Navigating the Journey with Purpose: Mission Driven Investing

As the summer travel season winds down and I reflect on hours spent driving (and sitting in traffic) along the East Coast, I realized how mission-driven investing for non-profits and foundations closely resembles a road trip. For investment committee members, the journey often comes with challenges and responsibilities, but the road always begins with a clear destination: the mission.

The Destination – The Mission

Much like the final stop on a road trip, the mission represents the nonprofit’s overall goal and purpose. It serves as the guide that helps determine not just where the organization is headed but also how it navigates the journey. No matter what detours or new strategies arise along the way, the focus remains on this ultimate destination: the mission.

In the context of investing, the mission is the ultimate goal that the investment strategy aims to support. Every investment decision should be evaluated based on how well it aligns with and supports the mission. This alignment ensures that the organization’s financial resources are used effectively to further its goals.

Your GPS – The Investment Policy Statement

But how do you ensure you are on the right path? On a road trip, we once relied on paper maps and atlases, but today, most of us depend on a GPS. With investing, the Investment Policy Statement (IPS) serves as that GPS, offering clear directions to help the organization reach its goals. The IPS outlines essential guidelines, objectives, and decision-making procedures, acting as a navigational tool that keeps the nonprofit’s investments aligned with its mission.

If the GPS is our IPS, then here are the key components that keep us on course:

The Optimal Route – Diversification
Just as a GPS offers different routes to your destination—whether toll roads, highways, or scenic backroads—diversification lays out the various investment paths you can take. Are you comfortable with the high speeds of major metropolitan areas (high growth assets), or do you prefer the steady pace of backroads (low risk investments)? Perhaps a combination of both is the ideal approach, depending on the journey.

Diversification is a critical element of sound investment management, as it spreads available funds across various investments with the intention of reducing portfolio risk. Several ways to diversify an investment portfolio include:

• Asset Class Diversification: Investing across various assets that could include stocks (ex. large cap, small cap, international), bonds (ex. government, corporate), precious metals, treasuries, or money market funds to name a few.
• Sector Diversification: Involves investing in a variety of sectors, such as technology, healthcare, and consumer goods. Sectors can perform differently under various economic conditions, so diversifying across sectors can help mitigate the impact of sector-specific risks.
• Geographic Diversification: Spreading funds out across various geographic regions such as North America, Europe, or Asia. Geographic diversification can protect the portfolio against region-specific risks, such as political instability or economic downturns.
• Investment Style Diversification: Entails allocating funds across various approaches, such as growth, value, and income investments. Each style has its own risk and return profile, and by combining them, the organization can achieve a more diversified and balanced portfolio.

Navigating Roadblocks – Risk Management
Risk management is similar to preparing for roadblocks, construction zones, or rush-hour traffic. Sometimes the GPS warns us of these delays, allowing us to reroute or brace ourselves for a longer drive. Similarly, effective risk management helps the investment committee anticipate challenges and adjust the strategy to avoid major financial pitfalls.

Risk management is crucial to mission driven investing. It involves identifying, assessing, and mitigating risks that could impact an organization’s ability to achieve their goals. There are various risks an organization should be mindful of, but a couple key ones are:

• Market Risk is a systemic risk that impacts the portfolio by factors influencing the entire market. These can include interest rate changes, geopolitical events, recessions, or currency exchange rates.
• Credit Risk is an important factor within a fixed income portfolio and related to risk of losses due to company or agency defaults. Reviewing investment grade products and spreading risk across debt obligations can help reduce this risk.

Planning Fuel Stops – Liquidity
Just as we ensure we have enough gas stations along our route, liquidity planning ensures the organization has access to the cash it needs. Whether it is covering mission impactful events or preparing for unforeseen expenses, having enough liquidity is essential to keep the journey going without unnecessary stops.

Liquidity is the ability to convert investments quickly and easily into cash without significant loss of value and key factors impacting liquidity are:

• Cash Reserves: knowing upcoming needs and have those funds readily available is essential to effective portfolio management. This also ensures that a company can have access to needed funds within 1-2 business days.
• Liquidity Laddering: A strategy of structuring a portfolio around key cash flow events can be important to ensure funds are still able to earn a return but will be available on the date needed. This can be especially impactful with seasonal fundraising or programmatic activities where investment funds are utilized.

Checking Your Progress – Performance Monitoring
On any road trip, we periodically check to see if we are on schedule. Are we making good time? For those who travel with children: Are we there yet? Performance monitoring serves the same function in investing, allowing the committee to assess whether the portfolio is tracking toward its goals and staying on course toward the destination.

Performance monitoring involves regularly reviewing and evaluating the performance of the organization’s investments to ensure they are meeting the established objectives. This process includes several key components:

• Benchmarking: Establishing a relevant benchmark within the IPS and comparing to the portfolio performance on a regular basis. It is important to select a benchmark that closely reflects the organizations investment objectives and composition of the portfolio.
• Investment Strategy: An overall aspect of the IPS should be a review of the investment strategy to ensure the required returns are in line with the risks taken.

Keeping Everyone in the Car Aligned – Board Governance
Every successful road trip requires all passengers to be on the same page about the plan. Board governance ensures that everyone—whether it is the board, the investment committee, or investment advisors like Strategic—is aligned with the IPS and the organization’s mission. Clear governance provides structure and keeps decision-making collaborative and accountable.

The creation and maintenance of the investment policy statement can be one of the most crucial elements for a board or committee.

Avoiding “Recalculating” – Reporting
Nobody likes to hear their GPS say, “recalculating,” but regular and timely reporting is crucial. It helps investment committees make informed decisions and identify if any course corrections are necessary. Regular updates ensure the organization remains on track and aligned with the mission, preventing any last-minute detours. Whether it is a quarterly investment report to review or a presentation from an investment advisor it is critical to stay informed of the portfolio’s activity and performance.

Reaching your Destination
Just as every road trip eventually ends, the journey of mission-driven investing is about reaching the destination: fulfilling the nonprofit’s mission. By carefully navigating the road with a clear destination, a reliable GPS, a diversified route, effective risk management, adequate fuel stops, and regular progress checks, nonprofits can ensure that their investments are aligned with their mission and are making a positive impact.

Mission-driven investing is a powerful tool for nonprofits to achieve their goals and create lasting change. By integrating the mission into every aspect of the investment process, from setting objectives to selecting investments and measuring performance, nonprofits can ensure that their financial resources are used effectively to further their mission and make a difference.

The content provided is for educational and informational purposes only and should not be considered as a basis for making any investment or financial decisions. Strategic Financial Services provides personalized advice tailored to the specific needs of each client. This material is not intended to offer legal or tax advice; please consult with a qualified tax professional or attorney for such services.

All investments involve risk, including the possible loss of principal. Strategic Financial Services is a registered investment advisor. Registration does not imply a specific level of expertise or training.