Investment Management in ECCT
Investment Management in the Episcopal Church in Connecticut
by Louis Fuertes, Canon for Mission Finance & Operations, 4/10/2017
In this month’s Administration and Finance eNews, I'll share some thoughts and suggestions about how your parish can improve the management of its investments. Based on Parochial Report submissions, the 164 parishes in the Episcopal Church in Connecticut collectively held $178MM in investment assets in 2015. Most of these parishes reported holding less than $1MM, but all of these parishes have responsibilities for managing investments with great care, regardless of their value.
Fiduciary Care – the foundation of parish investment management
Parish investment funds reflect contributions made by those who have come before us and the careful financial management of past parish leaders. In turn, they are to be held in trust for current and future benefit of our parishes and the communities we serve. Vestry and clergy are asked to act as “fiduciaries” in the management of these assets. Investipedia.com expounds on the meaning of the term “fiduciary:
Essentially, a fiduciary is a person or organization that owes to another the duties of good faith and trust. The highest legal duty of one party to another, it also involves being bound ethically to act in the other's best interests. A fiduciary might be responsible for general well-being, but often it involves finances – managing the assets of another person, or of a group of people, for example. Money managers, bankers, accountants, executors, board members, and corporate officers can all be considered fiduciaries.
Someone willing to act as a fiduciary in a parish setting must be committed to act in the best interest of the parish and also needs to have the skills, training and experience to fulfill the responsibilities required to manage parish financial assets going forward, as well as an understanding of the history of the assets themselves.
Is Your Parish meeting the “Fiduciary” Standard?
Here are some questions that can help answer this question:
- Does your parish have a group of three or more unrelated individuals with depth of knowledge and experience that meets at least regularly, at least twice a year, to review the performance, risk and expenses incurred in managing its investments? Are these individuals willing and capable to take on the responsibilities of fiduciaries for parish assets?
- Is the relationship between this group and the parish’s Vestry formally documented and communicated clearly to your congregation?
- Have the members of this group signed conflict-of-interest statements, pledging to manage investments or to select investment managers or advisors in a manner that will not favor family members or associates?
- Does this group have ready access to information about donor restrictions limiting how much of the endowment can be drawn down or how investment funds can be used? Is the group committed to honor these restrictions in managing parish investments?
- Does your parish have a formal Investment Policy Statement specifying:
- the range of permissible investment categories,
- a percentage limit on the amount that can be invested (directly or indirectly) in a single company
- the target asset allocation percentages (or percentage ranges) for parish assets,
- the frequency with which its portfolio must be brought back into the specified asset allocation ranges
- the allowable annual draw from investments to support operations
- If the parish uses investment managers or investment advisors, do these firms have the size, capability and track record to be entrusted with parish assets?
I suspect that many ECCT parishes currently fall short on a number of these questions. Those with the capacity to engage qualified and motivated parishioners and to create the structures outlined above should do so this year to conform with canonical restrictions of ECCT and The Episcopal Church (discussed below). Parishes that lack the capacity or willingness to put the processes and safeguards in place should reconsider their current investment approaches.
What do the Canons say about investment management?
ECCT’s Canons (Canon IV.2.A)) and General Church Canons (Canon I.7.1. (b)) similarly start with the premise that parish investment assets should be deposited in a state or Federally-chartered bank or with a “Diocesan entity” or a “Diocesan Corporation”. The reference to a diocesan entity or corporation flows from the fact that these entities have been established to perform the fiduciary oversight of parish investment assets in a professional and unbiased manner (“Donations and Bequests for Church Purposes, Inc.” was founded in 1863 to perform this role for Episcopal parishes in Connecticut, and has been doing so ever since. More information on “D&B”, as it has come to be known, is provided below).
However, both General Church and ECCT canons provide parishes with an alternative. ECCT’s canon states in part:
Any parish desiring to deposit permanent funds and securities of any kind whatsoever with any other organization must receive the approval of the Bishops and Finance Committee by filing an application that meets the requirements of the Diocesan Investment Policy. If approved, substantive changes to the information in the approved application as defined in the Diocesan investment policy must also receive the approval of the Bishops and Finance Committee.
