Uncovering the Drivers of Underperformance in Nonprofit Investment Portfolios

Despite the best intentions and professional expertise of their members, many nonprofit investment committees consistently fail to meet their organization’s investment objectives. In fact, numerous studies have shown that almost all nonprofit investment portfolios fail to beat simple benchmarks. The reasons are rarely obvious, but they are persistent. Over time, we’ve observed a recurring set of structural and behavioral challenges that undermine long-term performance. These issues are not the result of poor judgment, but rather common misconceptions about what “works” in the investment industry.

The RFP Cycle That Perpetuates Underperformance

Anecdotally, we’ve noted the cycle of hiring an outside investment manager through an RFP process where past performance is the primary consideration. In such instances, the manager with the best historical five-year track record is hired. However, when the market cycle shifts and the new manager underperforms, the committee issues another RFP to find a “better” manager.

This pattern encourages:

• Short-term decision making
• Disrupts strategic continuity
• Results in reactive behavior

It effectively locks in the process of selling low (at least on a relative basis) and buying high, which is not the best approach.

Rather than chasing performance, committees should adopt a long-term investment philosophy that informs manager selection, sets realistic expectations, and anchors decisions in mission-driven objectives.

Misaligned Incentives and Benchmark Distortion

Some advisors present performance in overly favorable terms by selectively choosing benchmarks or time periods that flatter results. While not always intentional, this practice can mislead committees and obscure actual performance.

The consequences include:

• A distorted view of success
• Misalignment between reported outcomes and actual goals
• Confusion among board members who may lack investment expertise

One trick used in the investment industry is picking weak benchmarks to make performance appear stronger than it is. For example, The Russell 2000 has underperformed the S&P 600 index by 1.5% annualized over the past five years (as of 8/31/2025), despite both being considered appropriate U.S. small-cap stock indices. That is why it’s not uncommon for firms to use The Russell 2000 as their small-cap benchmark.

Transparent reporting and consistent benchmarking are essential. Committees must demand clarity and integrity in performance communication to fulfill their fiduciary responsibilities.

Changes in Governance Due to Committee Turnover

Even if an organization is fortunate enough to have a qualified committee that implements a robust long-term investment program, membership turnover hurts consistency. It is not unusual for at least some committee members to rotate in and out every year or so. Without some documented philosophy to adhere to, committees can rush from one shiny object to the next in search of investment outperformance, even if the academic literature largely suggests that it is a fool’s errand unlikely to yield positive excess returns.

Over time, this results in:

• A drift in strategy and inconsistent execution
• Difficulty maintaining long-term discipline
• A lack of continuity in oversight

A well-articulated investment philosophy serves as a governance anchor. It ensures that decisions remain aligned with the organization’s values and objectives, regardless of who is in the room.

For additional information on the benefits of a philosophy statement, check out our article Beyond the Blueprint: Why Nonprofits Need an Investment Philosophy Statement. And if you’re looking to find the right investment advisor for your nonprofit, download our free guide that takes you through the entire process from identifying your goals and building an RFP to what to expect after hiring an advisor.

You can also visit our Institutional Investment Services page to learn more about our approach to investing or contact us at (585) 381-4180 or info@armbrustercapital.com.

Disclaimer:

Armbruster Capital Management’s views as portrayed in this post are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investing involves risks, and the value of your investment will fluctuate over time; as a result, you may gain or lose money. Past performance is no guarantee of future results.