Hello, everyone, and welcome to today's 2023 State of Nonprofits, the next generation of governance webinar.  Before we get started, I'd like to acquaint you with some of the ways you can participate today.  The On 24 Room you are in allows you to adjust and resize all panels that appear on your screen.  To resize any of these panels, just click on the lower right corner and drag to adjust.  To move a panel, click the top title bar of that panel and drag it anywhere within the console.  Closed captioning is available by pressing the CC button on the bottom of your media player.  You could then resize the media player to any size you'd like in order to read these captions easier.  There are also some related content links available on the right-hand side of the console.  Just click directly on any of those links and you'll be redirected accordingly.

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Now, without further delay, let's begin Today's 2023 State of Nonprofits, the next generation of governance webinar.  I'd like to introduce you to Alistair Jessiman, CEO of PNC institutional Asset Management for our opening remarks.  Alistair, the floor is yours.

Alistair Jessiman:

Welcome.  My name's Alistair Jessiman and I run PNCs Institutional Asset Management Business.  It's terrific to have you all with us.  This is our annual gathering of nonprofits where we collectively share information and collaborate to provide guidance and insights for all of us on what it takes to strengthen the nonprofit sector.

Throughout the year, I have personally had the opportunity to meet with nonprofit leaders around the country with you to learn what is on the minds of your organizations.  Today, we will focus on the next generation of governance leaders and donors.  The goals for today's event are to hear from our panelists regarding what nonprofits should consider in preparation for the next generation, discuss what to anticipate with the next generation and how this integrates with financial and investment decisions and make sense of the market environment that we're currently in and hear what boards can expect in 2023 as 2023 comes to a close.  And with that, let me introduce you to Henri Cancio-Fitzgerald, who runs our nonprofit practice and business across the US.

Henri Cancio-Fitzgerald:

Volatility, uncertainty, complexity, ambiguity.  VUCA.  What an odd way to begin a presentation.  The truth is, I've been reading a book that says that an audience will determine whether they want to hear anything the speaker has to say within the first eight seconds.  And I'm sure there's a chapter that says, don't start your presentation by screaming VUCA at your audience.  Perhaps you can let me know if that tactic worked when you complete the survey at the end of day's webinar.  Thank you all.  I'm Henri Cancio-Fitzgerald and I lead the nonprofit business within PNC Institutional Asset Management.  It's my pleasure to welcome you all to our sixth annual PNC State of Nonprofits webinar.

So, back to VUCA, it is actually a leadership concept that describes an environment characterized by volatility, uncertainty, complexity, and ambiguity.  Now, that sounds a lot like the current environment, right?  And it also sounds like the environment we've been in for the last four years or so.  But yet, here we are once again standing on the banks of the river VUCA, knowing that we have to cross it.  We have to cross it in order to serve our communities, in order to serve our environment, our hopes, our dreams, our faith, our children, our mission and the mission is going to help us to realize a better tomorrow.

So, as we build our vessel to cross the VUCA River, and yes, it is a real place.  I've been there more than I care to admit.  What we're going to need on our vessel is vision to guide us through volatility.  We're going to need understanding to help us move through uncertainty.  We're going to need clarity in order to help us to navigate through the complexity.  And finally, we're going to need agility to help us adapt to ambiguity.

Now, my bio and all my colleagues here, their bios show that we have a lot of formal training and education, and I'm certainly thankful for all of that.  But the biggest lesson that I've learned in my 20-year career is that true wisdom comes through conversations, it comes in the trenches and it also comes when we're dealing with real issues.  And similar to Alistair, he's been around the country speaking with nonprofit leaders.  I've joined him for some of those trips.  And I've also had other meetings with nonprofit leaders that really help understand the community, understand the challenges that nonprofits are facing, and also to build tools and provide tools that can help our clients and other nonprofit organizations navigate towards a better tomorrow.

And all of our conversations with board members and leaders of organizations and even professional allies, the theme that came along was governance and resources.  That's what everyone wants to talk about.  That's top of mind for everyone.  So, the theme for this year's state of nonprofits is the next generation of governance.

So, let me set up today's presentation by sharing that.  I sit on the board of my private college.  We recently, over the summer, had a convening.  We brought in all of the resource committees, or we call it the money committees, being advancement, finance and investments, along with the senior leaders who represented all of those areas.  We had a great conversation.  We shared our perspectives based on our background, the things we're working on and our functional areas.  And we all walked away energized, we walked away aligned, and we walked away feeling prepared that we could handle anything that faced us in this volatile, uncertain, complex and ambiguous environment.  That's the beauty of shared governance, and that's why I'm also excited to kick off today's conversation with my colleagues, my friends, and most importantly all of you.  And there's going to be an opportunity for you to engage with texting your questions in.

