As associations are evolving their revenue models and non-dues sources, it's becoming increasingly important for organizations to have well-managed investment reserves. A solid investment reserve picture provides additional sources of revenue, helps fund critical capital expenditures or initiatives, and secures operations during periods of economic or organizational stress. What are the best policies and practices associations should use in order to govern and handle investment reserves effectively?
With that in mind, the ASAE Foundation put together a research-based report called, Association Investment Policies, Practices, and Performance, which outlines strategies, polices, and best practices for handling and governing investment resources. It's designed to help associations evaluate their investment strategies, performance, and governance structure relative to those of similar organizations.
More than 500 professional and trade associations responded to ASAE Foundation's survey, and ORION Investment Advisors provided the analysis and narrative in the report.
Among the highlights:
- More than 75 percent of respondents reported using an outside investment advisor to assist in the management of their reserve funds.
- Organizations using an outside investment advisor were more likely to be satisfied with investment results; more than 80 percent of respondents using an investment advisor either strongly agreed or agreed that investment reserves are meeting their intended objectives. This compared to just greater than 50 percent for those groups not using an advisor.
- A large number of associations has delegated some level of discretionary authority to their outside investment advisor. Almost 50 percent of respondents' organizations permit the investment advisor to adjust portfolio allocations (within established investment policy parameters) and/or hire and fire outside investment managers without prior approval of staff or volunteer leadership.
- Approximately 22 percent of respondents reported that their organizations periodically rebid their investment advisory service at a predetermined interval. Of those associations that did regularly rebid these services, 3-5 years was the most commonly reported interval.
- Nearly 50 percent of associations reported drawing upon reserves on some basis, further underscoring the important role investment reserves play in the overall financial picture of associations.
- Average investment returns varied considerably by asset size in 2013; associations with larger investment portfolios significantly outperformed smaller organizations (reserves with less than 1M) brethren.
- Less than half of those with a separate foundation reported regular spending (46 percent), and this too was largely determined by specific need as approved by association leadership.
- More than 90 percent of respondents maintained a written investment policy. Those that did not tended to be associations with investment reserves of less than $1 million.
- A significant number (45 percent) of associations noted that their investment policy was reviewed at least annually. The larger the level of reserves, the greater the likelihood that the investment policy is reviewed at least annually.
- There was a positive relationship between investment performance and reserve size; for the trailing one, three, and five years ended December 31, 2013, associations with larger reserve balances outperformed organizations with smaller reserves. This is likely due to a number of factors. First, larger associations tended to have a greater allocation to equities and lower allocations to cash in an environment where equities have produced double-digit returns for the past five years while returns on cash have been at historic lows. Second, larger associations are more likely to have a written investment policy and an outside investment advisor—factors that may help contribute to a cohesive, disciplined long-term investment strategy.
This initial study of association investment policies, practices, and performance elicited a range of responses, which is not surprising given the diversity and complexity of ASAE's membership. The complete report is available through ASAE's Bookstore.