Launched in 2012, the annual Study on Nonprofit Investing (SONI) for associations asked organizations about their reserves and how those investments performed. The goal was to provide timely, relevant, actionable data to help associations verify their investment policies were “normal” and that their investment fees/performance returns were in line with other, similar organizations. To date, more than 2,000 nonprofit organizations have participated in SONI.

Over the past decade, SONI, conducted by Raffa Investment Advisers, has provided valuable insights. We’ve learned that fees matter, policy guidelines that instill discipline to decision-making are wise, and having objective benchmarks hold all those involved in the management of the portfolio accountable for results. RIA dug deeper into the results to expand on a few key takeaways learned over the years.

Amounts Held in Reserves Vary

One of the key questions SONI looks to answer is, “How much do associations hold in reserve?” Most years, the median results show that associations keep about 10 months of budgeted expenses. Although that can be a helpful reference for what’s normal, what we’ve found more interesting is the broad range of responses we receive. SONI data continually shows that associations can hold anywhere from three-plus years of budgeted expenses in reserve to next to nothing. This highlights how each association is unique and may experience distinct and unexpected circumstances that could affect long-term financial health. That which may be too little for one association to hold in reserve could be more than enough for another, even within the same budget size.

We’ve learned that fees matter, policy guidelines that instill discipline to decision-making are wise, and having objective benchmarks hold all those involved in the management of the portfolio accountable for results.

While it is important to know the median amount held in reserve for similar sized associations, we believe it is more important to embrace the very broad range of responses. Each association should target a reserve level based on the magnitude of the specific risks it faces and the opportunities and growth it seeks. Every organization is unique and so should be the right amount to maintain in reserves.

Associations Segment Reserves Similarly

While associations hold different amounts in reserve and invest those dollars differently, one constant we’ve noticed over the past decade is how associations structure or segment their reserves. Segmenting, or splitting, your overall reserve based on the timing of various objectives is almost universal within the association community. Outside of cash held in a checking account, we often see associations use a three-bucket system for segmenting their overall cash reserves into an operating (cash) reserve, short-term investments, and long-term investments. Collectively, these three buckets are an association’s “reserves.” We firmly believe that having this type of structure where your reserve buckets are set up for different purposes and time horizons is a best practice for association investing.

Factors Associated With Underperformance

In analyzing investment performance for associations over the past 10 years, two meaningful characteristics have consistently shown to reduce returns. The first is cash held in long-term portfolios. Investors may maintain cash positions as “dry powder” they can keep available to time the markets by deploying when they see fit. They also may hold cash in a long-term portfolio due to uncertainty—keeping dollars uninvested in case a withdrawal is needed to cover operations. Regardless, cash on hand has been a tremendous drag on performance since we started SONI. Associations that deployed more of their assets and held less in cash consistently outperformed those who didn’t.

Another leading cause of underperformance over the past decade has been associations that invest in alternatives. Although alternative investments span a wide variety of investment vehicles and strategies, they have largely disappointed over the past 10 years. SONI has shown consistently that associations allocating more to alternative investments also reported lower performance results.

Reflecting on the past sheds light on valuable takeaways that can benefit associations in the future. We hope the next decade of SONI continues to identify new trends and best practices for association investing: Will aligning investments with your organization’s values continue to become more popular through socially responsible investing? Will more transparent and lower cost alternative investment strategies add value in the future? Will associations become more conservative in their investing if the bull market of the past 10 years doesn’t continue?

The Study on Nonprofit Investing (SONI) summarizes an informal study compiled by analyzing the survey results of nonprofit finance executives. The views expressed herein are opinions reflecting the best professional judgment of Raffa Investment Advisers (RIA). For informational purposes only. Participant responses have not been verified or audited. The information contained in SONI has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information. Data analysis was performed by RIA. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from RIA.