Before considering an investment, one of the first questions to be answered is “What is the purpose of the money you are investing?” The answer to this question will typically provide an understanding of how long the money will be invested and how you intend to use the income.
If the money is to be used for operating expenses, it should be readily available (liquid) and have very little if any risk. Typically, a savings account or a money market fund would be an appropriate choice.
If the money is to be used as a permanent fund to provide income that is for funding scholarships, repairing buildings, or supporting other ministries, it should be invested in such a manner that the income can keep pace with inflation. If these funds are invested in savings accounts, money-market funds, or certificates of deposit, they will lose their purchasing power over time and will buy fewer goods and services. For this reason, a long-term investment vehicle that combines several classes of assets would be an appropriate choice.
When funds are invested in several classes of assets, there are two components that affect increase in value. These are: income generated by dividends and interest; and capital gains resulting from the increase in the actual value of the underlying assets. For a long-term investment to take advantage of both sources, the Pennsylvania legislature passed Act 141 (often referred to as the Total Return Act).
Under the Total Return Act, an account that invests endowments, trusts, and other long-term funds establishes an annual rate-of-return to be paid out in the next twelve-month period. This rate-of-return is expressed as a percentage of the average quarterly value of the investments over the previous twelve calendar-quarters. The benefits of this approach are that it provides a more consistent flow of income over a period of years and also allows the beneficiary to know in advance what the income will be in the next twelve-month period.
The Core Balanced Account, managed by the Foundation, utilizes the Total Return Approach.
There are three basic classes of assets that are used for investment purposes:
Cash — a readily available asset that is held to cover operating
costs, to provide opportunity funds for investing in other assets, and to
provide some down-side protection.
Stocks — an investment in the ownership of a company that has the potential to produce income by way of dividends and growth through capital gains. This asset class is the only one that over an extended period has met or exceeded the rate of inflation.
Bonds — a loan to a company or government that produces a fixed rate-of-return over a specified period.
Within each of these classes of assets there are various sub-categories. For example, stocks are classified based on the size of the companies as well as whether the company is more focused on providing income (dividends) or growth (capital gains). In today’s global economy, there is also an opportunity to own stocks in multi-national and/or international companies.
The Foundation establishes guidelines as to what percentage of each of these asset classes shall be in the Core Balanced Account, the Aggressive Account, and the Income and Growth Account. A detailed list of these percentages can be found in the investment policy of the Foundation.
The performance of an investment is usually compared to industry-standard indices known as benchmarks. Each asset class has a benchmark that is used as a measure against the performance of an individual asset or manager.
Each calendar-quarter the managers employed by the Foundation are measured against the appropriate benchmarks by our independent investment consultant. The consultant’s report is reviewed by our investment committee and the managers are evaluated for both their short and long-term performance.
In addition to this review, benchmarks have been established against which the Accounts managed by the Foundation are measured. These benchmarks are constructed using the appropriate weighting of the individual benchmarks against which the individual managers are evaluated.
If there are any other questions or comments about the Foundation’s funds management tools that you would like to discuss, please send us an email.
United Methodist Foundation
of Western Pennsylvania
223 Fourth Avenue, Suite 707
Pittsburgh, PA 15222
The Foundation is a ministry established to provide United Methodists with the resources to accomplish collectively more than can be accomplished alone. We act in accordance with our mission statement and a funds management approach that is based on a Biblical, theologically sound form of Christian stewardship.