But without further ado, let's meet our panel.  And what I'll do is I'll introduce each one of you quickly and then have you introduce yourself when we bring you into the conversation.  So, first, we have CJ Orr, who's the partner and president at the Orr Group.  The Orr group is a nonprofit, fundraising and consulting firm.

And we also have Kim Matthews, who's PNCs managing Director of Pension and Enterprise Solutions.  She's one of my favorite actuaries and CFAs, charter Financial Evolve analysts.  And her team does a lot of financial modeling.

And last, but never least, Stacey Herndon, PNC director of Investments.  So, let's start off with you, CJ, if you could introduce yourself.

CJ Orr:

Thanks, Henri.  My name is CJ Orr.  I'm partner and president at the Orr group.  And we're a consulting firm that works exclusively with nonprofits, about a hundred different nonprofits.  And generally, our services range from strategy, fundraising and recruitment.  Thanks for having me.

Henri Cancio-Fitzgerald:

Thanks, CJ.  So, what I'd like for you to do, just kind of in the context of, as I said it earlier, from an advancement committee and speaking with leaders, what should they be thinking about now in the context of the current state of nonprofit sector?

CJ Orr:

Yeah, I definitely love to jump in there, Henri, as I have a slide up, I realize I'm wearing the exact same thing in my photo there.  Maybe I should freshen up my wardrobe.  I thought that was funny and I really appreciate your comment about true wisdom comes through conversations.  I think that's great, and I wrote that down.

So, I'll just start by saying, again, thank you, PNC for having me today.  It's been a true pleasure to work with you all.  I know that you probably treat your clients all the same, and so, I'm sure it's a joy for them to work with you as well.  So, thanks for having me, allowing me to chat.

So, I'm going to talk a little bit about the current state of the nonprofit sector, and then, we're going to talk a little bit about how that gets engaged with boards, the advancement committee and the finance committee.

When talking about the current state of the finance sector, I really like to pull on my experience from the Giving Institute.  So, I serve on the board of the Giving Institute.  And the Giving Institute produces a report called Giving USA.  It's basically an aggregate of all the information, the giving information.  Each year they collect and survey all different nonprofits, donors and et cetera to bring statistics around where the revenue is going.  So, they do this every single year.  And in 2022, the report showed that there was a significant decrease in philanthropy being given.  In fact, the number is 10% decrease adjusted for inflation.

So, what you might glean from that in 2022 is okay, the sector was under some stress, and that's a fair assumption, but I also want to put it in context a little bit.  If you consider the broader economic landscape, the S and P was down, I think 19.4% or something along those lines.

In 2022, annual GDP was less than expected, around 2% or so, with generally those numbers as your economic backdrop, philanthropy actually did better than expected or better than the economy.  So, it's worth noting that the general state of the philanthropic sector in 2022 did not fare well.

However, there were a lot of other industries and a lot of other things that fared worse.  And so, when thinking about 2023, you notice a general better feeling in the market and just generally in the economy that's being felt in the philanthropic sector as well.  So, when the economy went down in 2022, so did the philanthropic sector, but when the economy is doing a little bit better here in 2023, I would expect and feel that the philanthropic sector will follow suit, maybe not as aggressively, but generally, I would predict that philanthropic giving and probably go up around six or 7% this year.

So, it'll be a little bit of a rebound from last year.  A few other trends or state of the sector information that I've pulled from the giving USA report, one is regarding where the money is going.  So, about $500 billion was given to philanthropy last year.  64% of that went to individuals, 21% from foundations, 9% from bequest, and 6% from corporates.  I think that trend, that stay of that market is going to continue.

And I often get the question, where should I be spending my time in terms of fundraising?  Who should I be going after?  So, I hope that math just shares that your focus, if you have the time you're focusing on fundraising should always be prioritized with individuals, then work your way down, foundation's, bequest, it's just a majority of that market is there.  And it's always great for nonprofits to be sure to focus on that sector.  And I think that that will continue.

One other just interesting fact that came out of that giving USA report, which shows a good state of the market, generally 80% of the donations come from 20% of the donors.  This has been a historical trend in philanthropy over the years.  What we're seeing actually is a skew in a wider gap.  So, now, it might be 90% of your donations come from 10% of your donors or even getting to the point of maybe it's 95% of your donations come from 5% of your donors.

So, for example, this year in the giving USA report, 13 billion came from six donors alone.  So, I think you'll start to see that trend continue down the line, but that's definitely in the current state.  So, if I were to look in 2024 and 2025, I do believe that we'll continue to track philanthropy will continue to track a little long with the economy and I'm sure you all have an opinion on it.  From my perspective, I think philanthropy will continue, will be strong this year and we'll continue to be strong for a few years down the line.

