My relationship with nonprofit organizations has come full circle.
Nonprofits were a constant presence in my life when I was a kid. I was born in a nonprofit hospital in Atlanta, Georgia, was a Boy Scout, learned to swim at the local YMCA, played baseball at the Boys Club and attended church with my family.
Today, as head of nonprofit relationship management in Vanguard Institutional Investor Group, I am privileged to assist our nonprofit clients with a range of issues including committee construction, spending, governance, and, of course, investments.
In the many years between my youth and now, I gained experience in many phases of nonprofit work. As a Cub Scout I knocked on doors to raise money for camping trips. Later, as an investment portfolio manager, I managed money for universities, hospitals, and arts organizations. In addition, I have been honored to serve as a board member for numerous nonprofits in roles ranging from fundraising to governance to treasurer.
Here are a few things I’ve learned:
- The only reason for a nonprofit to exist is to fulfill its mission. Whether they’re focused on religion, health care, education, or any other worthy cause, each nonprofit firm exists solely to improve society in their own unique way.
- Nonprofit organizations work hard to raise funds. In fact, in my experience many nonprofit leaders spend most of their working hours focused on where the next dollar is coming from. Their focus borders on obsession—because survival is at stake.
- Every dollar spent on investment costs is a dollar less you can invest in your mission.
The intersection of these points is where Vanguard comes into play. As a nonprofit leader or volunteer you work hard to raise philanthropic dollars in a hugely competitive environment. You spend a great deal of money and time—not to mention emotional and mental energy—to get more dollars in the door. Once those hard-earned dollars arrive, you try to stretch them to feed more people, pay for more hospital beds, or educate more children—to name just a few examples.
To focus on performance, focus on cost
Despite the pressure to do more with less, I often see nonprofits “going to the casino”—that is, using high-cost strategies in hopes of matching outperformance. In fact, according to Callan’s 2017 Investment Management Fee Survey, the median investment fees paid by endowments and foundations has increased by 24% (from 55 to 68 basis points) from 2014 to 2016.
I understand. Today’s low-return environment has many nonprofits worried about reaching their spending target. However, Vanguard’s research shows that cost is the most statistically significant way to predict active outperformance.¹
Since the costs paid by mutual fund investors are embedded in their funds’ returns, lower expenses appear as higher returns. We’ve found that low costs can lead, over time, to outperformance—if not of the broad financial markets, then of most competing funds.
Reducing asset management expenses can help to further your mission
The chart below shows the importance of costs. Here we assume endowments and foundations that pay the Morningstar industry asset-weighted average expense ratio of 62 basis points (bps) on a $100 million investment portfolio—versus Vanguard’s asset-weighted average expense ratio of 11 bps—stand to lose out on about $600,000 in one year, and more than $30 million over a 20-year time frame. That’s a lot of money that could have gone to your organization to further your mission—to provide mental health services to more patients, or to feed more hungry people, or to offer more college scholarships.
Asset-weighted expense ratio differences compound over time in a $100 million portfolio
This hypothetical illustration does not represent any particular investment. Initial portfolio value is $100M. Annual average rate of return is 6%. Rate of return is not guaranteed. Vanguard’s asset-weighted average expense ratio is 0.11% versus the Morningstar industry asset-weighted average expense ratio of 0.62% (excluding Vanguard), as of December 31, 2017. (Sources: Vanguard, Morningstar, Inc. and Lipper, a Thompson Reuters Company. Data as of 12/31/2017.)
Vanguard: Supporting your investment strategy of choice
Many nonprofits think Vanguard only promotes indexing. This isn’t true. We believe in giving you the best chance to meet your investment objective. For some organizations, this could mean an all-active portfolio using fixed income and equity; for others, it could be a blend of other strategies including both active and passive, a factor tilt, or alternatives. However, what we promote across all these strategies is the focus on cost—because we believe it gives you the best chance for outperformance. For example, take a look at our active fund performance:
Source: Lipper, a Thomson Reuters Company.
Number of Vanguard actively managed funds that outperformed their Lipper peer-group averages for periods ended March 31, 2018. For the three-year period, 110 of 120 Vanguard funds; for the five-year period, 108 of 116 Vanguard funds; for the ten-year period, 102 of 111 Vanguard funds. Results will vary for other time periods. Only funds with a minimum of three-, five-, or ten-year history, respectively, were included in the comparison.
Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks. For the most recent performance, visit our website at vanguard.com/performance.
Finally, for those nonprofit organizations looking for a partner to whom they can outsource their investment decisions, my colleagues in Vanguard Institutional Advisory Services® do an outstanding job of creating portfolios for, and providing service to, more than 900 nonprofits* seeking an experienced, skilled, and flexible investment partner, all at—you guessed it—a very competitive cost.
* Source: Vanguard, as of May 2018.
Control costs, fulfill your mission
Vanguard’s message for nonprofits is the same as our message for other investors: Focus on what you can control—and what you can control is cost. For nonprofits, the savings can be redirected, whether in the form of lower expenses now or higher performance later, to further your mission—to help people in need locally, nationally, or throughout the world.
¹ Wallick, Daniel W., Brian R. Wimmer, and James J. Balsamo, Shopping for alpha: You get what you don’t pay for, Vanguard, January 2015.
- 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.
- Costs are one factor impacting total returns. There may be other material differences between products that must be considered prior to investing.
- Advice services offered through Vanguard Institutional Advisory Services are provided by Vanguard Advisers, Inc., a registered investment advisor.