A Complex Environment for Investing, Governance Raises the Appeal of Investment Outsourcing

Erika Murphy

Remember the saying, ‘new year, same market’? That sentiment didn’t last long in 2025. For endowments and foundations, the pace of change has been anything but familiar.

In a global macroeconomic and investing environment that is adjusting to higher interest rates, persistent inflation, and a rapidly evolving political landscape, endowments and foundations are rewriting their playbooks. I regularly speak to these U.S. nonprofit organizations as their outsourced chief investment officer portfolio manager and what I am hearing that is that these institutions are worried about losing sources of funding tied to the federal government, potentially facing higher tax rates and higher operating costs due to rising inflation, and are grappling with how to balance greater needs for liquidity with elevated needs for return.

Wealth Preservation Takes Center Stage

Conversations with our nonprofit clients find the vast majority focused on maintaining their endowments into perpetuity. Fidelity’s latest survey of small to midsize endowments show that through 2023, small and midsized E&Fs have been generating returns that outpace their spending. The three-year average annualized return through Dec 31, 2023 was 6.3%, with a median spending rate of 5.0%. As we live through this period of elevated inflation, however, we continue to remind our nonprofit OCIO clients that an inflation-linked return objective (such as CPI plus the annual spending rate) can be helpful to ensure the real wealth of and endowment is preserved into perpetuity. We found in our survey that only 22% of small and midsized E&F respondents explicitly aim to beat inflation in their return objectives, but we expect this percentage will grow in coming years as nonprofits tune into the impact of inflation on their underlying organizations. In addition to these lofty long-term return objectives, our survey describes the top short-term challenges endowments and foundations are facing. Amid market volatility, most small to midsize E&F’s investment leaders feel they are poorly positioned to mitigate macroeconoimic risks—most notably geopolitical concerns, monetary policy shifts, rising global debt levels, inflation, high valuations, and a low growth environment—in order to meet their target returns in the next coming years. Against this backdrop, only 34% of those surveyed are highly confident that they will achieve their target return in the next three years. To address some of these concerns, we are encouraging our nonprofit OCIO clients to ensure portfolios have appropriate levels of diversification and flexibility to better navigate the myriad risks and opportunities that we face today.  

Fortunately, most small to-midsized E&Fs have been spared from liquidity-related challenges. Unlike many of their larger E&F peers, our survey shows that small and midsized nonprofits tend to have a greater focus on liquid investments–notably, U.S. public equity still remains a cornerstone for these investors’ portfolios (median of 45% of total portfolio exposure). However, our survey does show, small and midsized institutions are dipping their toes into alternative investments. Of the nonprofits surveyed, the median exposure to alternative investments was 15%, with the majority of this exposure coming in private equity and hedge funds/ liquid alternatives. The growing adoption of alternatives in small and midsized E&Fs makes a lot of sense to us. When invested in top-tier alternative strategies, we find that these asset classes not only can be return enhancers relative to public markets, but they can also mitigate big swings in E&F’s annual spending and help to preserve real wealth across a range of market environments.

Governance Goes Under the Microscope 

Aside from investments, governance remains a persistent challenge for this group of asset owners. Respondents cited fundraising (32%), difficulty in educating board members and leaders about investment strategies (21%), maintaining alignment of investments with the organization’s mission (18%) as top challenges. Among the E&Fs I interact with, we often see volunteer committees fulfilling fiduciary investment oversight roles. While these committees are filled with accomplished professionals – the vast majority of small and mid-sized E&Fs face very similar governance challenges. Commonly cited challenges we hear from our OCIO clients and prospects relate to having limited time and resources to adequately manage day-to-day investment oversight, as well as struggles to make timely decisions (often due to disagreements between committee members and a lack of clarity about roles and authority.)

One area where we do tend to see a lot of committee disagreement is mission-aligned investing. While 43% of small to mid-sized E&Fs believe it is important to align the investment portfolio to the mission of the organization, only 8% say their investment portfolio is fully aligned to their organization’s mission. In practice, we do have several nonprofit OCIO clients that partially integrate sustainability in their portfolios, oftentimes by targeting a percentage of the total portfolio (or certain assets classes) to be managed with a more sustainable-focused approach.

The OCIO Model Gains Traction 

A notable trend, the study found and that I am seeing myself, is the rapid adoption of OCIOs. Roughly one-quarter of survey respondents are already using an OCIO to manage their entire portfolio, while nearly 50% of respondents are currently relying on a third party for advice or management on at least part of their investment portfolio. This reflects a growing demand for professional oversight and faster decision making in volatile environments.

For the 24% of small- to mid-size E&Fs that use OCIOs to manage their entire portfolios, the majority of client-OCIO relationships are still less than five years old. Within this time period, survey respondents reported high levels of overall satisfaction, and none say that they are not satisfied with their OCIO. E&Fs that report satisfaction with their current OCIO generally show a higher rate of leveraging their partner’s capabilities across offerings regarding strategic asset allocation insights, risk management services, access to alternative investments, and reporting capabilities.

As the non-profit sector faces a series of challenges, such as a complex investment environment, governance issues, and limited research and risk management resources, small to midsize E&Fs are evolving their strategies with intention. A strong partnership with an OCIO can help these organizations meaningfully mitigate the challenges they face by providing additional perspective, resources, and continuity. While no two institutions are alike, the most forward-looking ones are embracing this moment to reassess, recalibrate, and recommit to both their fiduciary goals and their long-term impact. In doing so, they are not only safeguarding their commitment to their missions, but also positioning themselves to thrive in an increasingly dynamic landscape.

Erika Murphy, CFA, CAIA, is a portfolio manager in the Global Institutional Solutions group at Fidelity Investments.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.

Tags: endowments and foundations, OCIO, outsourced chief investment officer