Henri Cancio-Fitzgerald:

So, as we're also thinking about, I mean now's the kind of the time of year where budgets and strategy for the next year and actually long-term budget for the next three to five years, what trends might an advancement committee really be thinking about that might impact their strategy over the next three to five years?

CJ Orr:

Yeah, so, when thinking about over the next three to five years, this is definitely where the board gets involved with the advancement committee gets involved, but the finance committee gets involved.  So, boards generally work on and are part of the future trajectory of the organization, the vision.  So, it's important to know when budgeting or just generally around the board table, that we do believe that philanthropy will continue to be robust in years to come.  And I say that because if you're thinking for example, about doing a campaign, I would think that now would be a good time to consider a fundraising effort along those lines.

So, the campaigns, for example, I do believe over the next three to five years will continue to be one of the best tools for nonprofits to use to raise significant revenue.  Generally, comprehensive ones are incredibly effective, and the board will be incredibly involved with that.  They'll be involved with the mission, they'll be involved with helping give or get, they might be on the campaign committee.  There's a lot of engagement with the board in those processes and I think you'll start to see a lot of those start in the next three to five years.

Another trend that will continue, and I really hope that does continue, is diversity of board leadership and diversity of donors.  This has been a big important factor for many organizations over the past few years, and I'm a hundred percent confident that this will continue to be a priority for board leadership going forward.  Every single executive director we've spoken to has confirmed that every board that we work with has confirmed that as well.  And that's really great to see and we expect to continue to see a pursuit of diversity in their board for the years to come.

Another one that also came out of giving USA report and that your board should be aware of, is that where gifts are coming from?  So, DAFs have become an incredible useful tool that we're seeing more and more donors utilize.  So, it's important to be working with your finance team to make sure about your acceptance policies.  Any ways to accept DAFs will be important for your finance and advancement committee to be noodling on.

The other one is plan giving and blended giving.  So, we're in the middle of a transition of wealth, the great wealth transfer, so, they say, where the baby boom generation will be transferring a lot of their wealth over to the next generation.  And that's a big opportunity for a lot of nonprofit organizations, particularly around blended giving.  So, a lot of donors will be giving cash and a planned gift in order to get their total gift increased.

So, what's important for the board and for the finance committee is updating your grant or your gift acceptance policies to be able to accept a lot of the various different planned gifts that are out there.  So, planned gifts come in forms of real estate.  There are annuities, there's CLATs, there's insurance, there is a different variety of planned gifts and it's important for boards to be able to accept all of them.

The other piece that's going to be continuing to happen over the next three to five years, and we've been hearing it all in the news, so, this is definitely a buzzword and so, I'll just touch on it very briefly, is artificial intelligence will definitely be starting to touch fundraising departments and organizations generally.  If AI is able to make a fundraiser more productive at writing emails, writing just generally proposals or whatever, that means that they can meet more donors, they can fundraise, solicit more, put out more proposals, and ultimately raise more money for the organization.  So, we just think it's going to contribute as many industries to the productivity of fundraising.

Now, what does this have to do with board?  So, board would approve or review any AI usage policies.  So, it's important to know how your organization is using AI, making sure not to share donor information or any other information that could be proprietary to your organization.  And so, it's important for the board to be involved in those conversations.  And so, I feel as though in the next three to five years there will be more conversations about that as different tools are being utilized or things that people are thinking about things differently.

And then, the last one, very briefly, is just the next generation of board and donors is coming through as I was talking about, with a great transfer of wealth.  That also means great transfer of board engagement and donors.

So, we encourage a lot of our organizations we work with to one, have a robust pipeline of board members who are the next generation and coming up.  And then, also to even consider having a committee or associate board or something, a level below the board of directors where you can start to engage that next generation of future board members.  So, all of those combined, there's a lot coming up and a lot of exciting things.  I mean, everything I've shared here should be productive towards fundraising.  So, we're hopeful that we're going to see a productivity increase in fundraising and then ultimately that funds more programs and improves all of the impact of all of our nonprofits that we work with.  So, I'm bullish and excited over the next couple of years.

Henri Cancio-Fitzgerald:

Thanks, CJ.  And I'm going to bring in Kim here in a moment for the finance investment perspective, should the finance committee, what should they know about the things that you just discussed and how might the advancement work intersect with the finance?  Can you give me a couple of just examples on how they could work together?

