OK, so you've got the assets for your lodge. You've got a group of brethren interested in helping to manage those assets. They've even all agreed (incredible! More than two Masons agreed on something?!) that managing the assets like an endowment makes sense.
As I said in an earlier post in this series, arguably the most important decision you can make for managing a pool of assets is how you allocate them across asset classes. Well, the second most important decision is to create a policy document that governs asset allocation and all other aspects of how you're going to manage your money. You can’t make informed decisions about the portfolio if you don’t have a foundational document guiding you. So, let's talk about that first.
Investment Policy Statements: A Second Lodge Charter
A lodge is a number of brethren duly assembled, with a charter or warrant empowering them to work. Similarly, we can think of a lodge endowment as a number of brethren duly assembled with an Investment Policy Statement (IPS) empowering them to invest. An IPS is a foundational document that lays out the parameters for the endowment in as much or as little detail as is needed. Anything and everything is on the table here, from how the investment committee should be structured, to what powers it has, to spending policies, portfolio objectives, and of course permitted asset classes. There is no hard and fast rule with creating an IPS; it can be as detailed or as vague as your lodge feels is appropriate. But you should create it with the goal of making it as easy as possible for a future brother, a man who hasn't even contemplated joining Freemasonry yet, to understand how the portfolio should be managed, and who is responsible for managing it. With that in mind, here are some things that could be in your lodge's IPS:
Spending policy: We spent the majority of the last post talking about this, so you should probably formalize it. Is it a flat dollar amount? A certain percentage of assets in the portfolio? If the latter, lay out in plain language how the calculation is done so a random person reading it could do it, or know how it's done. Again, be as precise as you think is necessary here.
Objective of the portfolio: This is basically the overview of the whole endowment. What is the IPS covering? What is the objective of the portfolio? Is it to preserve the capital while also supplementing the operating budget? Is it capital preservation and growth of the principal?
Return objective: This can get more technical than a Masonic lodge may need. However, if your investment committee wants to take a firmer hand in monitoring the portfolio to ensure its meeting its objective, than you'll want to lay out some parameters here. The most typical way this is framed is "achieving X% return, with Y% volatility, over any given Z-year period"1although you can get much more technical than this if you like. But again, for a Masonic lodge, where few brethren will have a technical grasp of Modern Portfolio Theory2 and portfolio management principles, you may not even need to be this specific. Something as general as, "The return objective of the portfolio is to generate a total return that exceeds the annual rate of inflation over the trailing 12-month period, as measured by the Core CPI in the United States."
Asset allocation parameters: We'll spend the next post briefly walking through asset allocation, because it's one of the most important parts of thinking about managing your lodge's assets. And so, I would argue that at least laying out some ground rules for asset allocation in the IPS is a must. Again, no need to go into excruciating details, unless it's warranted, but I think you do want to say here what types of instruments and securities the portfolio can own and what it should expressly avoid. For the former: equity securities (US and foreign companies), corporate fixed income, Treasuries and/or other government securities, money markets, mutual funds, and ETFs are a fine start and cover the vast majority of what you'll ever need.3 For the latter, the list could be potentially very long because there are countless securities out there that nobody save for the most experienced traders should ever mess with. But for example, if you don't want future brethren with a day trading streak to toy with derivatives, say that! And you can even specify maximum weights in the portfolio. If you don't feel comfortable owning more than 10% in emerging market stocks4, put that in there!
Other considerations: Do you want to permit using a financial adviser to manage this for you, or will you keep it all in-house? How often do you want the investment committee or adviser to rebalance the portfolio?5 What is the basic reporting structure? Do you have an investment committee? Will they review the portfolio quarterly? Do they need to send a report to the Worshipful Master? How often? This sounds mundane, but laying out these structures now will ensure information continues to flow after you're gone. The worst outcome is a portfolio that gets neglected for years because the initial investment committee members have died and nobody knows the reporting requirements. How can the IPS be changed? Probably via recommendations from the investment committee submitted to the Worshipful Master, but who knows? Spell it out!
The IPS is your chance to lay the ground rules and establish the precedent that will guide the lodge for years, and ideally decades, to come. Below I've written up a sample IPS for our brothers at the hypothetical Prudence Lodge #101, who we met in the last post(insert link to previous post here).
