Darcy Hughes

Darcy Hughes has created 4 entries
  • Spending & Investment Policy Statements

    Keys to a Sustainable Endowment 

    The management of nonprofit or foundation assets can be a challenge. These are unlike managing family wealth due to the need for endowment longevity and the regular withdrawals usually made.

    Ideally, a foundation’s assets should grow beyond many lifetimes and allow for distributions of approximately 5% annually for most nonprofits. If the world could depend on financial markets consistently delivering returns in excess of 5%, or your donations exceeded this figure each year, managing these important assets would be quite simple. However, financial market returns are seldom consistent and can sometimes deliver losses rather than gains. Furthermore, in periods of financial market declines, your donations often decline or disappear altogether as donors tighten their own pocketbooks. 

    So how does a foundation attempt to bring consistency to the challenge of growing your assets, making annual withdrawals, and creating a sustainable endowment?

    The first step to meet the challenges of managing endowment assets lies in having a well-conceived, written Investment & Spending Policy Statements. These documents serve as the rulebook for your finance committee. They should be packed with all the details about how the foundation’s assets will be managed. These policies should be written to assist the finance committee and board not only in your quest for asset appreciation but managing risk. 

    A well-written and defined Spending Policy will include the goals of the foundation, the purpose of grants you make, and a statement of your long-term targets for grant spending. The policy should also include formulas to be pursued to “smooth out” your annual distributions based on recent year’s investment returns as opposed to using an absolute or fixed grant withdrawal rate that may have no connection to the growth or decline of your endowments assets. 

    For example, by using a moving average of recent annual returns, foundations can reduce the risk of overspending in any given year. Once the spending policy is established it should be reviewed and updated at least annually.

    The Investment Policy Statement is a document that assists the finance committee in meeting the spending policy guidelines while managing investment risk – key issues for fiduciaries. All too often foundations and non-profits run afoul in their management of risk. A well-written Investment Policy will instruct the committee on the guidelines to be followed to avoid taking on too much risk. At the same time, the Policy needs to spell out the upper limits of investment risk to meet long-term objectives. Too little risk can often result in below-average returns that equally limit your goals.  Risks need to be balanced. 

    The Investment Policy document will also define the goals of the foundation and all of the important factors that affect the investment of the assets. This will identify the foundation’s risk profile and growth targets, the types of investments allowable, the investment manager selection, guidelines for asset allocation ranges, and risk management strategies to prevent catastrophic loss. 

    In recent years, many foundations and non-profits have also added into their Investment Policy statements of environmental, social and governance (ESG) constraints. When completed, your Investment Policy thus serves as an important guide to reduce and manage risk, meet performance objectives, and fulfill the committee’s fiduciary duty.

    Today, more than ever, there are significant risks in global financial markets – many that we may know about, but more which we are unaware of. Though no one can predict with accuracy the outcome of future market returns or risk, a well-written Spending &  Investment Policy Statements will help your nonprofit’s finance committee to manage its way through up and down market periods and ultimately create a long-surviving, sustainable endowment.

    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon

  • Creating Your Nonprofit’s Investment Committee

    Foundations and non-profits are busy organizations with a myriad of tasks and goals. Often these organizations are filled with smart individuals with specific talents and backgrounds that make them ideal for the job at hand. 

    However, not all foundation board members or employees are actually well-suited for overseeing the management of the organization’s finances and investments. The importance of overseeing your assets cannot be overlooked. Your endowment is a key driver of your nonprofit’s survivability and future growth. 

    So, how can foundations and non-profits create a responsible investment committee to ensure a sustainable future? 

    The first step in creating a good group of individuals to oversee your finances and investments is to appreciate how important this committee is to your future. While it may seem easy to collect various individuals from within your organization who seem like they will be good “team players,” this method is usually a mistake. Each member of the finance committee should be selected carefully without exception. 

    In addition, there should be a written investment committee charter that authorizes its formation, purpose, roles, and responsibilities, as well as its meeting schedules.

    In selecting individuals to be on the investment committee, it is best to have at least one person with some experience in the financial / investment field. While the other members need not have direct experience, they should demonstrate a willingness to learn about investing through meetings and outside resources. 

    Every member of the investment committee has a fiduciary obligation to the organization. This requires many important character traits such as high moral character, the commitment to avoid conflicts of interest, a deep knowledge of the foundation’s mission, and of course the ability to attend all meetings. A member with a great background in investing, but who rarely attends meetings, is less than ideal. 

    To ensure your investment committee stays true to their fiduciary obligations and charter, it is highly recommended that they hire an outside investment manager. In doing so, they can bring in a team that can telegraph the current financial market conditions and can serve as a well-seasoned sounding board for questions and thoughts from the committee. Hiring an outside investment manager also goes a long way to fulfilling the committee’s fiduciary obligations. As with hiring any outside counsel, the committee should have well-planned criteria for this selection and a process to monitor the adviser.