ECCT has moved significantly in 2016 to comply with this Canon, as over 60% of ECCT parish investment asset are now either with D&B or with investment managers whose services are being overseen by parishes with ECCT-approved capability and structures. These efforts to increase compliance with our canons are on-going. Instructions for how your parish can comply with these requirements are available at https://www.episcopalct.org/Find-Resources/Parish-Administration-and-Finance/Policies/ (click on “Policies for Parish Investment Management”).
A few words about Donations & Bequests
Donations and Bequests for Church Purposes, Inc. (“D&B”) was established by act of the Connecticut Legislature in 1863 to “manage, invest, reinvest, sell convey and transfer”… “gifts, devices and bequests” for “support of the institutions, parishes and missionary work of the Protestant Episcopal Church in the diocese of Connecticut.” The enabling act specifies that D&B “may employ such assistance and incur such expenses in the management of the funds and property committed to its care as it may find necessary and desirable.”
D&B policies are determined by its Board of Trustees, consisting of a minimum of six members plus the ECCT’s Bishops, Treasurer, Chancellor and D&B’s Secretary. The Board (made up of Episcopalians from across the state with depth in finance, economics and investment management) meets at a minimum four times annually to provide fiduciary oversight for management of over $100MM in investments held by ECCT and 120+ participating ECCT parishes (over 75% of parishes with investment holdings).
More specifically, D&B Trustees:
- Manage D&B assets in good faith and with “prudent person” care, including
- Maintaining custody of assets and record keeping
- Selecting an investment advisor and specifying the engagement scope
- Monitoring performance of investments
- Diversifying investments
- Report annually to the Diocesan Convention
- Select a public accounting firm to audit annual records
Investment assets overseen by D&B Trustees have been managed by the US Trust division on Bank of America since 2014, which acts as D&B’s investment advisor. US Trust’s financial performance has been very good over this period in comparison to benchmarks for the asset categories included in its “Balanced Fund” investment offering.
D&B, and its investment advisory relationship with US Trust, provide a number of advantages to ECCT parishes:
- US Trust only places investment funds with third party managers, eliminating a source of bias and self-dealing.
- US Trust negotiates highly competitive fees with investment managers
- Given D&B’s $110MM investment holdings, ECCT qualifies for a very low combined US Trust and Third Party Manager fee structure (
- D&B maintains records of original donor instructions and can help parishes keep faith with these gifts and maintain trust for those who are considering making gifts in the future.
- D&B provides automated monthly disbursement capability and can support one-time disbursements on a monthly basis
Day-to-Day Parish Interactions with D&B
Theresa Dupont (TDupont@episcopalct.org, 203-639-3501, ext. 123) is the Secretary for Donations & Bequests, and works with parishes to help them establish and manage D&B accounts. Most parish requests involve money movements into and out of accounts. At the beginning of the year, most parishes establish requests for recurring monthly pay-outs, but we also receive requests for one-time pay-outs during the course of the year to respond to special needs. Requests to set up recurring or one-time transactions must be communicated through Theresa using the D&B Request Form (see https://www.episcopalct.org/Our-Diocese/Governance/Donations-and-Bequests-Inc-/Current-Participants/) and should be received by the twenty-seventh day of each month for processing as of month-end. Participants requesting withdrawals must provide vestry written authorization with at least two officers’ signatures
We recommend transmittal of disbursements from D&B accounts directly into parish bank accounts via Automated Clearing House (ACH) direct deposits. These transactions are a secure, fast way for parishes to receive funds from their D&B accounts. Parishes requesting disbursements should expect to receive ACH deposits 2 days after the first business day of the month. We can also make disbursements to parishes via check, which are typically received by parishes 3-5 business days into the new month.
Participants may elect to re-invest income generated by their investments, have net income distributed on a cycled basis, or establish a “spending plan” (with a fixed amount distributed monthly).
A participating parish or ECCT-affiliated organization may have any number of accounts for donor-restricted endowments and one or two unrestricted accounts. A minimum of $10,000 is required to open a new account. Money can be deposited in parish accounts via wire or check. Additions to existing accounts should be in amounts greater than $500.
If your parish does not currently invest through D&B and would like to take advantage of the fiduciary oversight provided by its Board of Trustees, its low management fees and staff support, please contact Theresa Dupont to learn more.
