By Roy Hayhurst
It’s a good challenge to face.
Your church finds itself with some kind of windfall. You want to be a wise steward but, with a myriad of investment options out there from your bank, brokerage firms and insurance companies, the choices can seem daunting.
While there are many options when making an investment decision, one doesn’t have to settle for lackluster rates of return just to rest easy about their investments. Nor do you need to sacrifice your values to achieve potentially superior returns.
“You really want to think in terms of anchoring your portfolio,” says Nathan Hutson, CFA, manager of client service and sales at Dallas-based GuideStone Capital Management. “There are three basic principles to anchoring your portfolio: risk premiums, that is to say, the amount you expect to earn above the return of a risk-free investment over a long time period; global diversification, and finally, strategic asset allocation.
“While no investment strategy can guarantee returns, anchoring your portfolio with these principles will improve your chances of growing your assets.”
Churches with money to invest generally fall into two categories, Hutson says. “One is an organization that has some extra money or an endowment, with a relative short-term time horizon, usually one to three years,” he notes. “Generally, they want to use at least a substantial portion of those funds during that time.” Funding for capital improvements often fall into this category. These churches are often looking for lower risk instruments with little or no fluctuation in value.
Other churches have benefited from oil and gas wells, large gifts to the church or other windfalls.
“This second group has no immediate purpose, and they want at least a portion of this money to have the opportunity for growth,” Hutson says.
What to invest in?
So, you find yourself with money to invest. Where do you put it?
“When you’ve got less than $5 million to invest, you probably need to stay in a registered mutual fund-type investment environment,” Hutson says. “It gives you diversification, you can monitor it easily, you have a very transparent investment, and it will generally perform along with the markets.”
Another important aspect is the trustworthiness of the institution with which you’re considering doing business. “There are a lot of people, sad to say, who take advantage of churches,” Hutson observes. “They charge them fees that are not easily understood. You have to ask yourself, ‘What fees am I paying?’ ‘Are they disclosing everything?’
“If, when you ask a question, their answer is unclear, and then you ask again and they still can’t explain it — that’s a red flag. While it could be a communication issue, it’s likely they don’t understand themselves or they don’t want you to understand what’s going on.”
How to invest
“Capital markets usually provide a risk premium for investors that can be captured by maintaining a strategic allocation over a long period of time,” says Rodric Cummins, CFA, chief investment officer for GuideStone Capital Management. “You must have patience, a defined risk tolerance, an understanding of your investment time horizon, and the discipline to stay with your investment strategy through good and bad times.”
Additionally, Cummins explains that investments for churches or individuals should be globally diversified and should include a strategic asset allocation that can spread risk and broadens the potential opportunity for growth.
“It’s important as CFO of an organization or executive pastor of a church to think about how long you’re going to put this money out there, put it in a risk-appropriate vehicle and let it ride until the time horizon is over,” Hutson said. “Not that you don’t tweak along the way, but you don’t pull out because the market is having a setback. Ad hoc changes to a long-term asset allocation strategy often result in lasting damage to financial plans.”
The market setback – especially the recent downturn in 2008 and 2009 – is fresh in the minds of many investors. Hutson said that has increased the sensitivity to risk, both for individual and institutional investors.
“How nervous are you going to get if you’re down 20 percent in a year,” Hutson asks. “If you can’t take that, then a more volatile investment – even with the potential upside – may not be right for you. This is why correctly identifying your risk tolerance and time horizon is critical to meeting investment objectives.”
Where to invest?
Finding someone who understands your church’s ministry and mission is paramount.
“One of the things that should be important to a Christian organization is matching their faith to their money,” Hutson says.
“GuideStone Capital, for one, has a structured process to ensure our values are embedded in the investment portfolios.”
Furthermore, Hutson recommends potential investors look at Lipper Rankings and Morningstar Ratings which provide general feedback about the mutual fund industry.
“Be sure to look at the suitability for various purposes,” Hutson says. “Money that is going to be used in the next three years shouldn’t be 75 percent in equity. Balance the need for capital preservation with the desire to have a better return over time.”
Finally, make sure your investments match your needs so that you can maximize your financial opportunities. “For long-term institutional investing, we’re big proponents of setting a strategic allocation based on your risk tolerance and investment objectives,” Hutson says.
Roy Hayhurst is editorial services manager, GuideStone Financial Resources, Dallas, TX www.GuideStone.com