    Members of the investment committee are often exposed to differing opinions about the state of the economy or the direction of the financial markets. Some of these thoughts and media opinions can rightly be debated.  However, a good committee member needs to bring an open mind, a willingness to listen to the professional investment manager, and above all be non-argumentative. A careful balance of open-mindedness and curiosity usually does the trick!

    In the end, a well-formed investment committee will put the odds in your organization’s favor to ensure better communication with the board of directors, to fulfill your fiduciary responsibilities, and to generate successful long-term investment results for a sustainable future.

    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon

  • Charitable Giving: Changes to Tax Laws May Change How You Gift Going

    I actively give back to local and global charities through my company and I know many of you do as well. In that spirit, I wanted to provide you with some changes that have been put into place regarding tax laws that may affect the way you gift to your favorite non-profits. If you are a non-profit, it is good to keep up with changing tax laws when asking for support.

    With the 2017 Tax Jobs Act, many more taxpayers will be using the standard deduction instead of itemizing. As a result, individuals who are used to charitable write-offs may no longer see a tax benefit from their contributions. This puts contributing to Donor Advised Funds (DAFs) and Qualified Charitable Distributions (QCDs) in a new light.

    Donor-Advised Funds (DAFs)

    You may also consider front-loading your charitable contributions while compounding your charitable impact, by contributing to a Donor-Advised Fund (DAF). One of the biggest advantages of a DAF from a strategic tax planning perspective is their flexibility: you make donations to the account and receive immediate tax benefits for doing so.

    You receive the deduction in the year the contribution is made, with no expiration on when the contribution must be made to the charity of choice. In fact, there is currently no set time frame during which you must pay out the funds. The donation you make can grow in the donor-advised fund account indefinitely or be distributed right away. Think of this as your charitable savings account where donors can contribute to the fund as frequently as they like and make grants to their favorite charity when they are ready.

    Donor-advised funds, like Schwab Charitable, – the 6th largest in the world – are recognized by the IRS as a tax-exempt public charity or 501(c)(3), thus are eligible to receive tax-deductible charitable contributions. However, donations to DAFs are not eligible as a QCD.

    Additionally, the 2017 Tax Jobs Act created higher standard deductions for taxpayers, making it less efficient to write off charitable donations. Instead of donors bunching their donations every other year to get over the standard deduction threshold and causing a feast or famine cycle for charities they can qualify for a current year, itemized deduction and grant to charities on their own timetable by donating to a DAF.

    DAFs might be useful for people who want to donate appreciated stock, mutual funds, exchange-traded funds, or other securities.

    Assets generally accepted include:

    • Cash equivalents
    • Publicly traded securities
    • Certain restricted, controlled, or lock-up stock
    • Mutual fund shares
    • Bitcoin shares
    • Private equity and hedge fund interests
    • Real estate
    • Certain complex assets, such as privately held C- and S-Corp shares

    Donor-advised fund tax deductions include up to 60% of adjusted gross income for cash donations and up to 30% for securities. Whether the donation is securities, cash or both, you must itemize in order to take the deduction.

    Qualified Charitable Distributions (QCDs)

    Individuals claiming the standard deduction can still get a tax break for giving to charity, just so long as they are 70½ or older and transferring the funds from a traditional IRA directly to a qualified charity.

    The QCD allows an individual to transfer funds from a traditional IRA directly to a qualified charity without the money being added to their adjusted gross income. If you are 70 ½ and have not yet taken your Required Minimum Distribution (RMD) for the year, then it can count toward your RMD for that year.

    One of the most important caveats is that these distributions must be made directly to a qualifying charity. If it is distributed to an individual taxpayer first, then it will be considered a taxable event.

    Many brokerage firms now allow individuals to order checks on their IRA accounts so that checks can be written and mailed directly to these charities. This is very convenient; however the taxpayer must be certain that the charity has cashed the check before the end of the year.

    Always get a receipt from the charity for tax reporting purposes. The charity must be a 501(c)(3) organization. Individuals, private foundations and donor-advised funds do not qualify as recipients. There is also a cap on the amount that can be gifted income tax free each year at $100,000 ($200,000 for spouses filing jointly).

    If neither of these options suit your gifting needs, please keep in mind you may gift up to $15,000 ($30,000 for spouses) per individual recipient in 2019. These gifts can be made tax-free either by check, transfer of funds, wire transfer or direct deposit into a 529 account.

    Here’s to happy giving!

    The Sustainable Endowment was written for executives and board members of small- to mid-size U.S.-based nonprofits, charities, or foundations. Running a nonprofit requires specialized knowledge and skills, especially regarding foundation management and investing your endowment so it remains sustainable for years to come.

    This book walks you through the basics and best practices of what you need to know to be successful.