Respecting History – Where did the money come from?
Financial management actions of clergy, vestries and finance committees can be limited by the history of the funds being managed. The original donor might have restricted how much of the funds can be used (income-only restrictions are common in older bequests, as are restrictions on spending the initially-donated principal) or how the funds can be used (e.g., for clergy housing, for scholarships, to support particular ministries, etc.). Parishes need to keep careful records of donor instructions, and vestries and others acting as fiduciaries should regularly be made aware of them. Note also that parish vestries might in the past have voted to designate the use of donations originally given without restrictions for particular purposes. Unlike donor restrictions, vestry designations can be overturned by a later vestry vote, either to return the funds to their original unrestricted nature or to be designated for a different purpose.
Managing Investments for Current (and Future!) Needs
At least once every year, vestries (and fiduciaries of all stripes) must determine how much of endowment assets should be taken to support operating budgets for the coming year. Vestries that get little joy from annually recurring impassioned debates on this question are wise to establish formal policies on this topic to preserve time for other perennial vestry debates (e.g., Would Jesus rather have us spend more of our budget on worship, music, outreach, Christian formation or buildings and grounds maintenance?).
So what is a reasonable amount to draw from parish investment holdings?
Economics and Finance professors love to answer questions like this with a smile and the words “It depends!”, and this answer is justified in this case. A good place to start is arriving at a reasonable expectation of future earnings from the investments into which parish endowments have been placed. While “past performance does not guarantee future returns”, it is instructive that over the past 90 years, in an inflation environment that has averaged 3%, total returns from stocks have averaged 9.5% and bond returns have averaged just under 5% (see http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html for year-by-year historical stock and bond market return data). Weighting these historical returns for a 60% stock/40% bond portfolio, or for a 70%/30% portfolio, produces the finding that those portfolios would have generated returns in the 7.7 – 8.1% range over the past 90 years, again in a 3% inflation environment. If the sub-1% environment we have experienced in recent years were to continue indefinitely, it would be appropriate to anticipate returns about 2% points lower, in the 5.5 – 6% range. Without making things even more complicated (ignoring potential gains from periodic portfolio rebalancing, current bond interest rates, etc.), these numbers represent a point of departure for expected future returns. ECCT Finance and Operations considers a 5% investment draw to be financial sustainable, and ECCT has budgeted a 4.5% draw on its endowment in recent years to support operation.
An implementation suggestion is to use a multi-period average price in determining the value of your parish’s endowment. Some parishes prepare for budgeting by documenting the number of shares or units of securities held as of a particular date (ECCT uses a June 30 cut-off date), and then valuing these units or shares using an average market price for the preceding several years (ECCT averages market prices from the trailing 12 quarter ending dates). This approach is advantageous because it eliminates significant annual fluctuations in amounts parishes can bring into their operating accounts had they based their draws on most recent market values. As the stock market (despite its volatility) generally increases in value over time, using a multi-year average value method introduces a measure of conservatism in calculating a parish’s annual draw amount more often than not.
What’s the limit on endowment withdrawals?
In recent years, a number of parishes have responded to financial challenges by drawing increasingly from endowments to support operating expenses. Some parishes have seen the value of their endowments decline dramatically as a result of these practices. In response, ECCT’s Two Hundred Thirty First Annual Convention in 2015 passed Resolution 11, Endowment Stewardship & Mutual Responsibility. This resolution limits parish cumulative draws from investments to support operations over a consecutive three year period beginning in 2016 to 25% of the average value of its investment holdings over the three year period. Parishes exceeding this cumulative endowment draw will have their future endowment draws in support of operations limited to a sustainable level as explained in the resolution (see https://www.episcopalct.org/FileRepository/DownloadFile.aspx?FileID=458).
Based on preliminary Parochial Report submissions,
- Eighteen parishes that have drawn over 8 1/3% from endowments to support operating expenses in 2016 are on pace to become subject to this resolution over the next three years,
- Twelve of these eighteen parishes drew over 12.5% from investments in 2016 and at this rate will be subject to this resolution within two years and
- Two parishes have already exceeded the 25% draw limitation in 2016 and will be subject to the Endowment Stewardship and Mutual Responsibility resolution going forward.