OCIO CASE STUDY

How financial modeling and CUSTOM OCIO CAN CREATE vision AND stability

Clearstead works with many regional Endowment and Foundation (E&F) clients. These clients tend to be a cultural mainstay of its city, a regional gem and a point of pride for communities in all its surrounding counties.

Even after decades of existence, these types of clients can feel considerable pressure for many reasons such as sales declines; population changes, and lack of recovery from past recessions.

In many cases these types of clients face the compounding problem of being under-endowed; no matter how much cost cutting its boards try to implement and improvement investments, they  still fall short of meeting expenses.

E&F CLIENTS TYPICALLY SPEND 5 PERCENT OF THEIR ENDOWMENT EACH YEAR. WE HAVE FOUND THAT TO MAINTAIN THE PURCHASING POWER OF THEIR INVESTMENTS AND ASSETS, THEY ACTUALLY NEED TO EARN BACK THAT 5 PERCENT PLUS AN ADDITIONAL 2 TO 3 PERCENT FOR INFLATION — A CHALLENGING TASK.

We have found that although E&F client board members can boast significant financial experience, they don’t  necessarily want to be held accountable for the organization’s performance. Staff members tend to lack the time and expertise to untangle mounting financial problems, and board members can also be members of various other committees — finance, investments, and capital improvements — and can operate in silos, with little understanding of what the others were doing. Clearstead’s outsourced chief investment officer (OCIO) service helps to identify an investment strategy, with the board’s collaboration on asset allocation and investment policy.

Typically our first order of business is to convince the board — and particularly the committee chairs — of the value of a customized financial modeling exercise. We explain that our service provides context to help us better understand a client’s entire financial picture, as well as a road map that leads them to where they need to be. As we often say to clients: If you don’t know where you’re going, any road will take you there. Clearstead’s service should function as a GPS for the organization’s fiscal future.

OUR SOLUTION

Our goal is for our client’s  investments to balance spending with its growth potential. We work with our clients to build a model, using data provided by the board, to help illustrate scenarios that might impact profitability, and how spending, investment returns and portfolio risk work together to impact the overall picture.

We have found that despite the sophistication of some board members, siloed committee structures can create some knowledge gaps that were unearthed through  our service: for example, the link between endowment variability and balance sheet considerations. Additionally, spending policies can be  based on a review of three years of  an endowment value. We like to calculate scenarios like the impact a 20 percent drop in the market would have on the portfolio and the spending rate. This helps us identify how much risk clients are really able to take so they can base the decisions on data points to find the optimal level of variability in the assets. 

Another example of our service is to help clients think of how the liability of their need for a 7 percent return aligns with the cost of capital, and get them to evaluate what purpose each investment serves in their longer-term goals.

We also help our clients better understand the context of their investment results. For example, if a client got a return of 6.5 percent, Clearstead helps them understand that it could be due to not assuming  enough risk to achieve the 7 percent target. Clearstead also uses peer analysis to help explain how similarly sized clients with different asset allocations (higher or lower) performed, so our clients can see the performance results of different asset allocations. 

Clearstead also revisits its clients the financial models every 24 to 36 months, so they are executing decisions based on a current landscape. 

Our hope is that Clearstead can provide our clients with greater clarity and vision to make sounder holistic decisions about their strategic directive. Our approach helps our clients focus on their institution’s mission instead of picking managers or dealing with tactical rebounds. 

The goal of our service is for our client’s investment results to be optimized to their  strategic goals and lower the organization’s total investment costs.  And with Clearstead’s approach of consistent goal re-evaluation — testing the strategy and implementing change as needed, again and again — our clients should be more stable and be in a position to preserve their organization for future generations.

FIND CUSTOM SOLUTIONS THROUGH THE CLEARSTEAD PRISM

Our proprietary Clearstead Prism OCIO service acts as a powerful extension to institutions, collaborating on a deep level to completely handle day-to-day management of investment portfolios after clearly defining objectives, quantifying risk, and creating benchmarks that clearly explain all results. Research drives our decision making, and we are quantitatively focused — tempered with the qualitative value of decades of experience and practical judgment.

Find Your Clarity

We bring our clients objective financial leadership through our fee-only advisory model, which enables us to remain objective. We do not offer proprietary products and take no commissions from product sales: our only source of revenue is fees we receive for financial advice. True to our founding principles, we do the hard work: the day-to-day investment management integrated with organizational priorities and family aspirations.

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Clearstead is an institutional and private client advisory firm that is relentless in providing solutions so our clients can exceed their aspirations and build stronger legacies for their families, their communities, and themselves.

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