The Practical Guide To Managing Nonprofit

-Thomas H. Hodges, Executive Vice President, Finance, and Treasurer Evanston Northwestern Healthcare (Evanston, Illinois)

WILLIAM A. SCHNEIDER, CIMA, is Managing Director of DiMeo Schneider & Associates, LLC, a Chicago-based firm that provides advisory services to plan sponsors and financial institutions. He currently advises many qualified plans, including several leading Midwest law firms and Fortune 100 companies. He holds the title Certified Investment Management Analyst, awarded through the Investment Management Consultants Association (IMCA) accreditation program at the Wharton School of Business.

ROBERT A. DIMEO, CIMA, CFP, is also Managing Director of DiMeo Schneider & Associates, LLC. In addition to being an advisory board member for Catholic Charities of the Archdiocese of Chicago, he serves on the governance board for Notre Dame High School and is a former member of the board of directors for the IMCA.

MICHAEL S. BENOIT, CIMA, CFP, is a cofounder and Managing Director, Private Client Services at DiMeo Schneider & Associates, LLC. He provides investment counseling services to private foundations, corporate executives, family trusts, and other substantial investors. He is a member of the International Association for Financial Planning. Mike is also a Certified Investment Management Analyst.

Chapter 1: Introduction.

A Crying Need.

Shocks to the System.

Finances.

Contributors.

The Pension Problem.

Environment of Mistrust.

The Good News.

The Fund-Raising Challenge.

Gifting Strategies.

Investment Strategies.

Expect to Find.

How to Use this Book.

Who Should Use this Book?

Chapter 2: Special Issues.

Hospitals—The Retirement Plan Mess.

Underfunded Pensions.

403(B) versus 401(K).

Annuities.

Mutual Funds.

Education and Communication.

Endowment and Operating Funds.

Contributions.

Considerations for Religious Institutions.

Summary.

Chapter 3: The Total Return Approach.

Early History.

The Modern Era.

The Legal Challenge.

The Barker Report.

UMIFA, ERISA, UPIA, and the Prudent Investor Standard.

The Case for the Total Return Approach.

Potential Negatives.

Summary.

Chapter 4: The Prudent Steward.

Build a House . . . Build an Investment Program.

Set Goals: The Blueprint.

Allocate Assets.

Manager Selection: Hire the Subcontractors.

Rebalance.

Monitor Performance.

Chapter 5: Set Goals.

Introduction.

Define the Mission.

Determine a Spending Policy.

Establish the Required Return.

Understand Your Risk Tolerance.

Designate the Time Horizon.

Summary.

Chapter 6: Investment Policy.

Overview.

Why Is It Important?

Content.

Sample Investment Policy Statement.

Implementation and Maintenance.

Specific Investment Guidelines.

Investment Benchmarks.

Summary.

Chapter 7: Asset Allocation.

The Efficient Frontier.

Capital Market Assumptions: The Building Blocks of Portfolio Construction.

Developing Expected Return Assumptions.

Modern Portfolio Theory.

Shortcoming of Traditional Mean Variance Optimization.

The Long Run.

Probabilistic Optimization Models.

Summary.

Chapter 8: New Asset Classes.

Real Estate Investment Trusts.

The Statistical Properties of Historical REIT Returns.

High-Yield Bonds.

International Bonds.

Mutual Fund or Separate Account?

Experience Counts!

Summary.

Inflation Indexed Bonds.

Risk Factors.

Conclusion.

Chapter 9: Investment Style.

Academic Research.

Ancillary Uses.

The Current State.

Summary.

Chapter 10: Manager Selection.

Overview.

Herd Mentality.

Avoiding the Star System.

Where to Begin.

Manager Selection.

Passive versus Active Management.

Databases.

Administrative Compatibility.

Trade Execution.

Social Investing.

The Commonfund.

Proxy Voting.

Account Types.

Negotiate Fees.

Chapter 11: Alternative Investments.

Hedge Funds (Absolute Return Strategies).

Funds of Funds.

Risks.

Benefits.

Fund-of-Funds Search.

Real Estate.

Timberland.

Private Equity.

Structured Equity.

Managed Futures.

An Investment Strategy.

Benefits of Diversification.