CJ Orr:

Yes.  So, there's a few where it's going to be very tight and close.  I think the campaign style fundraising where it's comprehensive, you're going to need finance, you're need advancement to be in lockstep because you're planning out budgeting for a significant endeavor.  You're planning out programming, where's this money going to go to what programs?  All of the donors will be asking for allocation charts.  So, 20% goes here, 30% goes there, you're going to need to be, advancement and finance are going to need to be in lockstep.  It's also a multi-year process.  So, you're going to be half to budgeting over many years.  A donor will be giving a complex multi-year gift and finance and advancement really have to be in lockstep for that process.

And then, the other trend that I spoke to that could definitely have intersection finance and advancement is playing gifts.  Those get very complex, especially as you start dealing with real estate, you start dealing with insurance, they just get very complex that your finance team will be actively involved because if something's irrevocable or revocable, that makes a big difference.  For finance, if it's irrevocable, that means that you could probably start counting some of it now towards your fundraising goals.  You can be more public about it and all that stuff, but if it's revocable for example, you can't really, it can be changed.  So, there's different policies for accepting it in your finance books.  So, I think that finance and advancement will really have to work closely together on those two of the ones that I mentioned about.

Henri Cancio-Fitzgerald:

Thank you.  Hi, Kim.  So, same setup.  Please introduce yourself.

Kimberlene Matthews:

Thanks, Henri.  And really, thank everyone for joining today.  So, as Henri mentioned, I lead the Pension Enterprise Solutions Group here at PNC and I started my career as an actuary, really focused on working with institutions on the liability side of the equation.  But I saw the need over time to expand this work into the asset side and help organizations manage risk.  So, my team here at PNC is a national team that delivers analytics to help organizations make strategic decisions and improve outcomes over time.  This work has been especially impactful in the nonprofit sector, and I look forward to discussing that in a little bit more detail.

Henri Cancio-Fitzgerald:

Thanks, Kim.  I sit on, I used to chair the investments committee of my college right at the beginning of the pandemic and I also now chair the finance committee.  What I can share is that volatility, uncertainty, complexity and ambiguity are just not words we really like to hear in those committees.  So, how might the finance and investments committee work together to navigate the current environment?

Kimberlene Matthews:

Good question.  And as you know, these committees are typically, especially for those that have sizable investment asset, distinct separate committees that are involved in meeting the mission.  So, when we think about the money committees using your terms, we know that the decisions made by one committee could have a major impact on the decisions that are being made by another committee.  So, there's a real need to have integration of those decisions.

And the reality is when we ask finance leaders at nonprofits, how do they feel like it's working?  Are the decisions really integrated?  They often discuss the need for these areas to work more closely in a holistic way.  So, to give you an example, you could see a situation where an investment committee decides to dial up the risk in the portfolio and that ultimately leads to lower liquidity.  And at the same time, the finance committee could meet and say, hey, we need to have a large spend and pull assets from the portfolio and that requires more liquidity, but they may not have what they need based on the decision that the investment team just made.

And so, that's an example of decisions that are unintentionally working against each other, but happens to be a real common challenge at nonprofit organizations.  So, while each of these committees are focused on driving the best outcomes, it's often challenging when all of the key stakeholders are not sitting at the same table in the same room when those decisions are actually being made.

So, a tool and how can we help with this is the question and a tool that we've seen nonprofit leaders find extremely helpful is what we call enterprise financial modeling to help bridge that gap.  So, this tool represents a multi-year, forward-looking projections that shows the impact of how various decisions impacts the organization's results and ultimately the ability to meet the mission.  So, I think we can all agree conceptually that today's decisions affect tomorrow's outcomes.  So, how do we take those future outcomes and feed into the decisions that we're making today?

And that actually requires a large degree of coordination of the stakeholders.  So, part of this process is gathering information from the stakeholders and building that into the model.  So, whether an organization is deciding on a major spend that advances the mission or whether they want to use debt financing or investment assets to move to make that spend, they're getting a large inflow coming in for new funding.  How do you put that to work?  These are all major decisions and the approach of really modeling out the outcomes actually gets these stakeholders communicating more and ultimately leading to a better decision in that whole process.

Henri Cancio-Fitzgerald:

Can you share a couple of examples that would show how this all works in practice?  Because I've been in both committees and I used to call it a tale of two committees when we're making decisions that when you look at it, you realize that hey, this is really contradictory to each other.  So, if you could share an example or two on how this might work in practice, that'd be beneficial for the audience.

Kimberlene Matthews:

Sure.  So, I have a couple of examples.  The first one, I'm going to call it mission expansion, and this is common things that nonprofits are looking at.  So, we are working with a nonprofit foundation that was designed with a promise to provide scholarships to urban youth for about 25 years.  And so, the program was about 15 years in and with the expectation that it was winding down in the eight to 10 years, the leaders at the organization were seeking to understand a couple of things.

