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August 19.2025

2 Minutes Read

Can an Investment Philosophy Statement Break the Underperformance Cycle?

Golden tree emerging from book, knowledge and growth concept.

Institutional Investing: A Look Beyond the Surface

While the world often visualizes institutional investing as a realm dominated by elite firms, a hidden layer exists beneath this facade—almost two million nonprofit organizations in the United States with investment portfolios that often underperform their goals, particularly due to their reliance on strategies that aren't well-suited for their size and structure.

Chronic Underperformance: The Need for Change

Despite similar objectives, such as achieving a balance between current and future needs, many nonprofit portfolios struggle, showing systemic underperformance relative to market benchmarks. Recent studies, including one by researchers Sandeep Dahiya and David Yermack, revealed that endowments lag significantly behind a standard mix of U.S. equities and Treasury bonds, with a notable 5.53 percentage point deficit in median annual returns.

Dissecting the Causes of Underperformance

This underperformance cannot solely be attributed to the external market pressures. Poor manager selection, ineffective committee behavior, and inherent structural inefficiencies add to the woes faced by these organizations. For instance, larger institutions, while thought to have advantages due to their size, often see diminished returns because of costly allocations to alternative investments that yield ordinary returns at excessive costs, as noted by Richard Ennis.

Establishing an Investment Philosophy Statement

Proposing a potential remedy for these systemic hurdles is the adoption of a clearly articulated investment philosophy statement. Such a statement not only guides decision-making but also aligns investment strategies with the overarching goals of the organization. By establishing a foundation based on thoughtful reflection and clear objectives, nonprofits can maneuver out of the cycle of underperformance.

Conclusion: The Path Ahead

The need is urgent for nonprofits to reconsider their investment approaches actively. By doing so, they not only have the potential to improve performance but also ensure a sustainable future for their organizations. As stakeholders in the nonprofit sector, addressing these core issues will pave the way for a more robust institution capable of meeting its commitments.

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Can an Investment Philosophy Statement Break the Underperformance Cycle?

Institutional Investing: A Look Beyond the Surface

Chronic Underperformance: The Need for Change

Dissecting the Causes of Underperformance

Establishing an Investment Philosophy Statement

Conclusion: The Path Ahead

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