KEEPING YOUR FOUNDATION HEALTHY: NATIONAL CONFERENCE OF BAR FOUNDATIONS – JULY 31, 2015 KEEPING YOUR FOUNDATION HEALTHY: REVIEW OF INVESTMENT PRACTICES & POLICIES Matthew R. Veith Fund Evaluation Group, LLC Senior Vice President Thomas P. Moushey, Esq. Robinson & McElwee, Alliance President-Elect Ohio State Bar Foundation Alison M. Belfrage Executive Director Ohio State Bar Foundation

A Primer on Board Fiduciary Responsibility The Investment Process AGENDA A Primer on Board Fiduciary Responsibility The Investment Process Case Study: Ohio State Bar Foundation Considerations for an Expected Lower-Return Environment

A Primer on Board Fiduciary Responsibility

A Primer on board fiduciary responsibility Ohio State Bar Foundation Experience Introduction Financial health of the organization Board of Trustees – Fiduciary Duty

A Primer on board fiduciary responsibility Ohio State Bar Foundation Experience Review of Existing Investment Policy When to review Review of Investment Policy with Investment Manager There are known unknowns….

A Primer on board fiduciary responsibility Ohio State Bar Foundation Experience “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.” To whom do we attribute this famous quote?

“There are known knowns; there are things we know that we know. There are known unknowns; that is to say there are things that, we now know we don’t know. But there are also unknown unknowns – there are things we do not know we don’t know.” Donald Rumsfeld, Former Secretary of Defense

A Primer on board fiduciary responsibility Ohio State Bar Foundation Experience Hire an independent consultant Asset allocation Investment policy statement Performance Fees Governance

The Investment Process

Oversight structure: checklist FOUNDATION GOVERNANCE ORGANIZATIONAL Spending Policy % of Foundation Budget Gifts / Development Debt / Expenses INVESTMENT CONSIDERATIONS Tolerance for Volatility Liquidity Needs Economic Variables Capital Loss Tolerance PORTFOLIO CONSTRUCTION Return Hurdle Scenario Modeling Risk Analysis / Tolerance Illiquidity Study Asset Allocation Modeling Stress Test

1 2 4 3 OBJECTIVES ONGOING MANAGEMENT STRATEGY IMPLEMENTATION Investment Process

1 4 2 3 Evaluating Investor Objectives Risk and Return Goals Spending Policy Constraints Current Market Environment Step 1: Objectives

Client Assessment Risk Analysis Liquidity Analysis 3 1 4 2 OBJECTIVES: Evaluating Investor Objectives Client Assessment Risk Analysis DISCOVERY PROCESS For each bucket and holistically, FEG would initiate a discovery process to understand: Return Objectives Risk Time Horizon Tax Considerations Liquidity Legal Concerns Comfort with Asset Strategies / Restrictions Governance Liability Measures Funded Status Funding Volatility Financial Statement Volatility Liquidity Analysis

Enterprise Risks Investment Risks Spending policy OBJECTIVES: Risk 1 4 3 2 OBJECTIVES: Risk Enterprise Risks How losses impact institution Debt covenants Liquidity Headline risk Investment Risks Permanent impairment of capital Shortfall risk Volatility Underperform benchmarks Underperform peers

Spending is only part of the equation 1 4 3 2 OBJECTIVES: Return Return Objectives Long-Term Return > Target Spending Rate + Administrative Costs + Inflation 4.5% + 1.0% + 2.5% = 8.0% Spending Fees Inflation Primary Objective

SPEND TODAY VS. SPEND TOMORROW 1 4 3 2 OBJECTIVES: Spending Policy SPENDING GROWTH 4% vs. 6% Spending Rates This is an important slide to show the effect of lower the spending rate over the long-term. As the percent of market value spent decreases: Spending decreases in the short-term (due to lower rate) Spending increases in the long-run (20-25 years, due to reinvestment) Probability of maintaining purchasing power increases (due to lower spending) Data Source: Lipper; Data as of 12/31/2013. Returns represented by 70% S&P 500 Index and 30% Barclays U.S. Aggregate Index.

