Labor Day unofficially signals the end of summer and marks the start of another season—and I don’t mean fall. If you’re like me, you know that whether it’s college or the pros, weekends will find many of us on the couch watching football, rooting for our team or hoping to catch an exciting game.

But the thing about exciting games is that they are often decided by a single play. It’s fantastic when your team nails that 50-plus-yard field goal or throws a Hail Mary to win in the waning seconds, but we’ve also been on the other side, where a team loses a game because a special teamer missed a very makeable kick.

Either way it’s real hold-your-breath time. And while this might make for an exciting game, when it comes to fiduciary responsibility you should never be holding your breath or crossing your fingers that the investment returns you were expecting would come down to one final play.

So why might a nonprofit organization be left holding its collective breath? Here’s one example: Let’s suppose that a given organization spends 5%, desires to keep its corpus steady after inflation (2.5%, perhaps), and maybe wants a bit of growth on top (say, 50 bps). Add these up, and the return expectation might be 8%. In an environment where we believe global equities have less than a 50-50 chance of getting you 8%, this organization either needs to be okay with possibly not meeting its 8% return objective or looking for additional help. And let’s be clear: Very few people want to admit that they can’t achieve their goals!

Most often this “help” comes in the form of promises of alpha from active management and higher returns from exposure to alternatives. The problem with this approach: Saying it will does not necessarily make it so.

The drumbeat of muted returns

Rewinding five years, we can see there’s been a consistent drumbeat of muted return expectations and, therefore, an oft-cited need for alpha and private alternatives. And nonprofits have responded—investing heavily in such vehicles looking to meet both their need to spend with their desire to grow—just like the one in our example above. Today the average allocation to alternatives among endowments is 53%1 while foundations are not far behind at 45% for private foundations and 25% for community foundations2 (see NACUBO and Council of Foundations, respectively).

What we’ve seen, however, is that the bet on alternatives has often been akin to paying a free-agent quarterback a ton of money and then watching him mismanage the season to the point where, instead of making the postseason, they are jockeying for draft position. The more Hail Marys or 50-plus-yard field goals you have to rely on to meet your objective, the more likely you are to come up short.

Unfortunately, while a football team can realign for the following season, playing from behind as a nonprofit has much more real consequence: It translates to fewer meals or lower scholarships or less health care—in other words, falling short on funding your mission.

That’s the very real concern of nonprofit organizations today, especially given an environment where global equities have returned an average of 12.5% over the last five years through June 30, 2017,3 and valuations are widely thought of as extended. Isn’t this just the kind of market that one shouldn’t hitch their wagon to? Isn’t now the time when that free-agent quarterback or rock-star kicker will make the most difference?

Growing assets, shrinking private-equity opportunities

Also consider that, according to Bain & Company, dry powder (that is, cash reserves or liquid assets available to deploy, when needed) among private equity managers stands at $1.5 trillion,3 even as NEPC, LLC, points out that 42% of nonprofits are expected to increase their allocation to private equity and private debt over the next year.4 Simple economics suggest that more capital—and a trillion-and-a-half dollars is a lot of capital—chasing a return may lead to a shrinking payoff. Long-term trends suggest just that when you compare the decade through 2015 with the previous decade, returns to venture capital declined by 67%, private equity returns declined by 31%, and hedge fund returns declined by 64%.5

Perhaps it’s time for that game changer

Given the statistics above, I would argue that employing a proven process—like that of a Vanguard Institutional Advisory Services® OCIO—that seeks to get you close to your return objective in a disciplined, steady approach and validated by decades of academic and practitioner research, can be a better outcome than going all-in on a high-priced free agent, unproven in crunch time.

I’ll admit it’s exciting to watch a football game that comes down to the wire and relies on one person’s ability to win. But frankly, all else being equal, I have to say that I enjoy watching a whole lot more when my team has a comfortable lead, start to finish. You?

1 NACUBO-Commonfund Study of Endowments, 2016.

2 2016 Council on Foundations-Commonfund Study of Investments for Foundations (CCSF).

3 Bain & Company, Inc., Global Private Equity Report, 2016.

4 NEPC, LLC, Endowments & Foundations Q3 2016 survey.

5 Vanguard calculations using data from Hedge Fund Research, Cambridge Associates, and Thompson Reuters Datastream to compare the difference in annualized returns for each segment for the ten-year period 1996 to 2005 versus the ten-year period 2006 to 2015. Values for venture capital and private equity are internal rate of returns, while hedge funds returns are total returns. Private equity includes both buyout and growth equity funds.


  • All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Diversification does not ensure a profit or protect against a loss. Past performance is no guarantee of future results.
  • Advice services offered through Vanguard Institutional Advisory Services are provided by Vanguard Advisers, Inc., a registered investment advisor.