What are the major components of the Foundation’s Investment Program?

  • Because asset allocation is the most important variable in investment performance, the program gives investors a choice of three Investment Fund models – Conservative Fund, Moderate Fund, and Aggressive Fund. Based on the objectives of each fund, the UMFNIC Investment Committee has set a target allocation for each asset class in the portfolios. See the Investment Policy Statement for these target allocations.
  • The three Investment Funds are broadly diversified across asset classes and ten sectors of the economy.
  • Lower cost passive indexing strategies are used in all three funds. Previously the Foundation’s portfolios were all actively managed. The use of indexing strategies has resulted in annual savings of investment fees of 10 – 20 basis points (0.1% – 0.2%).
  • The Investment Program is overseen by the Investment Committee of the Board of Directors.  The Committee meets quarterly with a principle of Envestnet.  Changes to the fund are brought to the Investment Committee; the Committee brings its recommendation to the full Board for consideration/approval.

Where are the assets of the Foundation’s Investment Program held?

The Foundation contracts with Charles Schwab & Company, Inc. for custodial services.

What about socially responsible investing?

In accordance with United Methodist values found in The Book of Discipline of The United Methodist Church and The Book of Resolutions of The United Methodist Church, the UMFNIC will periodically review its responsibility as a socially responsible investor as it relates to the UMFNIC’s investment funds and holdings. The UMFNIC may direct its Investment Managers to screen the UMFNIC’s investments, vote its proxies, participate in shareholder engagement, and seek investments that are based on sound environmental, social, and governance principles. Investment Managers will report annually all socially responsible investing activity to the UMFNIC Board of Directors.

Generally, the UMFNIC directs its Investment Managers to exclude holdings according to the “Ethical Exclusions Guidelines” of Wespath Benefits and Investments, formerly known as the General Board of Pension and Health Benefits of The United Methodist Church. These exclusions may consist of, but are not limited to, as summarized by Wespath, “companies earning significant revenues from gambling or from the manufacture, sale or distribution of alcoholic beverages, tobacco-related products, pornography, weapons, or the management or operation of prison facilities.”

How does socially responsible investing affect investment performance?

Socially responsible investing (SRI) spans a wide and growing range of products and investments, with estimates of $1 in $9 (more than $3 trillion) invested now participating in socially responsible practices. Like all investors, socially responsible investors seek a competitive financial return on their investments, and the good news is that it is possible to consistently achieve this. A growing number of academic studies have demonstrated that SRI mutual funds perform competitively with non-SRI funds over time.

Why are indexing strategies used in some asset classes? 

In certain asset classes, the markets respond almost immediately to any changes in the investment environment. For example, when information is announced about US economic indicators that is especially disappointing or exceeding previous estimates, the domestic markets have adjusted for that news within a very short time frame, perhaps within hours. It is difficult for investment managers to outperform the market after investment fees and transaction costs are deducted in these efficient markets. And the cost advantage in using index managers is significant. For example the costs to index the S&P 500 are typically one-tenth the cost of active large-cap management (including trading costs).

Which Investment Fund will maximize income for our account(s)?

For investors with a goal to maximize current income and who are limited to withdrawals of interest and dividends only, the Conservative Fund offers the highest potential yield. However, for those funds that are permanent investments, such as endowment funds, an investment strategy that spends only earnings from dividends and interest and invests the funds to maximize current income ignores another important issue: the cost of inflation over time. To discuss the possibility of using a total return approach for investment contact us.

What is a Total Return Investment Strategy?

The total return on an investment includes income from dividends and interest, as well as appreciation or depreciation in the value of the investment, over a given time period. Those overseeing investments that are considered permanent funds, such as endowment funds, are charged with protecting the corpus (principal) of the fund and spending only the earnings. In order to preserve the purchasing power of the permanent fund, inflation must be taken into account. An investment strategy for such funds balances both current and future income as well as maintaining the purchasing power of the fund. Thus one of these investment objectives may be most appropriate for permanent funds:

  • Balancing long-term growth of the fund and current income, or
  • Maximizing long-term growth of the fund

A Total Return investment strategy may be accompanied by a Total Return Spending Policy.

What is a Total Return Spending Policy?

Rather than setting spending from the fund at the amount of interest and dividends received for a period of time, a Total Return Spending Policy establishes a percentage of the total fund as the amount available for spending. Here is our recommendation for spending from permanent funds:

The percentage used to calculate the ________________________________ United Methodist Church annual Permanent Endowment Fund payout is 50% of the applicable federal rate as defined in The Internal Revenue Code on Jan 1st of every year; however, the percentage shall never be lower than 3% or greater than 5%. In years in which there is excessive growth in the fund, the committee reserves the right to make additional distributions of income and capital gain beyond the 5% ceiling by 2/3 approval vote of its members.

 The percentage determined shall be applied against a rolling 3-year average of the fair market value of the fund as determined on the first business day of each calendar year.

 The Federal Rate in use is the mid-term bond rate. IRS Section 7520.