Weathering Potential Storms: An ERM Approach Can Help

By SEI February 24, 2020 May 18th, 2020 Blog Post
Blog Post

With a challenging and uncertain environment for higher education institutions, an enterprise risk management (ERM) approach is a highly effective way to help ensure the foundation positions itself to support the institution’s current and future financial situation by factoring all financial and organizational details to evaluate risk and determine the best asset allocation and overall strategy for the portfolio. With challenges like lower enrollment, a competitive environment and rising costs, the foundation’s role is critical, and alignment with goals and risks becomes increasingly important.

SEI surveyed 18 college and university financial professionals to learn more on the challenges they will be facing in the upcoming years. Of these respondents, 67% said that their expenses were growing faster than the cash and revenues that support them. And lower enrollment continues to be a concern. 94% of the respondents said that the trend of new credentials becoming available would significantly impact the competitive landscape for student enrollment. Taking an ERM approach provides valuable insight that enables the foundation to better align the portfolio with university needs and risk tolerances, in an effort to guard the investment portfolio from being overly conservative or aggressive.

“Leaning into enterprise risk management can lead to a stronger portfolio with more concrete goals that help you to gain more knowledge on risk-taking altogether.” According to Andy Daly, Nonprofit Investment Director for SEI’s Institutional Group.

Properly positioned and executed, ERM helps you support goals, including strategic, operational and reporting objectives. ERM requires information from across the institution and involves complex financial modeling. These are the five steps to begin implementing enterprise risk management:

  1. An operational and strategic initiative review that will gain an understanding on your organization goals, fundraising expectations, upcoming capital needs, scholarship and discounting plans and future enrolment expectations.
  2. Creating baseline and downside operational projections, which incorporates into the strategic asset allocation discussion.
  3. Deriving investment portfolio needs such as determining the optimal portfolio from a return, risk and liquidity perspective.
  4. Analyzing your strategic asset allocation choices through a study that includes a stochastic analysis with probabilities of achieving the organization’s goals while also considering the impact of downside projections
  5. Strong ongoing risk management must then be in place which takes a forward-looking, holdings based analysis rather than backward-looking, returns based approach

Thankfully, ERM is becoming more popular, and with that, more educational materials are created that you can reference when tackling the risk on your own. Managing risk is complex but you can acquire true success by embracing it and planning rather than running in the other direction.

If you are interested in learning more about ERM, SEI has an interactive tool that you can find here.

Information provided by SEI Investments Management Corporation, a registered investment adviser and wholly owned subsidiary of SEI Investments Company (SEI). AGB is not affiliated with SEI or its subsidiaries.

Investing involves risk including possible loss of principal. There is no guarantee risk can be managed successfully or that objectives will be met. Asset allocation may not protect against market risk.

SEI Nonprofit Management Research Panel, “2019 Nonprofit Investment Survey” n=18 (August 2019).

This information is for educational purposes only. This is not intended to be investment, legal and/or tax advice. Please consult your financial/tax advisor for more information.

With Thanks To AGB Partner SEI

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