One, they wanted to understand well, are the assets enough to meet these commitments that have been made in the community over the next 10 years coming off of volatile market environments?  And the second thing they wanted to understand was whether it was possible and how much funding would be required to offer one-on-one coaching to the students in the community.

It's different from the original mission, but it's really looking at expanding that the enterprise financial modeling approach and the tool that we work with them on.  It developed those projections of their financials looking at a wide range of scenarios, looking at different capital market expectations, different funding scenarios, even stress testing, what the student behavior might look like, so whether you'll get a large degree of applications or not.

So, what they could see with the modeling was exactly how much money they would need and also remain after those commitments were made.  So, they looked at, for example, how much is needed in donations to really expand the coaching program and took that information, presented that to the board in various committee members, and really the leaders at this nonprofit were able to bring these projections to stakeholders, so, the donors, potential donors that could impact the mission, showing them what do they need to really meet that mission over the next 10 years.  And even ongoing from that ultimately led to them being able to decide that it is quite possible to expand the program, but then going to those funders and asking for that lift in the funding.

The second example is what I would call, and CJ touched on planned giving programs earlier, but I call this example, what's the value of planned giving?  And a number of organizations have these planned giving programs that ultimately provide great economic benefit to the charities and missions over time.

However, when you ask leaders at these organizations, what's the actual value of this program?  How much do you expect to receive over the next several years from the donors taking into account the experience?  It's often a challenge to answer that question.  And so, one particular nonprofit organization that we were working with, had a seasoned planned giving program.  They wanted to take a fresh look and understand a couple of things.

One is evaluate whether it was beneficial to have this program to begin with, given that there is some administration that's required by staff on this program.

And then, the second thing they wanted to understand was how much to invest should they continue to invest in the program, specifically around marketing efforts to acquire new donors, new gifts, and then how much?  So, through the enterprise financial modeling, they were able to see an aggregate view of the value of the program looking at expected receipts over the next five to 10 years reflecting the demographics of the donors.

So, when might those annuities close out and they were able to even stress test, future gift activity to better understand what the desired outcomes were from the donors needed to be impactful to the community.  So, after reviewing the results, they uncovered that they program was actually quite healthy, even if they never received a single gift.  The value of the program was really going to drive a lot of impact for the organizations, but when they reviewed the scenarios that included new donors coming in, the results gave them really a justification and a desire to invest more and acquire those additional donors so that they can keep making the impact that they would like to make.  So, that's another example of how the modeling helped to really evaluate the success of the program.

Henri Cancio-Fitzgerald:

And planned giving.  I mean, we've been working with a lot of planned giving programs and seeing those types of questions regarding what's the value in that question does come from finance occasionally my next step is next stop is going to be with the investments committee.  And so, from the case studies that you just shared, what are some of the takeaways that we should share?

Kimberlene Matthews:

Yeah, so, the takeaways, it really goes back to the example I gave earlier of the two committee decisions that we're actually working against each other.  So, when we see decisions being fragmented being made in a vacuum, this could really slow down the progress that the organization is seeking to make.  So, the key concept I mentioned as well earlier was that today's decisions affect tomorrow's outcomes.  So, when you have a process that incorporates the, really provides support for enterprise risk management, it not only leads to better decisions, but it also arms nonprofit leaders with the data and the documentation that they can take to stakeholders and even provide more impact to the community.

Henri Cancio-Fitzgerald:

Thank you, Kim.  And Stacey, if Kim is my favorite actuary, you are definitely my favorite PNC IAM, National Investments Director.  Please introduce yourself.

Stacey Herndon:

Thanks, Henri.  I currently serve as investment director for our institutional asset management business.  Prior to this role, I was actually an investment advisor for over 11 years working almost exclusively with some of our nonprofit clients.  So, here I am.  I'm very excited to be here with Henri and Kim and to meet CJ and to be with you here today.

Henri Cancio-Fitzgerald:

Thank you, Stacey.  And I'm thinking as we build our vessel to travel across the VUCA River volatility, I'd imagine we'd want some indicators.  So, when we think about the current economy and the investment markets, what are some of the indicators that the investment committee should pay attention to?

Stacey Herndon:

I think it's very helpful sometimes to understand where we've been, to really consider where we are.  The Fed in trying to fight inflation and bring it in line with its long-term target rate of 2% is actually raised interest rates roughly a dozen times to levels we haven't seen in 22 years and all of this in two years.  This in and of itself, I think we've all seen, has been a massive adjustment for the capital markets causing much of the volatility that we've seen over the past, really two years with some inflation rate readings still remaining higher than ideal.