    Order your copy today on Amazon

  • “Should I Stay or Should I Go Now”

    Is Recent Stock Market Strength a Sign of Safety…or Danger?

    Since early October there has been a “bear market” in stocks, both here and abroad. Though some indexes declined approximately 20% from their highest point, most stocks were down much more until just recently. In the past few weeks, stock indexes have rallied about 10% providing some relief for investors, but far from the peak reached in late September.

    This is a good time to explore if the recent strength in indexes is the beginning of a better stock market or just a short-term advance leading to further trouble ahead. As you know we have kept your portfolio defensive during this period, with less stock exposure and less volatile stocks. Though this is effective during market declines, it can be a bit trying in the face of the recent market strength.

    How can we determine if there is further downside ahead or if the recent rally is the beginning of a real recovery? Let’s review the data points that were the cause of the tough market. In my view, we need these data points to stop trending downward or to become more clarified, before we take a more “risk on” growth posture. 

    Economic Data
    The economy and stock market are co-dependent. The first sign of economic weakness at the end of the third quarter is what sent stock prices into the downward trajectory. Since that time most leading economic indicators continue to be in a downtrend. Investors need global economic growth to stabilize stock prices to stage a meaningful long-term recovery. If economic growth can stabilize – albeit at a lower rate – stocks could still do very well and better than most investment alternatives. However, we need to see clearer signs of stability on this front.

    Corporate Profit Growth
    Economic growth is directly tied to the profitability of companies both here and abroad. We are now at the beginning of earnings season and need to see companies meeting or exceeding the lowered expectations that analysts have adjusted downward since the fourth quarter. Some of the most recent warnings and reports have not been positive, including Apple, JP Morgan, Macy’s and Ford – all of which have been negative.

    However, the earnings season has just begun and we have some big bellwether companies reporting over the next few weeks including domestic heavyweights Boeing and Caterpillar. These upcoming reports should shed further light on the sustainability of the market’s recent advance.

    Lastly, when it comes to earnings reports, it is very important that investors realize that these reports are about what happened last quarter and are not a precursor to what may happen going forward. This is why we also want to consider the following three policy challenges. These policy issues need to be better clarified before markets can be on more sound footing. 

    Federal Reserve (Fed) Policy
    The Fed has raised rates nine times over the past two years in an effort to prevent the economy’s growth (inflation) from accelerating too quickly. As we have written before, this effort comes with the risk that the Fed can mistakenly “overshoot” their estimate of interest rate increases versus growth and turn an otherwise sound economy into a recession.

    This concern is real and is one of the reasons investors have been selling shares. Fortunately, the Fed has recently backed away from being so adamant about further rate hikes. In the short run, this has soothed investor’s fears. However, I would like to see further clarity in the Fed’s message and a willingness to reverse course if necessary. The next Fed meeting at the end of this month may provide this.

    Global Trade Policy
    Tariffs and other impediments to trade with China and other global trading partners are a negative for global and domestic growth. On this front “no news is bad news.” Economic data from China is slowing and they remain an important trading partner for the US and global economy. A trade deal that turns out to be better than earlier perceived would go a long way to alleviate investor fear and support both economic growth and global corporate profitability. We will be watching these negotiations carefully.

    Government Shut Down
    Though short-term government closures have been stock market nonevents in the past, we are now in uncharted waters. Previous government shutdowns have been measured in days while this one is now more than a month old. This has a negative effect on a number of sectors of the US economy and some of our country’s largest corporations. Investors would be wise to consider the shut down as a further risk to stock prices. As with the other policy challenges, any sign of improvement or positive outcome to this standoff would be supportive of a better stock market environment.

    Clearly, there is no shortage of bad news and challenges on the domestic and global front – for the sake of brevity, we left Brexit and US debt levels out of the discussion. At times the stock market “discounts” all of the bad news by lowering the price of shares. We are not sure that the stock market has fully priced in some of these current risks, particularly given the more recent elevated level of share prices. However, if it turns out that the recent strength is the beginning of the recovery – coupled with some clarity on the issues described above – a re-test or normal correction from these levels would be expected, allowing us an opportunity to invest at more attractive prices in the very near future.

    Keep in mind that bear markets often demonstrate periods of short term strength which are followed by declines back to the old lows or even lower. This was the case with the market rally in November that resulted in a further 10% decline in indexes. If this recent strength is just another temporary rally in the bear market – given that all major indexes still remain in long-term downtrends – I want to make sure your assets are safe. In that spirit, I continue with my recent, ongoing mantra of “better to be safe than sorry” when it comes to the bulk of your liquid net worth. Keep in mind that historically bear markets last just 6-8 months and this one is already entering its fourth month. Over the next few weeks and months I will be continuing to monitor the data points and view any pullback in stock prices as a possible re-entry point, but one that will need to be validated by better fundamentals. 

    I am excited about the prospect of re-investing in a significant global stock market recovery.

    I hope you find this update helpful.