Understanding the Power of Benchmarking in Investment Committees for Nonprofits, Endowments, and Foundations
When managing investments for endowments, foundations, and nonprofits, transparency, accountability, and strategic decision-making are essential. One powerful tool that helps investment committees achieve these goals is benchmarking—the process of comparing a portfolio’s performance to a relevant standard. But not all benchmarks are created equal.
In the video below, Arthur Muñiz, Founder and CEO of Archipelago Wealth Management, discusses why traditional benchmarks like the S&P 500 may not always be ideal and how Archipelago’s customized approach provides more accurate insights.
Read on for a deeper look at how benchmarking can enhance your investment strategies, improve decision-making, and ensure you are on track to meet your long-term goals.
What Is Benchmarking and Why Does It Matter?
Benchmarking is the process of comparing the performance of an investment portfolio against a relevant standard, often referred to as a “benchmark.” For investment committees, particularly those managing endowments, foundations, and nonprofit funds, benchmarking is crucial for ensuring the portfolio is performing as expected and justifying any investment decisions made.
As Arthur notes, “Benchmarking is just a standard or a point of reference to compare your portfolio’s performance to let you know whether you’re doing well or you’re doing poorly.”
Without benchmarking, it’s challenging to assess whether the investment strategies are yielding the results they should. Benchmarking allows investment committees to measure their performance against a standard to determine whether their portfolio is underperforming or performing well, relative to similar investment options.
Why the S&P 500 May Not Be the Best Benchmark
One common benchmark that financial advisors often use is the S&P 500. While the S&P 500 may be an easily accessible and widely recognized index, it’s not always the best comparison for certain portfolios, especially for nonprofit or endowment funds. The reason lies in how the S&P 500 is constructed: it is a market capitalization-weighted index, which means the biggest companies in the index—like Microsoft, Nvidia, and Apple—carry more weight in the index’s overall performance.
Arthur explains, “The reason is it’s because it’s what’s called a market capitalization-weighted index, which is just sort of industry jargon for the biggest companies in the index move the needle for the overall index altogether.”
This approach may not be ideal when you want a comprehensive snapshot of the economy or when your portfolio holds a variety of smaller or mid-sized companies that aren’t heavily weighted in the S&P 500. Relying on the S&P 500 can sometimes lead investors to the wrong conclusions, as it can overlook critical performance factors of smaller, yet still significant, companies in a diversified portfolio.
For nonprofit and endowment investors, relying on a benchmark like the S&P 500 may distort the true value of their portfolio, especially if they are investing in sectors or asset classes that are not adequately represented by this index. Therefore, it is important to use a more customized benchmarking approach that better reflects the true makeup of the portfolio.
Archipelago Wealth Management’s Approach to Benchmarking
At Archipelago Wealth Management, the firm takes a more tailored approach to benchmarking. Instead of relying on generic market indices, they evaluate each mutual fund and ETF in your portfolio against other similar funds in the industry. This provides a clearer and more accurate picture of how well your investments are performing relative to others.
Arthur explains, “We take every mutual fund and ETF in your portfolio, and we rank it against every other fund in the industry like it. We use a set of over 10 data points that include expense ratios, sharp ratios, alpha investment, management tenure, style drift, and investment performance on a 1, 3, 5, and even 10-year basis to name a few.”
This approach allows for a deeper understanding of performance metrics, beyond the surface-level market index comparisons. These data points allow for a more nuanced and comprehensive analysis, ensuring that committees can evaluate their portfolios accurately.
Key Metrics for More Accurate Benchmarking
The benchmarking process at Archipelago Wealth Management leverages several key metrics that paint a clearer picture of how investments are performing. Here are a few of the critical data points used in their analysis:
Expense Ratios
This refers to the costs associated with managing an investment fund. A high expense ratio can eat into the returns of an investment, so it’s crucial to evaluate this alongside performance.
Sharpe Ratio
This metric helps investors assess the risk-adjusted return of an investment. It indicates how much return is generated for each unit of risk taken on by the portfolio.
Alpha
This measures the value added or subtracted by the portfolio manager. A positive alpha indicates that the manager has added value above the market return, while a negative alpha suggests the opposite.
Investment Management Tenure
The length of time the fund manager has been managing the portfolio can indicate the stability and reliability of their strategies.
Style Drift
This metric tracks whether the fund’s investments are straying from the original style or strategy that was intended, which could signal a shift in risk levels or portfolio focus.
By leveraging these and other metrics, Archipelago Wealth Management provides a comprehensive benchmarking process that goes beyond traditional market indices like the S&P 500.
The Importance of Transparency and Accountability
For investment committee members, particularly those managing nonprofit funds, transparency and accountability are essential. Fiduciaries—those responsible for managing funds for the benefit of others—have a legal obligation to ensure the investments are being made with care, diligence, and in the best interests of the beneficiaries.
As Archipelago’s expert highlights:
“If you are actually in a fiduciary capacity managing funds that are for the benefit of someone else or donated by a group, for example, then you have a fiduciary responsibility that is an immediate trigger for you. Should be having consistent reporting. You should be providing transparency and demonstrating some sort of accountability for your decisions.”
Benchmarking plays a significant role in fulfilling this fiduciary responsibility. When committees can provide transparent and consistent reports about how the portfolio is performing relative to its benchmarks, it ensures that donors, constituents, and stakeholders are confident that the investments are being managed responsibly.
How Benchmarking Enhances Reporting and Decision Making
By having a clear, data-driven view of how investments are performing, committees can make informed decisions about buying, selling, or holding assets. This approach ensures that investment decisions are grounded in facts, rather than influenced by market hype or emotional impulses.
As the expert explains, for investment committees, this data-driven process is incredibly powerful:
“Armed with this information, an individual investor can make a more informed decision for how his investments are performing against other investments like it. And it’s incredibly powerful for investment committee members of endowments, foundations, and nonprofits who have to be held to account by their donor base and constituents.”
By embracing a comprehensive benchmarking strategy, committees can align their decisions with their long-term goals and maintain a track record of success that is transparent and easily defensible.
Final Notes
Benchmarking is an essential tool for investment committees managing nonprofit, endowment, and foundation funds. It offers the transparency and accountability needed to justify decisions and helps ensure the portfolio is on track to meet its long-term objectives. By moving beyond traditional benchmarks like the S&P 500 and using more relevant, customized metrics, investment committees can make more informed decisions and improve their investment strategies.
At Archipelago Wealth Management, the emphasis on data-driven, client-focused benchmarking provides committees with a clear and accurate picture of portfolio performance, ensuring they are well-equipped to meet their fiduciary responsibilities and enhance transparency to their donor base.
For nonprofits, endowments, and foundations looking to enhance their investment decision-making process, working with Archipelago Wealth Management can provide the tools and insights necessary for long-term success.
Why Work with Archipelago Wealth Management?
At Archipelago Wealth Management, we specialize in helping high-net-worth individuals navigate complex financial landscapes. Our team of advisors understands the unique challenges and opportunities that come with managing wealth, especially in the face of changing tax laws.
We’ll work with you to create a personalized financial plan that helps you stay ahead of these changes, ensuring your wealth is protected and optimized for long-term growth. From investment strategies to estate planning, we’re here to help you make the most of the opportunities presented by the tax changes in 2025.