More recently, we've seen some additional weakness as markets come to the realization and adjust to the fact that the Fed intends to keep rates higher for longer than perhaps, we had even expected just a couple of quarters ago.  However, it's our assessment that the Fed is done raising rates for this interest rate cycle.  As we look forward, we now have to consider the potential for recession in the next 12 months.  This could impact not only investment decisions, but also, depending on the depth and breadth of the recession, it could have impact on revenue streams of not-for-profit organizations, whether the sources are charitable in nature or business driven.  So, there's really a lot to consider, Henri.

Henri Cancio-Fitzgerald:

That's a lot of information now what's relevant and what's changed that's caused us to really give this a deep thought about how we proceed forward.

Stacey Herndon:

I think it's critical, first and foremost, as fiduciaries and to be prudent that we do not make investment decisions based exclusively on short-term data from the marketplace, unless we'll caveat that there is an imminent liquidity need that will be funded from an investment portfolio.  That said, we do believe that it can be helpful in terms of setting expectations to have some awareness of key data points and inflection points that might cause short-term volatility, but also have the ability to shift long-term market expectations and outlook.  It's about understanding what's driving market activity so that we're not caught off guard.

There are a few key indicators as fiduciaries that we might want to be mindful of really in the coming quarters.  We at PNC are currently of the stance that where we are necessitates that the market pivot from at some point higher rates for longer to one where we have to do the opposite, and that is consider when do we enter the next recession.

Our baseline assumption is that we see a very mild, very short recession after the first quarter of next year with rate cuts potentially beginning as early as March, but more likely later.  So, given this baseline assumption for us, I know our investment office and strategic professionals are really going to be focused on first of all earnings.  We're going to see third quarter earnings begin in earnest in about three weeks, and we're going to be looking for what are those actual earnings relative to what earnings expectations have been.

But I think, more important, we're going to be looking at forward looking earnings expectations as an indicator of future corporate profitability.  We're also going to be very, very cued in on the health of the consumer.  Going back to the great recession, the American consumer has been the linchpin of economic strength within the US economy.  We'll be looking at retail sales, consumer sentiment, consumer credit finally, although not part of our baseline assumption, is the possible outlier that inflation indicators keep the fed in a tightening stance longer than the market is currently expecting, which could cause additional market volatility as this represents a significant shift from current expectation.  This is not part of our baseline assumption.  Again, we are of the belief that the Fed has done hiking rates for this rate cycle.

Finally, as it relates to sort of fiduciary responsibilities as board members, committee members or members or executives, we believe that it's good practice for you annually to review your investment policy statement to ensure that it reflects the organizational intention of the asset pool in question that it reflects the appropriate goals and constraints of the entire organization consistent with Kim's recommendation, but also, consistent with your most current strategic plan, your investment advisor is then best able to work with you to make adjustments necessary.  Within your IPS and your portfolio, they're able to inform decision-making with analysis that supports any changes to expected return spend policy or asset allocation.  We believe that this level of two-way ongoing communication between a board and executives and their investment manager actually is key to managing an investment portfolio successfully over time.

Henri Cancio-Fitzgerald:

So, that's a lot to consider, Stacey.  So, what I'm hearing is rates are at historically high levels.  We're expecting a mild recession next year at some point, how organizations today position their portfolios for that outcome.

Stacey Herndon:

So, clearly, there's a lot to unpack in that question.  So, let's start with some historical perspective.  Going back 30 plus years, a portfolio could easily generate a nominal return of 7% using a 97% bond allocation and only needed a 3% allocation to US large cap equities.  This portfolio would've had a standard deviation or measure of risk around 6% 15 years ago.  The same portfolio, the same return expectations could be supported by a roughly 50% allocation to diversified equities and a 50% allocation to US fixed income.  The standard deviation on this portfolio would've had a 9.5% volatility for the same expectation of return.  We have now taken our risk up 50%.

Now, if we consider the same return target today, a portfolio would have a 30%, 33% allocation to bonds, a 20% allocation to traditional alternatives including private equity and a 47% allocation to diversified equities.  This portfolio has a standard deviation of roughly 12%, so, we've almost doubled the amount of risk needed to generate the same return in 30 years.  I walked through this because it's important for fiduciaries to understand the risk reward trade-offs within a portfolio at any time.  So, it's critical at this point in time is that with bonds yielding an excess of 5% and the expectation of modest equity returns, bonds now have the ability not only to make meaningful contributions to return, but once again perform their historic role of providing some ballast within portfolios given their relatively lower risk profile.