Risks.

Conclusion.

Chapter 12: Portfolio Rebalancing.

Traditional Rebalancing Methods.

A New Approach.

Building Your Own Model.

Conclusion.

Chapter 13: Performance Measurement and Evaluation.

Performance Calculations.

Benchmarks.

Market Indexes.

Style.

Picking the Right Index.

Multiple Benchmarks.

Presenting the Data.

Universe Comparisons.

Portfolio Analysis.

Style Analysis.

Risk Analysis.

Recent Developments.

Performance Reporting.

Terminating a Manager.

Chapter 14: Socially Responsible Investing.

History.

Socially Responsible Investing Strategies.

Separate Accounts versusMutual Funds.

Performance Impact of Socially Responsible Investing.

Incorporating Socially Responsible Investing into Investment Policy.

Chapter 15: Selecting Other Vendors.

Step One.

Step Two.

Step Three.

Step Four.

Record Keepers.

Narrow the Field.

Final Steps.

Defined Benefit Plans.

Gift Annuities.

Brokers.

Chapter 16: Hiring an Investment Management Consultant.

Identifying the Need: A Tale of the Typical Nonprofit Organization.

The General Contractor—A.K.A. The Investment Consultant.

Effective Use of a Consultant.

Summary.

Chapter 17: Behavioral Finance.

Trying to Break Even.

Snake Bitten.

Biased Expectations and Overconfidence.

Herd Mentality.

Asset Segregation or Mental Accounting.

Cognitive Dissonance.

Anchors.

Fear of Regret and Seeking Pride.

Representatives.

Familiarity.

Investor Personality Types.

Risk-Seeking Behavior.

Naturally Occurring Ponzi Schemes and Market Bubbles.

Conclusion.

Chapter 18: Legal Aspects of Investing Charitable Endowment, Restricted, and Other Donor Funds.

Overview.

The Nature of Endowment or Restricted Funds.

Endowments Created by the Board.

Donor-Created Endowment Funds.

Donor-Created Restricted Gifts or Funds.

General Statement About Investing Endowment and Other Funds.

The Prudent Man Rule.

The Prudent Investor Act.

Uniform Management of Institutional Funds Act.

Private Foundation Rules.

Summary.

Chapter 19: Fiduciary Issues—Retirement Funds.

ERISA.

Who Is a Fiduciary?

Fiduciary Requirements.

Penalties for Fiduciary Breaches.

Prudent Procedures to Limit Fiduciary Liability.

Department of Labor Tips to Help Fiduciaries Understand Their Responsibilities.

Chapter 20: Final Thoughts.

Summary.

The Prudent Steward.

Take Aways.

Conclusion.

Appendix A: Sample Investment Policy Statement.

Introduction.

Purpose.

Spending Policy.

Investment Policy.

Investment Objectives.

Asset Allocation.

Cash Flows/Rebalancing.

Transaction Guidelines.

Selection of Investment Funds/Managers.

Performance Monitoring.

Termination of Managers.

Proxy Voting Policy.

Responsibilities of the Investment Consultant.

Meeting Schedule.

ABC Hospital Fund.

General Guidelines for All Managers.

Specific Guidelines.

Investment Manager Objectives: Evaluation Benchmarks of Selected Managers.

Appendix B: Investment Manager Questionnaire.

Appendix C: Sample Search: Investment Analysis.

Definition of Key Statistics.

Large Company Value Search: The Screening Process.

Large Company Value Investment Analysis.

Large-Cap Value Equity Analysis.

Appendix D: zzz eVestment Alliance, L.L.C.: eA U.S. Equity Sample Product.

Appendix E: Request for Proposal for Hedge Fund-of-Funds Management.

Appendix F: Request for Proposal: Record-Keeping Services Firm Background.

Plan Sponsor Services.

Administration/Record Keeping.

Participant Services.

Communication and Education Services.

Investments.

Trustee Services.

Mutual Fund Trading Practices.

Fees.

Conversions.

Appendix G: Resources.

Data.

Analytical Software.

Other Resources.

Glossary.

Index.

What is included with this book?

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The Practical Guide To Managing Nonprofit Assets

Summary

Author Biography

Table of Contents

Supplemental Materials