Spending Policy should, at a minimum, achieve intergenerational equity 1 4 3 2 OBJECTIVES: Spending Policy If the Foundation can spend only income (interest and dividends, not capital gains), there is a conflict between maximizing income and increasing the market value of the portfolio May seek greater income through higher bond exposure (lower expected returns) Increase in market value does not translate into higher levels of spending Spending Policy should enable the Foundation to maintain the purchasing power of the portfolio Spending Policy should, at a minimum, achieve intergenerational equity

Objectives: Investment Policy Statement (IPS) 1 4 3 2 1 4 3 2 Objectives: Investment Policy Statement (IPS) 1 1 4 4 2 2 3 3 CORE ELEMENTS OF AN IPS Overview Purpose and Scope Definition of Duties Fiduciary Duty Roles and Responsibilities Objectives & Constraints Return Objectives Risks Constraints: Liquidity, Legal, Time Horizon, Taxes, Unique Circumstances Strategic Asset Allocation Targets and Ranges of Asset Classes and Sub-Asset Classes Rebalancing Active and Passive Management Investment Styles / Market Capitalization Monitoring & Evaluation Manager Performance Benchmarks Guidelines / Restrictions Private Equity, Fixed Income, Credit Sensitive, Commodities, MLPs, Derivatives

1 4 2 3 Alignment with Spending Policy Strategic Asset Allocation Step 2: Strategy

Spending and asset allocation policy should align 1 4 3 2 STRATEGY: Spending Policy and Asset Allocation RETURNS VS. OBJECTIVE 60/40 Equity/Bond Portfolio, 10-Year Rolling Return 60/40 achieved an 8% return ~50% of the time A 60/40 portfolio enjoyed unusually strong performance during the 1980s and 1990s, supported by a secular bull equity market and high bond yields. A 60/40 equity and bond portfolios returned an annualized 8.5% from 1926-2010, but realized 10-year returns in excess of an 8% return objective only 54% of the time Area circled – two easy decades, but not the norm. Data Sources: Ibbotson Associates and Barclays Capital; Data as of 12/31/2013.

Increasing complexity―ASSET allocation 1 4 3 2 STRATEGY: Strategic Allocations are Increasingly Complex 4 2 3 Data Source: 2014 NACUBO-Commonfund Study of Endowments.

TABLE OF INVESTMENT RETURNS 1 4 3 2 STRATEGY: Be Mindful of Chasing Asset Classes TABLE OF INVESTMENT RETURNS 2005-2014 Annual Return of Key Indices 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Emerging Markets 34.0% Public RE 35.1% Emerging Markets 39.4% Bonds 5.2% Emerging Markets 78.5% Public RE 27.9% Public RE 8.3% Public RE 19.7% U.S. Equity 33.6% Public RE 28.0% Int'l 13.5% Emerging Markets 32.2% Int'l 11.2% Hedge Funds -19.0% Int'l 31.8% Emerging Markets 18.9% Bonds 7.8% Emerging Markets 18.2% Int'l 22.8% U.S. Equity 13.7% Public RE 12.2% Int'l 26.3% Hedge Funds 10.0% U.S. Equity -37.3% U.S. Equity 28.3% U.S. Equity 16.9% U.S. Equity 1.0% Int'l 17.3% Hedge Funds 9.1% Bonds 6.0% Hedge Funds 9.3% U.S. Equity 15.7% Bonds 7.0% Public RE -37.7% Public RE 28.0% Hedge Funds 10.2% Hedge Funds -5.3% U.S. Equity 16.4% Public RE 2.9% Hedge Funds 3.6% U.S. Equity 6.1% Hedge Funds 12.9% U.S. Equity 5.1% Int'l -43.4% Hedge Funds 20.0% Int'l 7.7% -12.1% Hedge Funds 6.4% Bonds -2.0% Emerging Markets -2.2% Bonds 2.4% Bonds 4.3% Public RE -15.7% Emerging Markets -53.3% Bonds 5.9% Bonds 6.5% Emerging Markets -18.4% Bonds 4.2% Emerging Markets -2.6% Int’l -4.9% Taking a long-term approach gives us a higher probability of success – it allows for fundamental truths to play themselves out where day –to-day market activity is practically random It is also important to not make rash decisions based upon short-term market activity. Many aspects of market activity exhibit reversion-to-the-mean tendencies. This graph shows that managers tend to be fired after periods of poor performance then go on to post better returns thereafter, and also that managers are hired following good performance, but the average returns thereafter are nowhere near as positive. Our value proposition stems from a unique mix of FEG characteristics. We are experienced fiduciaries with an institutional focus. We have a track record of results serving endowments, foundations, religious entities, pension funds, and others. We bring a deep, stable and experienced investment staff equipped with all of the tools and resources necessary to serve clients. We have a highly proactive culture of delivering completely independent and objective fiduciary advice and management. No manager conflicts, no business channel conflicts, no ownership conflicts. We are one of the few remaining firms to maintain independence without an ownership concentration problem. We are flexible in the way we deliver our cost effective solutions. And we can offer you a set of administrative efficiencies that will enable you to focus on the big picture. Data Sources: FEG, Lipper, HFR, Preqin. As of 12/31/2014.

