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Rethinking Investment Strategies

By Net Assets posted 06-14-2019 10:57 AM

  
Endowment

Financial Management |

Many independent schools face financial challenges related to cash reserves, endowment depletion and operations. Finding ways to align enterprise considerations and investment strategies can help address these issues, said the presenters at the session “Aligning Your Endowment Strategy with Your School’s Operations” at the 2019 NBOA Annual Meeting. “The sweet spot for an endowment investment strategy is where the school’s needs and mission, the [investment] committee’s knowledge and experience, and the current state of the capital markets are aligned,” said presenter Richard Grzymajlo of FEG Investment Advisors.  

About ten years ago, St. Christopher’s School in Richmond, Virginia, a co-presenter at the session, had a strong endowment, but considerable financial obligations. The finance and investment committees weren’t comfortable with the $23 million dollars in debt held by the school and its foundation, taken out to support school construction.

The Episcopal all-boys day school with 1,000 students JK-grade 12 developed an investment policy statement (IPS) that clarified how it would pay down the debt by taking funds from the endowment. The IPS specified the annualized total return to be achieved each year, that the goal of investing was to maintain the foundation’s purchasing power, and that cash could be used to meet short-term liquidity needs. After discussions, the committees decided to use $7.5 million of its endowment to pay down the debt and has since paid an additional $2.5 million. The school now has a $13 million debt and took out a bridge loan to build a new leadership center and begin construction on a new recital hall.

St. Christopher’s IPS also sought to limit volatility in year-to-year spending. The document called for developing a five-year plan, budgeting based on current funds and expected returns, and discussion of investment models. The investment committee wanted to ensure the budget was balanced consistently while maintaining long-term growth of the fund. The spending rate will “step down” over a number of years for this to happen.

While the IPS was instrumental in helping the school plan its strategy, the key to developing an effective investment policy was the collaboration and communication between the finance and investment committees. Often, finance committee members are board members who are closely connected to the school. Investment committee members may be advisors from outside the school and don’t serve on the board. Work to connect the parties should pay dividends, as in the case of St. Christopher’s.

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