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An investment blueprint.

Planning a framework for key association decisions.

Investments allow associations to achieve key goals, such as purchasing a headquarters building or setting up a scholarship find. Given their important function, investments require effective management, the procedures for which can be clearly outlined in an association investment policy.

This policy enables an association to achieve continuity in management; continuity is most likely to yield the best security and financial return for the association. It also clearly outlines investment objectives and strategies to guide those charged with managing investment funds.

An investment policy, which should relate closely to the association's policies on cash management and the overall objectives for the composition of the balance sheet, generally includes the following: * purpose of investments; * process and responsibility for investment decisions; * investment objectives; * investment portfolio composition; * proper disposition of donated assets; * reports concerning investments; and * arrangements for adopting and updating the investment policy.

Defining the purpose

The association needs to link the purpose of its investments to its mission and explain how they contribute to fulfillment of the mission. Clearly describe the programs or activities facilitated by investments, keeping in mind that a strategic plan most likely addresses these programs or activities in greater detail.

For most associations, reserve funds serve as a safety margin for unexpected events. Many organizations also want to maximize what they can earn on temporary funds. Associations may also hold investments to facilitate the purchase of major equipment, such as a computer system, or to fund research programs.

Sometimes an association receives memorial funds that are to be held for fulfillment of a specific purpose and are part of the investment portfolio. In such instances, it may be necessary to establish special or segregated accounts.

If possible, the investment policy should 1. quantify the amount of investments needed for each purpose; 2. describe the method and timetable for meeting each purpose; 3. specify planned additions to invested funds and the use of investment earnings; and 4. relate investment performance objectives to each purpose.

Process and responsibility

An investment policy describes the role of the association's board of directors, finance committee, and staff responsible for investment management. Depending on the size of the association's investments, independent assistance by managers, advisers, and others will help ensure that investments are safely and carefully managed. The policy should also describe the qualifications and responsibilities of these "safekeeping agents" and the process for their selection and evaluation.

Specifying who has the responsibility to take certain actions related to investments makes it clear that certain parties are not authorized to take certain actions. Board members, for example, may not make individual, unilateral investment decisions unless such actions are clearly authorized by the investment policy.

Determining objectives

Investment objectives flow directly from the purpose for which the investments are held. The objectives section of the association investment policy should describe long-term and short-term objectives as well as the desired balance between return and risks.

Objectives are described in terms of return or yield, safety or security, and liquidity or access. The yield can be only the amount of income (interest, dividends, rent, and so forth) but is more commonly the total of income and change in principle value (the market change). The yield objective can be expressed in one of three ways: 1. as a specific percentage (usually the annual income and market change divided by principle at the beginning of the year); 2. in relation to some external index (such as the rate of return earned on stocks in the Dow Jones industrial Average, U.S. Treasury certificates of a specified maturity, and so forth); or 3. in terms of the needs of the association (such as a principle value of a certain amount by a specified date to meet a described need).

The policy might say, for example, that common stocks should yield 25 percent more than the stocks in the Dow Jones Industrial Average. Minimum yield expectations can be specified with the assumption that the manager will obtain the highest yield possible for each type of investment. Safety and security provisions as well as liquidity or access provisions are discussed in the composition section of the policy.

Since the association probably has a variety of purposes for its investments, it is helpful to specify the objectives for each purpose separately. For example, investments held to provide a cushion for unexpected events must be both liquid and secure, whereas investments held for the eventual purpose of building a headquarters building need not be liquid until the scheduled date for acquiring the building.

Also, the association may be more willing to seek a higher return on the building funds, thereby accepting more risk with these funds, recognizing that this risk may result in delaying or modifying the building plans. Memorial funds held as an endowment need not be liquid, but attention must be given to both return and security.

Composition

Once the various investment objectives have been specified and quantified, the composition or asset allocation of the investment portfolio can be determined. Your association policy may specify the minimum and maximum portion of the portfolio that may be invested in each type of investment. In addition to producing the desired yield, the composition considers security and liquidity.

Security is achieved by diversification and adherence to standards for each type of investment. The investment composition should specify the portion of funds to be held in various types of investments, such as equity securities (stock), fixed income securities, real estate, collectibles, or cash equivalents. At a minimum, the policy should specify the minimum and maximum percentage of the portfolio that may be invested in equities and bonds.

Also specify the appropriate form of investment within each composition category and the desired degree of diversification, such as not having funds in any bank account in excess of the federally insured amount, or by specifying acceptable industries and the number of different stocks that must be owned in each industry group. This section would also address limitations, such as avoiding international investments or recognizing social responsibility.