1 4 3 2 1 4 3 2 Manager Selection Selecting the Right Service Model Step 3: Implementation

IMPLEMENTATION: increased complexity 1 4 3 2 Increased complexity Navigating the investment landscape requires resources, acumen, and infrastructure The OCIO model was developed in response to profound changes in the institutional investment environment over the last decade, which have placed increasing pressure on the traditional nonprofit governance model. While some investment pools still consist of a traditional mix of stocks, bonds and cash, many institutions have sought to increase investment return and decrease portfolio volatility through more highly-diversified asset allocation strategies. Use of alternative investments has grown, demanding much closer analysis, due diligence and ongoing monitoring. Volunteer boards and investment committees, meeting only four or five times a year, have been challenged to construct and monitor these complex portfolios, which have become the standard for many longterm investors. New legal and regulatory requirements, too, have placed a heavier load on fiduciaries. Taken as a whole, the investment process is far more time- and resource-intensive than ever before.

Compliance with Investment Policy Statement IMPLEMENTATION: Manager Selection 1 4 3 2 1 4 3 2 Compliance with Investment Policy Statement Role within overall portfolio Organizational structure (ownership, AUM, personnel) Consistency of investment style Execution of strategy Active vs. Passive Style (growth, value, core) Private vs. Public Markets Number of Managers A passive allocation or smart beta strategy is suitable to efficiently gain market exposure at little cost in highly efficient markets like Large Cap U.S. Equity Opportunities, exist, however, for managers (in less efficient areas such as private markets, certain areas of fixed income, and through the use of hedge fund strategies) to add value through: Expert knowledge, better use of information, and access to unique opportunities A valuation-oriented, contrarian approach Unconstrained mandates

IMPLEMENTATION: Active Manager Focus—Inefficient Markets 1 4 3 2 IMPLEMENTATION: Active Manager Focus—Inefficient Markets 1 4 2 PERFORMANCE DIFFERENCE BETWEEN TOP AND BOTTOM QUARTILE 10 Years Ending December 31, 2013 3 Index/Enhance Index in efficient asset classes Focus active manager efforts in less efficient asset classes Manager selection is important due to the wide variance of returns A passive allocation or smart beta strategy is suitable to efficiently gain market exposure at little cost in highly efficient markets like Large Cap U.S. Equity Opportunities, exist, however, for managers (in less efficient areas such as private markets, certain areas of fixed income, and through the use of hedge fund strategies) to add value through: Expert knowledge, better use of information, and access to unique opportunities A valuation-oriented, contrarian approach Unconstrained mandates Data sources: Lipper, HFRI, Preqin, PerTrac. Private Equity Data for vintage years 2001 through 2010, performance available through December 31, 2013. Returns are in U.S. Dollars net of fees.

Implementation: The oversight structures employed 1 4 3 2 Implementation: The oversight structures employed 2-TIER COMMITTEE DRIVEN Governing Fiduciaries Investment Committee, Staff, and Consultant – Supporting Fiduciary Managing Fiduciary Operating Fiduciaries Investment Managers Custodian Actuaries Other Vendors 3 TIER OUTSOURCED Investment Committee Staff and Outsourced CIO Investment Managers Custodian Actuaries Other Vendors 3 TIER CAPTIVE Investment Committee CIO, Staff, and Consultant Investment Managers Custodian Actuaries Other Vendors Sources: FEG, Pension Fund Excellence, Keith P. Ambachtsheer and D. Don Ezra.

FIDUCIARY INVESTMENT DECISION MAKING IMPLEMENTATION: Aspects of Service Models 1 4 2 3 FIDUCIARY INVESTMENT DECISION MAKING Collaborate Delegate Consulting OCIO Buy-in on portfolio decision making Shared accountability Client retains control / committee driven Clearer Accountability Flexibility Consistency Extension of Staff

TOP REASONS WHY ORGANIZATIONS DECIDE TO OUTSOURCE: Drivers of demand IMPLEMENTATION: DRIVERS OF OCIO DEMAND 1 TOP REASONS WHY ORGANIZATIONS DECIDE TO OUTSOURCE: Better Risk Management Lack of Internal Resources Additional Fiduciary Oversight Faster Implementation / Decisions Need to Increase Returns Cost Savings 4 2 3 Source: 2015 Outsourced-Chief Investment Officer Survey. Responses from 208 asset owners were accepted for the survey from January 12 to 27, 2015.

