook on Private Foundations. David F.
Debt Is Not the Issue. Commonfund Institute Whitepaper,
Freeman, Council on Foundations, 1991.

- 30 -
Hedge Fund and Absolute Return Strategies. Performance Presentation Standards. Financial Analysts
Commonfund Institute, Monograph Series, 2005. Federation, adopted as amended by the Committee for
Performance Presentation Standards, April 1990.
How Efficient is Your Frontier? Commonfund Institute
Whitepaper, 2003. Pioneering Portfolio Management: An Unconventional
Approach to Institutional Investment. David F. Swensen,
How to Write an Investment Policy Statement.
Free Press, 2000.
Jack Gardner, Marketplace Books, 2003.
Principles of Real Estate Investment. Commonfund, 2000.
Improving the Investment Decision Process: Quantitative
Assistance for the Practitioner and for the Firm. Risk Bucketing – Keeping an Eye on What Is Important.
H. Russell Fogler and Darwin M. Bayston, Institute of Commonfund Institute Whitepaper, 2005.
Chartered Financial Analysts, 1984.
The Role of Hedge Funds in Nonprofit Investment
Inflation: Avoid that Sinking Feeling. Commonfund Management. Commonfund, Revised 2005.
Institute, Monograph Series, 2005.
Spending Policy for Educational Endowments. Richard M.
Investing with the Best. Claude N. Rosenberg, John Wiley Ennis and J. Peter Williamson, The Common Fund, 1976.
& Sons, 1986.
The Standards of Measurement and Use for Investment
The Investment Committee. John H. Biggs, Association of Performance Data. Investment Counsel Association of
Governing Boards of Universities and Colleges, Board Basics America, 1988.
Series, 1997.
Succeed in Private Capital Investing. Commonfund,
Investments. William F. Sharpe and Gordon J. Alexander, Revised 2003.
4th ed., Prentice-Hall, 1989.
Understanding the Four Levers of Fiduciary
Investments. Zvi Bodie, Alex Kane and Alan J. Marcus, Responsibility. Commonfund Institute Whitepaper, 2005.
4th ed., Richard D. Irwin, Inc., 1999.
Why Do We Feel So Poor? Commonfund Institute
Irrational Exuberance. Robert J. Shiller, Princeton Whitepaper, Reprinted 2004.
University Press, 2000.
Winning the Loser’s Game: Timeless Strategies for
The Law and the Lore of Endowment Funds. William L. Successful Investing. Charles D. Ellis, McGraw-Hill,
Cary and Craig B. Bright, The Ford Foundation, 1969. 4th Edition 2002.

The Management of Investment Decisions. Donald B. The Yale Endowment. Yale University Press, 1995.
Trone, William Allright, Philip Taylor, Irwin Books, 1996.
The Yale Endowment, Updates 1996-2004. Yale
Managing Your Investment Manager. 2nd ed., Arthur University Press, 1996-1999.
Williams, III, Dow-Jones Irwin, 1986.
Web sites:
Nonprofit Investment Policies. Robert P. Fry, John Wiley & www.agb.org
Sons, 1998. www.commonfund.org
Performance Expectations and Reality: Smaller vs. Larger
Endowments. Commonfund Institute, Monograph Series,

- 31 -
About Commonfund

Commonfund provides vital financial services for institu-

tions dedicated to bettering society.

Our mission is to enhance the financial resources of non-

profit institutions and to help them improve investment
management practices. As the largest nonprofit investment
manager, we place the fulfillment of this mission ahead of
profit, unfettered growth, and asset gathering. This allows
Commonfund to offer thoughtfully constructed, high-
quality programs and services at competitive costs.

Through well-managed, long-term investment programs, we

endeavor to help these institutions strive to build the financial
resources they need to maintain and improve their programs,
staff, physical plant and infrastructure. And our state-of-the-
art treasury management tools help them increase financial
productivity and reduce administrative costs.

Commonfund was founded in 1971 as a nonprofit corpora-

tion. Together with our subsidiaries, we have approximately
$30 billion in assets under management for more than 1,500
nonprofit clients.

- 32 -
Returns on investment funds will fluctuate, and investors
could lose money on their investments in any Commonfund
Group funds, just as they could with other investments.
Past performance may not be indicative of future results.

The information provided in this brochure is for general

informational purposes only and is not an offer to sell or
a solicitation of an offer to buy any securities, options,
futures, or other derivatives related to securities in any
jurisdiction. This brochure is also not an offer or solicitation
to participate in any particular trading strategy. All
Commonfund Group investment funds are offered only
by means of detailed offering memoranda and related
disclosure materials. Potential investors should read all such
materials with care prior to investing.

Certain Commonfund Group funds impose various

eligibility requirements. For more information generally,
see www.commonfund.org. Securities are distributed by
Commonfund Securities, Inc.
Commonfund Tel 888-823-6246
15 Old Danbury Road Tel 203-563-5000
P.O. Box 812 www.commonfund.org
Wilton, CT 06897-0812

©2005 Commonfund 1/05