How can institutions better understand their investment goals, and how do investment assets contribute to financial health? We believe in a holistic approach that integrates business strategy, financial statements, and investment management. But that approach raises several questions, which we tackle in this paper.

1. Is there a benefit to looking at an institution’s asset pools together?

We believe the simple answer is yes. Institutions that examine their investment programs holistically may be better positioned to achieve their missions. Considering “all-in” asset allocation and how volatility in one asset pool could affect other pools may offer greater insights into the role of investment assets in an organization. For example, a university could hold endowment assets through foundations in addition to balance sheet funds available for general expenditures. In looking at its program holistically, this university would understand how investment volatility in both pools influences its ability to meet spending obligations and broader measures of financial health, such as the Composite Financial Index (CFI) or the Department of Education (DOE) composite score. This approach to risk management could help the university focus on its mission of educating and preparing tomorrow’s leaders.

2. Can a single asset pool still be managed holistically?

Holistic, goals-based investment management can still be beneficial even with a single asset pool. Consider a charitable organization that heavily relies on spending from its foundation to maintain operations and meet constituents’ needs. Using an “investment-only” approach may help the foundation manage assets with a sole focus on expected return. In contrast, a goals-based framework would first examine the key financial metrics the organization assesses to measure financial wellbeing and mission attainment, such as those related to liquidity or minimum levels of investment income. By understanding how investment risk affects those measures, a not-for-profit could implement an investment program that centers on the broader role of investment assets. This, in turn, could create an opportunity for a more robust approach to investment management.

3. How can the impact of investment assets on key financial metrics be measured and reviewed?

There are three important steps to this process. The first step is identifying the key metrics most indicative of an organization’s financial health. These metrics are often related to debt levels (such as debt service coverage ratio) and liquidity (e.g., days of cash on hand) but may also be more encompassing, such as the CFI and DOE composite score. The next step is understanding how different asset pools contribute to those metrics. For instance, an institution’s board of directors or donors could restrict the use of certain asset pools, making them unavailable for routine operating expenses. Finally, a forward-looking analysis that integrates financial projections for an organization, varying asset allocation profiles, and assumptions about the future performance of investment assets is necessary. A robust forward-looking analysis would, for instance, model the impact of investment volatility on an organization’s debt-to-capital ratio or ability to preserve adequate liquidity. This modeling work can be complex, and many institutions could benefit from engaging a qualified financial services firm for such an analysis. 

CFI is a measure of financial health widely used throughout higher education. It comprises four core ratios that measure different aspects of financial wellbeing: primary reserve, viability, return on net assets, and net operating revenue ratios. DOE composite score is a general gauge of an institution’s financial responsibility. It is linked to an institution’s ability to demonstrate it is maintaining the standards of financial responsibility necessary to participate in Title IV programs (federal student aid).

4. How do capital spending plans influence investment strategy?

In keeping with a holistic perspective, we believe capital spending plans, or any plans that call for deploying investment assets, should inform the investment strategy and vice versa. In general, spending plans that make greater use of investment assets would lower an organization’s ability to take investment risk; a planned spend-down of investment assets may need to be tabled if investment volatility threatens baseline measures of liquidity. In contrast, relying on debt financing to fund spending plans would, in theory, introduce additional liquidity to the balance sheet, though debt service considerations may preclude wholesale changes in the ability to tolerate investment risk. In either case, the funding decision weighs on the investment strategy decision. Incisive organizations should, however, have an understanding of reasonable discretionary spending plans and the role the investment assets play in broader measures of financial health. Acknowledging this two-way relationship – that spending plans inform the investment strategy and vice versa – is critical to navigating investment risk and fulfilling strategic objectives.

If poor or volatile investment returns threaten an organization’s ability to pay operating expenses (i.e., keep the lights on), that would likely reduce its ability to tolerate further investment risk. That means it may need to postpone a planned spend-down of investment assets for some future project because the investment portfolio is lower in value than expected.

5. Should investment assets provide liquidity in challenging operating years?

We believe a prudent investment strategy should anticipate the need for liquidity without sacrificing the long-term return potential of investment assets. That said, there is seldom a magic bullet: An organization must be comfortable with its investment strategy in terms of the role investment assets play in securing adequate near-and long-term liquidity. For example, a healthcare provider with an outsized allocation to alternative investments may find itself in a liquidity crunch if operating income is below budget and spending plans are not adjusted; such illiquid investments may not available for sale on short notice. On the other hand, if the provider maintains an excessive cash balance, it could be courting shortfall risk, or the risk of failing to build sufficient capital to meet longer-term objectives. Our whitepaper Understanding Special Distributions from Long-Term Asset Pools offers additional color on using long-term investment assets to address immediate liquidity needs.

About the EIRM Team

Our Enterprise Investment Risk Management (EIRM) team strives to help institutions achieve their organizational goals by understanding how investment assets contribute to financial health. Our holistic approach integrates business strategy, financial statements, and investment management into comprehensive solutions.

For more information, please reach out to Vincent Klos, CFA, Director of EIRM Solutions, at