So, there may be an opportunity in some cases to adjust the risk profile downward within portfolios depending on a client's specific situation and goals.  Unfortunately, I can't provide or we shouldn't provide a blanket guidance for all clients within the not-for-profit space really as there are wide variety of goals and constraints that drive decision-making, risk tolerance and then, consequently, portfolio construction.

Very broadly though, we are recommending the following within portfolios.  So, within the equity space, we have focused on quality companies and investments that focus on these companies.  We want exposure to companies that have some pricing power that are somewhat immune to inflationary pressures, companies that have clean balance sheets, but more specifically companies that do not have to access the capital markets to support their growth within fixed income.  We have reduced significantly or more than likely eliminated explicit allocations to yield and leverage loans within bond allocations.  Given that we really feel that core bond portfolios offer a better risk return profile now and for the foreseeable future given where interest rates are.

So, currently, we're focused on core and core plus bond managers with consistent strong track records.  In some cases, we're also reassessing the risk reward trade-offs across asset allocation.

We've had or are having discussions with clients around reducing their equity exposure in favor of a higher bond allocation, helping each client to understand their risk reward trade-offs based on their situation.  By its nature, this is and will be very specific discussion with each client.  As you can see though, much of our current thinking and positioning is centered around the material shift in interest rates in the past 20 years.  The reality is that prior to the last year and a half interest rates had been at all time historic lows for an extended period of time.  From a fiduciary perspective, a higher rate environment, generally speaking, could impact how investment portfolios are structured.  Depending on the specific goals of your organization, your investment advisor really can help you have these conversations with your board, with your staff to better inform long-term decision making.  But suffice it to say, to bring it back, the one thing we all have learned in recent history and beyond is to expect the unexpected.

Henri Cancio-Fitzgerald:

That is true.  Thank you, Stacey and CJ, Kim.  Stacey, thank you for sharing your perspectives and even humoring me as the theatrics I've brought from being trying to put myself in the chair of a board leader or executive leader as they're discussing governance and strategy in this volatile, uncertain, complex and ambiguous environment that we're currently in.

At this time, what I'd like to do is bring in our audience as I teased a little bit earlier and here what's on their minds.  We've received a lot of great questions ahead of the event and from the registrants, and then we're going to try to answer as many of those as we can today.  Time permitting, whatever we can't get to though, we will follow up with you directly.  So, the first question was submitted by Wayne Janik, CFO at the YMCA of Metropolitan Milwaukee.

Wayne's question is, what trends do you see regarding government funding for nonprofits in the education industry and at the federal levels?  As I mentioned, I work with the college and definitely this is a question that's on a lot of organizations’ minds right now, particularly organizations that are receiving funding from the government such as higher education institutions.

As far as the actual trends, total spending as a percentage of appropriations really hasn't gone  down dramatically.  However, there's a little caveat here.  The higher education business delivery model has gotten more expensive, and so, the state appropriations and the federal spending, and here I'm thinking Pell Grants and other sources simply just haven't recovered from the cuts that were made during the global financial crisis.

And when we bring in inflation into the picture, the state and federal dollars just don't have the same purchasing power.  So, it feels like there is a lot less that's able to meet your mission, but it's just a matter of the current inflation and that there hasn't been a lot of increases going on.  So, Wayne, thank you for that question.

The next question comes from Ellen Ferretti, executive director at North Branch Land Trust, and the question is, how do we create awareness among managing trusts, those managing trusts, et cetera, about the opportunity to donate to our organization?  So, in other words, how can grant seekers gain greater visibility among charitable trust managers or grantors?  So, CJ, I'll bring you in on this one.  Can you share your thoughts on this question as it relates to charitable nonprofits creating awareness with trust managers?

CJ Orr:

Definitely.  Thanks, Henri.  A question that we get quite often given the rise in foundations and in DAF giving and et cetera, we get the question, how do I raise awareness or get in front of it, wealth advisors, trust managers, wealth managers, whatever it may be, there's no easy solution.  There's a few things that you can do though.  Generally, we believe when a wealth advisor or someone is looking at different organizations, they have what they know and what they've worked with other clients and all that, but they also would definitely do research.  So, in terms of research and binding organizations, what we recommend is all of our nonprofits that we work with have updated profiles on the resource research sources, which are candid, Charity Navigator, Charity Watch,  All of these different organizations have profiles on nonprofits.  And so, when folks do research nonprofits, you want yours, your profile to be updated and to reflect current information and all of that.

So, that's one strategy.  The second is removing friction.  So, we want to make sure a nonprofit wants to make sure that it's easy for an organization or for an individual to give via a DAF or an estate gift or a plan gift.  So, we always recommend updating your donor acceptance policies and making sure that if you ever were to have a wealth advisor recommend your organization, that you are able to accept any type of donation that your donor is thinking about.

