Fulfilling your mission, keeping risk in check, maintaining healthy financials, and using your assets to help achieve these outcomes—is completing all of these tasks possible against a backdrop of change, uncertainty, and volatility?

In our view, the answer is yes, with an analytical and enterprise approach. We increasingly see institutional investors implement a goals-based analytical framework for managing their assets and liabilities en route to achieving their organizations’ objectives. In this paper, we discuss this trend and its potential benefits.

A Challenging Landscape

Institutional investors are facing numerous and unique challenges, including major reductions in revenue and uncertainty regarding the shape and timing of an economic recovery. While these challenges might be novel, the presence of unforeseen challenges is not. In the table below, we attempt to summarize specific challenges facing institutions today.


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We see institutions shift to a more holistic, enterprise-focused investment management model in response. Specifically, we see this occurring in two ways:

  • Analyzing the role of balance sheet investment assets in contributing to their financial wellbeing.
  • Using the relationship between investment assets and financial results to help determine the best asset allocation for addressing liquidity and cash flow concerns.

Together, these two strategies form what we call a goals-based investment framework. In this framework the institution’s enterprise goals serve as a key component of the investment strategy for the asset pool(s).

Goals-Based Investment Frameworks

While there is no single formula that will work for all institutions, most goals-based investment frameworks are based around four key steps:


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While the implementation of these four steps can vary, the objective is to attempt to determine how investment assets impact key financial metrics and overall financial wellbeing. This type of analysis can range from a corporation reviewing the impact of its pension on its cash flows to a university determining appropriate liquidity so as to avoid inopportune operating asset sales.

A goals-based framework can link both sides of the balance sheet, such as a healthcare system that seeks to terminate its pension using either a borrow-to-fund approach or funds from long-term operating assets. The optimal endowment asset allocation for a charitable foundation that needs to disburse resources while facing fundraising challenges and uncertain prospects for financial asset returns is another example.

Based on the nature of this analysis, a goals-based investment framework that is flexible and tailored specifically to a given institution will tend to outperform one that is rigid or “one-size-fits-all,” in our opinion. Additionally, organizations need not devise and administer such a framework on their own. Working with financial services firms with experience helping like institutions, deep analytical capabilities, and an understanding of both sides of the balance sheet can provide a path to successful execution.

Conclusion

As is the case with any period of uncertainty or instability, institutional investors will need to continue to implement tactical and strategic plans for managing their finances. Institutions must balance maintaining solvency in the present with being financially viable in the future. Implementing a goals-based investment framework can aid with navigating these challenges.


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Chart 1

  Challenges

Nonprofits

  • Increased demand for resources to help communities address unemployment, food insecurity, medical needs, and so on
  • Major uncertainty around the ability to raise resources through traditional fundraising with historical data showing that charitable giving growth typically declines during adverse economic scenarios

Higher Education

  • Cash flow issues related to refunded tuition and lost room and board fees
  • Increased pressure on longer-term asset pools, such as endowments, to make extraordinary (and potentially harmful) distributions to cover budget shortfalls
  • A long-term tuition discounting trend likely to continue

Healthcare

  • The immediate emergency associated with responding to the global pandemic
  • A decline in higher-margin revenue sources, such as elective surgeries
  • Ongoing challenges such as tight labor markets, a shift to value-based payments from the fee-for-service model, and changes in consumer behavior

For-Profit Entities

  • A start-and-stop economy with increased cost of goods sold, a major acceleration in the shift to online consumption, and a significantly disrupted supply chain
  • Major uncertainty around the shape and timing of a global economic recovery creating barriers to reliable financial forecasting


Chart 2

Step 1. Goals & Objectives: Establish goals and objectives for asset pool(s)

Step 2. Understand Business & Projections: Gather and analyze institution’s enterprise financial projections

Step 3. Enterprise Investment Risk Analysis: Measure and calibrate relationship between changes in investment strategy and impact to key financial metrics

Step 4. Customized Investment Strategy: Create custom asset allocation for each pool that maximizes probability of achieving organizational objectives within risk constraints