1. 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

2. 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

3. A Primer on Board Fiduciary Responsibility

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

5. 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….

6. 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?

7. “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

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

9. The Investment Process

10. 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

11. 1 2 4 3 OBJECTIVES ONGOING MANAGEMENT STRATEGY IMPLEMENTATION
Investment Process

12. 1 4 2 3 Evaluating Investor Objectives Risk and Return Goals
Spending Policy
Constraints
Current Market Environment
Step 1: Objectives

13. Client Assessment Risk Analysis Liquidity Analysis3 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

14. Enterprise Risks Investment Risks Spending policy OBJECTIVES: Risk1 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

15. Spending is only part of the equation1 4 3 2
OBJECTIVES: Return
Return Objectives
Long-Term Return > Target Spending Rate + Administrative Costs + Inflation
4.5% % % = 8.0%
Spending Fees Inflation Primary Objective

16. SPEND TODAY VS. SPEND TOMORROW1 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.

17. Spending Policy should, at a minimum, achieve intergenerational equity1 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

18. 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

19. 1 4 2 3 Alignment with Spending Policy Strategic Asset Allocation
Step 2: Strategy

20. Spending and asset allocation policy should align1 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 , 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.

21. Increasing complexity―ASSET allocation1 4 3 2
STRATEGY: Strategic Allocations are Increasingly Complex 4 2 3
Data Source: 2014 NACUBO-Commonfund Study of Endowments.

22. TABLE OF INVESTMENT RETURNS1 4 3 2
STRATEGY: Be Mindful of Chasing Asset Classes
TABLE OF INVESTMENT RETURNS
Annual Return of Key Indices
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Emerging Markets %
Public RE %
Emerging Markets %
Bonds %
Emerging Markets %
Public RE %
Public RE %
Public RE %
U.S. Equity %
Public RE
28.0%
Int'l %
Emerging Markets %
Int'l %
Hedge Funds %
Int'l %
Emerging Markets %
Bonds %
Emerging Markets %
Int'l %
U.S. Equity
13.7%
Public RE %
Int'l %
Hedge Funds %
U.S. Equity %
U.S. Equity %
U.S. Equity %
U.S. Equity %
Int'l %
Hedge Funds %
Bonds
6.0%
Hedge Funds %
U.S. Equity %
Bonds %
Public RE %
Public RE %
Hedge Funds %
Hedge Funds %
U.S. Equity %
Public RE %
Hedge Funds
3.6%
U.S. Equity %
Hedge Funds %
U.S. Equity %
Int'l
-43.4%
Hedge Funds %
Int'l %
-12.1%
Hedge Funds %
Bonds %
Emerging Markets
-2.2%
Bonds %
Bonds %
Public RE %
Emerging Markets %
Bonds %
Bonds %
Emerging Markets %
Bonds %
Emerging Markets %
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.

23. 1 4 3 2 1 4 3 2 Manager Selection Selecting the Right Service Model
Step 3: Implementation

24. IMPLEMENTATION: increased complexity1 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.

25. 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

26. IMPLEMENTATION: Active Manager Focus—Inefficient Markets1 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, Returns are in U.S. Dollars net of fees.

27. Implementation: The oversight structures employed1 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.

28. 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

29. 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.

30. Step 4: Ongoing Management1 4 3 2 1 4 3 2
Risk Management
Monitoring Capital Market
Monitoring Managers
Step 4: Ongoing Management

31. Sample Exposure Report1
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

32. Case Study:
Ohio State Bar Foundation

33. 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

34. 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

35. 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

36. Considerations for an Expected Lower-Return Environment

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

38. 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.

39. 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

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

41. 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 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, 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.