And then, the third and final way is to kind of grow your network of wealth advisors and getting in front of managing trust is networking.  It is going to conferences and meeting with philanthropy advisors, meeting with CPAs, tax advisors.  There are different conferences and membership organizations like the International Association of Advisors in Philanthropies, a perfect one.  So, just getting out there and being part of the conversation so that wealth advisors and others know who you are just because you met with them or you're part of the organization that they're part of.  So, we just generally believe that raising awareness and networking a bit could be helpful in that process.

Henri Cancio-Fitzgerald:

Thank you, CJ.  And I think, let's see here.  Next question is how do, okay, CJ, I think I'm going to come back to you on this one as well.  How do philanthropists fully understand the impact of their dollars for deep social change?  How are they made aware of the research and data for deep social change?  So, this is impact question.

CJ Orr: 

Yeah, really good question.  And also, one that we do get quite often.  So, the question was how do philanthropists get their education on what impact is an organization having?  Generally, we think there's three different sources.  The first one will be quantitative.  So, metrics are probably a very common term that I'm sure most folks on our webinar here are familiar with.  Philanthropists look at your impact metrics such as how many people serve, how much food delivered, et cetera.  There are evaluator companies or just generally internally deep data evaluations done to produce these metrics.  Essentially, what you want to be doing with this process is ensuring that the community actually needs the programs that you're delivering.  So, in order to do that, you do a lot of surveys and work with the community to understand what their needs are and making sure then to tailor your programs to what those needs are and then reporting on your progress.  So, the reporting back is the metric piece.  And again, there's evaluation companies that do this, but you can also do it internally at your own organization.  But that's the quantitative side.

The other side of how do philanthropists really get their education and understand about your impact is qualitative.  So, bringing donors on tours, bringing donors to your organization, to your community that you serve, whatever it may be, actually experiencing it is really a great way for the philanthropist to really understand the impact.  I don't have math around it, I can't tell you three x does this or things like that, but I can show you in real time where your dollar is going and the impact it's having in the community in real time.  That's a really big influencer.

And then, the third one is really just generally general awareness.  So, a lot of philanthropists when trying to understand the impact of organizations will do field building exercise.  They'll go to communities, they'll do research, they'll do conferences and they'll just do their general online research and all of that.  That I think is a very broad topic, but that's kind of goes to our point earlier in the question before about making sure to have your online presence updated and making sure to be up to date with Candid and all these other organizations as just philanthropists will be doing general research around understanding your impact.

Henri Cancio-Fitzgerald:

Thank you, CJ.  And let's see here.  Our next question that came in through the chat with respect to financial models discussed earlier, and this is going to be for you, Kim.  How often do you update those financial models you were discussing?

Kimberlene Matthews:

That's a great question and often it's one of the first questions we get when we talk about this model with clients.  And really, the model is updated as frequently as organizations need it to be updated.  And so, oftentimes, we're looking at this annually when new information like the annual financial audit is available.

So, the starting point for really the financial position for the organization is built in and we want to make sure that's as up to date as possible.  But the other times you often see updates is if there's a major event that changes the situation.  So, for example, if you have a sizable donation that's come in that wasn't really planned, that's a good reason to take a fresh look and see what that does to the future outcomes for the organization.  And then, if you have a capital project that requires some evaluation, that is often a need to really build that in, look at some scenarios and testing and make sure that's appropriately captured.  So, it really moves at the pace that the organization is moving in terms of needing it to drive those major decisions that need to be made.

Henri Cancio-Fitzgerald:

And thank you, Kim, and actually, thank you all.  We're reaching our time here and I did want to leave just a couple of statements here, but thanks for joining to our webinar today as we discuss the next generation of governance, which I hope it came through, that the theme is that the next generation is shared, collaborative, and forward-looking with the vision, understanding, clarity and agility being the common goal.

If you found today's discussion to be intriguing, we encourage you to join us for other upcoming events that we have and also keep an eye out for our thought leadership.  We release new thought leadership very often, so please keep an eye out for that.  I'll turn it over to our conference technology host V2 for final instructions regarding the post-event survey that I mentioned earlier.  You can tell me if that eight second rule that I mentioned earlier, if that was actually working.  So, thank you all.  Please complete the survey.  I'll turn it over to our technology host.


Okay, great.  Thank you, Henri, and thanks to all of our presenters and participants for joining us today.  We hope you found today's webinar useful and informative.  Once again, if you could please fill out the post-event survey that will appear on your screen after the events conclusion, that will be greatly appreciated and it will help us gain further information on your thoughts on both this and future webinars.  Thank you again and have a great rest of your day.