Here at the Connecticut Health Foundation (CT Health), we often get asked: “As a nonprofit organization that does no fundraising, where does the foundation’s money come from?” The short answer is that it comes from our investment portfolio’s total return (income, realized gains and losses and market appreciation or depreciation) that is carefully managed to p rovide a steady source of support for our initiatives.
That management piece, however, involves a lot of work. Recently, our Vice President of Finance Carol Pollack and the Finance and Investment Committee of the board, spearheaded a search for an external chief investment officer (CIO). Here Carol reviews the differences in investment models, and shares tips for other nonprofits that may undertake this search.
Since the beginning, CT Health, along with its Finance and Investment Committee, has used a traditional investment advisor to help manage our investment portfolio. In the middle of last year, however, we decided to re-examine this model because of the committee’s desire to be more strategically focused and a need to reduce demands on limited staff.
We found that another model involved the use of a CIO, either as an internal resource or an external firm acting in this role. What is the difference between the advisory model and the CIO model? Namely, the degree of autonomy. An investment advisor and CIO perform (for the most part) the same activities, but an investment advisor seeks approval before carrying out these activities. A CIO, on the other hand, does nearly all of these things independently.
What empowers the CIO to act independently is the creation of a comprehensive investment policy. A CIO would first lead us through the process of developing this policy, including elements such as investment return objectives, tolerance for risk, spending policy, and more. With this agreed-upon framework in place, the CIO can then act with full support of the committee.
This model appealed to us, so our next decision was to determine whether this CIO should be internal or external. For a foundation our size, having an external CIO made the most sense.
Searching for a CIO was a six-month process, and involved a lot of work on the part of staff and the committee. Here’s what we learned along the way:
- Develop a comprehensive activities list. Write down all of the decisions that get made and all of the functions performed. We found it gave us a benchmark to evaluate our candidates’ capabilities against.
- Get everyone on the same page about fiduciary responsibility. Our full Finance and Investment Committee met to discuss what we viewed as our fiduciary responsibility and how this would mesh with giving decision-making autonomy to an external CIO. Figuring out what we would do, versus what the external CIO would do, helped everyone feel much more comfortable with moving to this model. It also informed the writing of our request for proposal (RFP).
- You can’t really compare apples to oranges. The most challenging piece for us was ensuring that we had truly comparable data on all candidates. Each candidate came with different data about their experience levels and investment performance. We had to do some extra legwork to make sure we could truly rate one candidate against another.
Ultimately, we selected Boston-based Cambridge Associates and we’re looking forward to working with them. We believe this approach will support a proper level of fiduciary responsibility by the committee while allowing them to be more strategic and result in less work for staff.
But we’d like to hear from you. Has your organization undertaken a similar initiative? What lessons did you learn along the way that you would share? Do you have any guidance for us as we start implementation?
**Photo courtesy of zbowling under the Creative Commons license.