Step 4: Ongoing Management 1 4 3 2 1 4 3 2 Risk Management Monitoring Capital Market Monitoring Managers Step 4: Ongoing Management

Sample Exposure Report 1 ONGOING MANAGEMENT: Performance & Adjustment 4 2 CAPITAL MARKET Return/risk assumptions developed and adjusted at least annually Fundamentals, valuation and market sentiment analyzed and discussed formally on a monthly basis CHANGING AND RETURN OBJECTIVES On an ongoing basis, monitor total portfolio asset allocation and risks MANAGER MONITORING Not only appropriate due diligence, but also a source of market color and potential risks/opportunities 3

Case Study: Ohio State Bar Foundation

Backdrop – OSBF Case study Long term relationship with one firm managing foundation assets While satisfied with investment manager, committee thought it was prudent to have an outside, objective firm perform an analysis on vital aspects of the investment program: Asset Allocation IPS / Spending Policy Performance Fees Governance

ASSESSMENT & RECOMMENDATIONS Asset Allocation: Assessment: the Foundation’s allocation was expected to fall short of the absolute return goal of 4.5% spending + 2.5% inflation Recommendation: diversifying the portfolio beyond the current allocation of US large cap stocks and core bonds, prudently accept more risk Investment Policy Statement: Assessment: critical points covered in the IPS, but some language needed to be tightened and added Recommendation: add specific performance and risk metrics for the overall portfolio and specific allocations in order to more clearly define accountability and measurement of goals

ASSESSMENT & RECOMMENDATIONS Performance: Assessment: overall performance was positive on a relative basis, but trailed on an absolute basis longer term versus CPI + spending goal Recommendation: ensure performance reporting is consistent with IPS metrics to better inform committee Fees: Assessment: fees were competitive versus industry standards Governance: Assessment: currently operating under an outsourced approach but with one manager Recommendation: ensure the existing manager is capable and experienced in managing the various asset classes of a diversified allocation, if not consider a “manager of managers” approach

Considerations for an Expected Lower-Return Environment

“The market’s not a very accommodating machine; it won’t provide high returns just because you need them.” Peter L. Bernstein, Financial Historian (1919-2009)

EXPECTED RETURN VS. EXPECTED RISK Expected returns EXPECTED RETURN VS. EXPECTED RISK Historical Returns of 60/40 Portfolio = 9.1% Current Expectations of 60/40 Portfolio = 4.1% Historical Current Expectations Return Risk Objective Two options: (1) Adjust strategic asset allocation. However, spending needs should not unduly influence asset allocation decisions. The market is not currently rewarding risk. Why take more? Higher spending needs could lead to overly aggressive asset allocation. Lower spending needs could lead to overly conservative asset allocation. (2) Lower spending rate. Source: Fund Evaluation Group, LLC.

Considerations for current environment Ensure board is functioning properly as cannot afford slippage due to poor decision making Ensure IPS captures all relevant risk and return goals, and any relevant constraints Spending policy should be crafted in conjunction with strategic asset allocation Manager due diligence is increasing complex. Consider manager style and active vs. passive focus If appropriate, consider outsourcing Fiduciary responsibilities are ongoing

Questions? v Matt Veith mveith@feg.com Tom Moushey tpm@ramlaw.com Alison Belfrage abelfrage@osbf.net

DISCLOSURES This was prepared by Fund Evaluation Group, LLC (FEG), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directed to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202 Attention: Compliance Department. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities. Net Returns – Returns net of fees may or may not include the reinvestment of all dividends and income. Past Performance is not indicative of future results. FEG has a contractual relationship with Ohio State Bar Foundation to serve as its Investment Advisor. Index performance results do not represent any managed portfolio returns. An investor cannot invest directly in a presented index, as an investment vehicle replicating an index would be required. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Any return expectations provided are not intended as, and must not be regarded as, a representation, warranty or predication that the investment will achieve any particular rate of return over any particular time-period or those investors will not incur losses. The information on page 21 was was obtained from the 2014 NACUBO-Commonfund Study of Endowments (NCSE). The study includes a survey of 832 U.S. colleges and universities. The study divided the data into six categories according to size of endowment, ranging from institutions with endowment assets under $25 million to those with assets in excess of $1 billion. Data is for the 2014 fiscal year (July 1, 2013 - June 30, 2014). The National Association of College and University Business Officers (NACUBO) is a membership organization representing more than 25,000 colleges, universities and higher education service providers across the country and around the world. The Commonfund Institute houses the education and research activities of Commonfund and provides the entire community of long-term investors with investment information and professional development programs. NCSE returns are presented net of fees and expenses.