NFP Why it pays to take a long term approach

Not-For-Profits Perspectives

Why it pays to take a long term investment approach

Good governance is crucial yet challenging for Trustees in the Education sector who need to ensure appropriate investment strategies are in place

Investment decisions in the education sector focus on providing sustainable, financial security for the organisation and its programs, often for generations.


While this situation remains constant, economic conditions don’t, and good governance around investment decisions is now as challenging as it is crucial. In a recent article on the challenges faced by not-for-profit boards my colleague Russell Garrett highlighted governance as one of the major issues.

Through increased government oversight of the sector and increasing demands on Trustee's in general, the job is getting more difficult. Trustees have become more visible and potentially personally liable for their actions.

The boards of foundations and endowments need to establish prudent investment governance frameworks to ensure appropriate investment strategies are in place. These strategies need to take into account the unique circumstances of the organisation and the pressures of lower asset returns on immediate financial requirements. There’s no doubt the need for liquidity has created a haze on the long term investment horizon.

There are significant responsibilities in guiding your organisation through a challenging financial environment and it’s important to be clear eyed around long term investment. This includes clarity around your tolerance for illiquidity, guided by an understanding of your capacity for illiquidity during normal market conditions and tolerance during stress periods.

It’s also important to be rewarded for a long term investment decision. Are you benefiting from an illiquidity premium as a long term investor?

Academics and institutional experts conclude 0.50% - 3% per annum is the illiquidity premium range investors could receive in return for sacrificing liquidity depending on their investment strategy.


In a previous article I discussed how, by evaluating your overall liquidity profile and capturing a formal liquidity policy as part your governance documentation, the liquidity budget becomes integrated with the overall investment strategy setting process.

The strategy should also include risk mitigation around the nature of your investments. It’s important to address the actual behaviour of the assets you invest in, not the short term noise surrounding them. One big advantage when you take the long view is you are not affected by the world events in the same way as other investors in listed equity and debt markets. Right now, when a tree falls in Greece or China everyone can hear it and we see problems that have nothing to do with the underlying assets having the ability to move markets in a downward direction. This actually creates an opportunity for long term investors to capitalise on the fear that asset prices might fall further. When you’re a long term investor these moments can become an ideal time to buy these assets, as long term investors are better placed to weather short term volatility.

Of course the education sector still needs to manage the short course - pre-scheduled distributions to stakeholders, allowance for inflation and other demands eating into capital. Endowment managers need to understand how much of a contribution is required from the endowment to reach established goals, and this can be difficult, particularly when stakeholders’ concerns are heightened and market conditions are changing. This is why we suggest endowments often need greater diversification in their portfolio. It’s important to define your time horizon, again based on your tolerance for illiquidity, and create a long term strategy that also incorporates some remuneration on a short term basis, such that issues of intergenerational inequity do not arise. Of course it’s also essential that an organisation’s long term mission and strategic goals is reflected adequately in their investment policy.

Once a strong investment strategy has been formulated it’s essential to commit to it. Don’t say you’re a long term investor then behave like a short term one.

As you stay the course and monitor your investments over a period of time you can develop a liquidity budget that will meet your short and long term requirements, whatever the market conditions.

About the author

Hendrie Koster, Principal

With more than 15 years of experience within the investment industry, Hendrie is a Principal in Mercer's Investments business. Based in Sydney, he advises endowments and foundations and not-for-profits on a wide range of issues, including investment strategy, portfolio construction and manager selection. He is also actively involved in strategic research and the development of Mercer’s intellectual capital.

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