Greetings all,

Recently accepted an appointment to an executive/finance committee on a board of directors for a regional non-profit. There is an existing endowment fund (low eight-figures) and a new executive director and incoming board president and they want to move the endowment to a new advisor and custodian. I was tasked to take a look and make some recommendations.

The portfolio is overly complex, in my opinion, AUM fees are in excess of 1.25% in addition to front load funds and actively managed funds. There's about 12 actively managed funds in the endowment fund in addition to over 40 individual stock tickers, 5 ETFs, and a bunch of bond and CD ladders. If I didn't know any better I would guess that the fund and stock selections are window dressing. Asset allocation for the endowment are something along the lines of 50/40/10. Performance is ok, but fees and expenses of around 2.5% are really dragging down performance when you look at it from a 5-year or 10-year timeline.

I proposed moving to a lower cost firm that could offer 0.3% AUM (based on available information online) and simplifying the portfolio to a lazy portfolio. My initial recommendations included a 3-fund, 4-fund and 5-fund portfolio. I did enough backtesting with the current endowment and my 3 proposed allocations to show that we could easily match the performance before fees in addition to pocketing another 1.5 - 2% year over year from reduced expenses by using index funds and having access to institutional shares. Also the new setup would easily fulfill the mandate of generating 5% returns without having to draw down the principal using a three-year rolling average to help model cash outflows and inflows.

When I presented my findings, I was told by several board members that my portfolio for the endowment wasn't sophisticated enough and that I must have been missing out on something crucial.

I was asked to work with some other board members, who are accredited investors, to come up with a more sophisticated asset allocations to “maximize upward potential but maintain capital preservation” and also look at some other firms that can provide exclusive advice and guidance. We've done one working session so far but it's left me a bit concerned. Suggestions from the session included cryptocurrency, hedge funds, private equity, VIX funds, holding physical gold in the main office, and buying up vacant property around HQ. I guess the word is out on the street because we are also getting inundated with offers for lunch or dinner with various advisory firms, banks, and wealth managers.

As a compromise, I'm hoping to construct a portfolio that's 90% lazy (using David Swensen Yale portfolio as a baseline) and maybe window dress the remaining 10% with individual holdings and exotic ETFs to placate other internal stakeholders. Also I want to figure out a way to construct an endowment, or revise the bylaws governing the endowment, that's a bit more insulated from leadership changes or advisors. There's effectively a new board of directors every four years at the organization and this would have been the 4th time in 20 years that the endowment has been reconstructed.

I was looking to see if anyone here has had experience setting up an endowment or legacy fund for a non-profit and what strategies or tactics did they find successful to build consensus and more importantly survive the turnover within the leadership of the organization. I feel like I really underestimated the “people” aspect of endowment investing.

P.S. the advisor emailed me and some other board members in a panic offering to take us out to lunch and reminding us he moved us to cash during the last 2 market pullbacks. He is also emailing former board members that rolled off to see what the deal was with me, and the new leadership in general.