Security standards can be specified - for example, investing only in securities with specified ratings given by independent agencies like Standard and Poor's or Dow Jones. Measures of security can also be specified - for example, avoiding a decline in principle value in excess of a certain percentage.

Composition must also consider the liquidity of the association's investments. Reasons for various types of liquidity were described earlier. The liquidity or maturity of various types of investments can be specified in the policy - for example, limiting maturities of U.S. Treasury bills and notes to five years or less. Liquidity may also consider the volatility of the investment, since the expected value of a volatile security may not be available when needed.

Meeting objectives of diversification for small funds or for specialized segments of a large fund may be achieved best by participation on a commingled basis with funds of others. The criteria for such mutual fund investments should be as specific as any other type of investment.

Donated assets

A policy concerning the disposition of donated assets helps donors understand what happens to resources they provide. This section must recognize that donors may specify the form in which donor-provided resources must be held. It may be possible to blend these specified holdings into the overall composition of the investment portfolio.

Reports

An investment policy also determines the form and frequency of reports concerning investments. Investment objectives guide the organization and content of the report, which also should show progress toward fulfillment of objectives.

For example, the report might include the percentage of the portfolio total that each type of investment represents. A report could include a detailed listing of every security owned or merely totals by category (stocks, bonds, and so on). It can show the original cost and current value. Include data from several prior years for trend analysis along with some external data, such as the Dow Jones industrial average.

A percentage of change in value might be another element of the report, and the policy might call for this to be expressed on an annualized basis. The policy might specify how the rate of return is to be calculated. For example, return can be measured exclusively in terms of current income but generally includes changes in value.

Reports may be provided with differing frequency and degrees of detail to various interested parties. For example, the board of directors might get summary reports quarterly and detailed reports annually, whereas the finance committee might receive detailed reports quarterly or at each of its meetings.

Adopting and updating

The investment policy should clearly state whether it was adopted by the board, finance committee, or staff. Specify regular reviews of the policy and describe the authority to amend the policy.

Investments provide security to associations and enable them to meet the demands of special needs. A well-written policy helps all involved understand their roles and maximizes use of valuable association resources.

ASAE's Finance and

Administration Section

Members of ASAE'S Finance and Administration Section get far more from their involvement than a head for numbers. The section focuses on four crucial areas of association management: finance, human resources, general administration, and technology applications. It provides the following services to enhance members' professionalism: * The monthly Dollars & Cents newsletter provides reports on roundtable discussions and new programs as well as expert advice in cost-saving ideas to increase your bottom line, finance, human resources, and administration. Articles cover such topics as benefit plan alternatives, building operation issues, and technology applications. A "Tax & Legislative Highlights" column keeps section members informed on timely topics. * The Networking and, Resource Directory is a handy annual guide provided to all section members. It lists those section members willing to provide free advice on peers' questions in more than 50 specialized areas. The directory includes a list of ASAE books, education programs, and Information Central resources of interest to section members. * Roundtable luncheons address key issues in all four of the section's interest areas. The roundtables are held twice a month in Washington, D.C., and are sometimes broadcast to other parts of the country. The newsletter reports on these events so that members nationwide can learn from this sharing of experience. * Twice a year, ASAE offers a five-day Finance and Administration Certificate Program designed to give participants the information they need for an introduction to this area of nonprofit management. Other education programs, like the Financial Management Symposium, provide section members with technical advice and tips to help them manage their association. * Awards of Excellence are presented for outstanding achievements. * Distinguished Papers are recognized annually and summarized to all section members in Dollars & Cents.

For additional information on the range of programs offered to members of ASAE's Finance and Administration Section, call Wayne Miller, (202) 626-2781.

Guide Includes

Sample Policy

Reserve Funds and Investment Policies, an ASAE background kit, is a collection of helpful articles, statistics, and association investment practices. It also includes a sample association investment policy. Priced at $22 for members and $44 for nonmembers, it is available from ASAE Publications, 1575 Eye St., N.W., Washington, DC 20005. Or fax your order to (202) 408-9634. Add $5.25 for shipping and handling. Washington, D.C., residents add 6 percent sales tax.
COPYRIGHT 1992 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Financial Management; includes related article; investment management for trade and professional associations
Author:Kovener, R.R.
Publication:Association Management
Date:Jul 1, 1992
Words:1878
Previous Article:Putting the ADA to work.
Next Article:Presenting financial reports.
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