An independent school may want to change the way its endowment is handled for different reasons, including better alignment with school mission and values and/or improved return on investment.
Transitioning to an outsourced chief investment officer (OCIO) is a multi-faceted endeavor, requiring the well-orchestrated movement of potentially millions of dollars of investments, agreement on the strategic vision for the school’s portfolio, and completion of many legal and administrative documents. Coordination between various groups is critical.
As TIFF Investment Management worked with McDonogh School, a PK-12 independent school in Owings Mills, Maryland, to transition OCIOs, we at TIFF developed a running list of best practices in terms of both endowment and project management throughout the process. Here’s what made this particular transition work well, and could help your school too.
Project Management Best Practices | |
Identify Key Stakeholders and Responsibilities | School leadership, Board-Level Investment Committee, Board-Level Finance Committee, Board of Trustees, and OCIO provider (and previous advisor if relevant) involved in transition. |
Create a Transition Plan and Timeline | Establish and communicate a clear plan and timeframe; obtain buy-in from all stakeholders. |
Clear, Transparent, and Frequent Communication | Regular updates on the progress of transition and any challenges faced. |
Key Parts of the Transition Plan | |
Strategic Asset Allocation (“SAA”) Review | Assess financial circumstances, risk management and tolerance, return objective, and liquidity needs when approving new Asset Allocation. |
Update of Governance Documents | The Investment Policy Statement (IPS) will need to be revised and approved by appropriate parties. |
Legal Documentation and Other Technical Items | Completion of AML (Anti-Money Laundering), IMA (Investment Management Agreement), POA (Power of Attorney), etc. with assistance from OCIO |
Executing Transition of Portfolio Assets | Create and execute a plan to transition assets from the existing provider to the new OCIO and to implement new Asset Allocation. |
Project Management Best Practices
Identifying Key Stakeholders and Their Responsibilities
The success of any OCIO transition hinges on assembling the right stakeholders in the process and establishing their responsibilities at the beginning stages of the transition. Key stakeholders and their responsibilities in the transition include:
- School Leadership: Partner with the OCIO on the transition plan, executing operational and legal tasks while providing input on the school’s financial circumstances.
- Board-Level Investment Committee: Provide guidance on and approval of the SAA and the IPS, as well as review key decisions regarding the investment strategy.
- Board-Level Finance Committee: Provide additional input on the school’s financial circumstances and approve the SAA and IPS.
- The Board: Provide final approval of the IPS and other governing documents.
- OCIO (TIFF): Lead and manage the transition process, designing and executing the plan to ensure alignment with the school’s financial goals, risk tolerance, and return objectives. Also, provide education and clarification whenever needed.
- Previous Advisor (if relevant): Serve as the counterparty in transitioning assets.
The key stakeholders for McDonogh were aligned with its governance structure; however, it's important to note that each school may have its own structure, which could impact the stakeholders involved.
Creating the Transition Plan and Timeline
During the transition, a well-defined project framework and timeline are crucial to establish key actions items, deadlines and responsibilities.
- Transition Date and Interim Check Points: A specific date or timeframe to transition the investment portfolio provides key stakeholders a unified goal to work toward, along with interim checkpoints to ensure the process remains on track.
- Checklists: Using checklists ensures that action items and deadlines are tracked, holding key stakeholders accountable.
Clear, Transparent and Frequent Communication
Effective communication is essential to the success of a transition, ensuring transparency and alignment among key stakeholders at each stage. The project lead should establish communication protocols and regular check-ins early in the transition process to facilitate important discussions with stakeholders.
- Project Management (OCIO and Staff – Weekly): Prioritize the time needed for check-ins to cover operational tasks, timelines and any roadblocks.
- Strategic (OCIO, Investment Committee and Staff – two or three meetings): Schedule two or three Investment Committee meetings to discuss and make decisions on asset allocation, IPS and other key investment and governance topics. There will also likely be intermittent discussions with the Investment Committee Chairs and/or school leaders in preparation for the transition.
Key Action Items in the Transition Stage
Strategic Asset Allocation Review
A critical part of the transition is ensuring the endowment portfolio aligns with long-term financial goals and investment return objectives through the agreement on the SAA:
- Required Target Return: How will this portfolio maintain inflation-adjusted value after spending?
- Risk Tolerance: What is the school’s tolerance, both the Investment Committee and the school’s financial standing, for risk?
- Liquidity Requirements: What is the school’s liquidity profile (e.g., spend, debt, emergency)?
The OCIO should also evaluate organizational factors, including:
- Endowment Dependence: Reliance on the endowment draw to meet the annual budget.
- Operating Profile Stability: Stability assessment financials.
SAA reviews help assess various options and trade-offs between different asset allocations, helping the stakeholders to make informed decisions that best align with the school’s investment return objectives and financial circumstances.
Voelkel notes, "McDonogh's endowment represents our commitment to balancing exceptional educational experiences with responsible financial stewardship. The partnership with TIFF has enhanced our ability to fulfill this vital balance for current and future generations."
Governance Documents
Internal documents, policies and governance structures need to be revised to align with the new investment strategy and governance shift to discretionary management. The most pivotal document is the IPS, which outlines the school’s investment objectives, asset allocation, spending policy and risk management guidelines.
When McDonogh transitioned to a discretionary OCIO relationship with TIFF, the school’s portfolio shifted to include previously underutilized investment strategies. In collaboration, TIFF and McDonogh revised the IPS accordingly, which required approval from the board-Level Investment and Finance Committees as well as the full board.
Legal Documentation and Other Technical Items
Transitioning OCIO will result in an influx of different agreements and documents for review and agreement by key parties. These include:
- The Investment Management Agreement (IMA)
- “Know Your Client” / Anti-Money Laundering review
- Power of Attorney (POA)
- New fund subscription documents and account opening for brokerage firm(s)
It is prudent to include legal counsel to review and, if appropriate, comment on all new agreements.
Executing the Transition of Portfolio Assets
The final step is moving the assets to the new provider and implementing the agreed-upon portfolio allocation. TIFF provided McDonogh with guidance on the complicated concert of implementing a new strategy while adhering to a few key principles:
- Maintaining market exposure.
- Timely processes and coordination of cash movements.
- Clear timeline and dates of any redemptions and new subscriptions/investments.
A Successful Transition
Successfully transitioning endowment management to an OCIO provider requires a strategic and collaborative approach. The process that TIFF and McDonogh executed ensured a seamless transition and enabled all stakeholders to have input into strategic decisions along the way.