The brethren of Prudence Lodge #101 A.F.&A.M. have established the Prudence Lodge Investment Fund ("the Fund") to fund long-term capital projects for the lodge, provide funds for the Prudence Lodge Annual Scholarship program, and to supplement the lodge's annual operating budget. This Investment Policy Statement has been established to provide guidance for the Investment Committee ("the IC"), the officers, Worshipful Master, and any investment managers that may be engaged in the management of the Fund's assets. This document outlines the objectives, methodologies, asset allocation guidelines, and applicable procedures for administering the Fund and its monies.
The objective of the Prudence Lodge Investment Fund is to provide financial support for the activities of Prudence Lodge. The spending policies are designed to balance the short-term operating needs of the lodge with the long-term desire to maintain the principal of the Fund with appropriate growth. This will help the lodge to meet the needs of the membership today as well as into the future. The return objective of the Fund is to generate a real (after inflation) return that preserves the principal of the Fund while providing an income stream that can help meet these financial obligations. The objective is therefore to generate an average real return of at least 4% per year over the long-term, defined here as the trailing five years, while taking on prudent levels of risk commensurate with capital preservation.
The Fund's spending policy is designed to also strike this balance between providing for the ongoing immediate short-term operating needs of Prudence Lodge, while also not endangering the principal capital and eroding the Fund's purchasing power over time. The Fund's spending policy is therefore to be held constant at 4% of assets under management, defined as the trailing three-year average ending asset level in the portfolio.
Asset Allocation Guidelines
Given the importance of the asset allocation decision in the investment process, guidelines for permissible asset classes, proposed ranges or restrictions, and general guidelines are provided below, subject to change by the IC. Additionally, it is likely that the Fund will be managed on a day-to-day basis by a third-party financial advisor, in which case these guidelines should be communicated to them.
The primary goal is to ensure the Fund will be invested in a broadly diversified range of asset classes to provide a strategic mix of sources of return, while reducing risk to the overall portfolio. While the asset mix may skew towards higher returning equities, other assets can be added in to enhance returns without adding inappropriately to the risk profile of the overall portfolio. The IC should work closely with the financial advisor, should one be engaged, to determine the appropriate risk profile, although it should be biased towards a conservative approach. The IC should review asset allocations and risk profiles at least annually.
The Fund should be predominantly invested in low-cost mutual funds and other commingled vehicles (e.g., ETFs) as determined as appropriate, in order to minimize expenses to the Fund and Prudence Lodge, and to maximize net of fees returns.
Ed. Note: Here you might insert proposed ranges to be held in certain asset classes. For example, between 20% and 40% in global (US & international) stocks, between 5% and 15% in cash or fixed income, and so on. Not a requirement, certainly, but if you want to specify maximums in certain areas, this is the time to do it. Ranges can be helpful in determining how often you rebalance your portfolio (see below)
The portfolio should be rebalanced on a regular basis, with an eye towards minimizing costs for the lodge in doing so. The Fund should be rebalanced at least annually to ensure compliance with the stated asset allocation objectives of the IC. However, portfolio weights should be monitored by the IC and reviewed on a quarterly basis to ensure those weights remain reasonable. Short term fluctuations in asset weights is to be expected, however persistent dislocations should be avoided via intra-year rebalancing as deemed appropriate by the IC in consultation with the financial advisor.
The IC should meet quarterly to review the latest statements and reports from the financial advisor (should one be engaged), or to review the portfolio weights, performance, and other appropriate metrics. The IC should also meet annually to review the asset allocation ranges in the portfolio to make any changes for the coming year. The IC should provide regular reports to the Worshipful Master, Treasurer, and brethren as deemed appropriate and at a minimum via:
Written report from the IC to the Worshipful Master detailing the performance of the Fund, beginning and ending market values, asset weights, and any notable issues discussed at the IC meeting such as additions or eliminations from the portfolio, etc. This could be provided to the Treasurer as well for his records.
A semi-annual summary report provided to the brethren, either in open lodge or via writing, detailing performance and beginning and ending market values.
5 Portfolios become unbalanced over time as market movements cause asset weights to deviate from their intended ranges. Rebalancing is simply buying and selling on a regular basis (typically annually or semi-annually is fine, so as to minimize trading costs, which reduce portfolio returns) to maintain proper ranges. For example, let's say Prudence Lodge's portfolio was $1,000 with 60% in stocks and 40% in bonds. That year, stocks returned +15% while bonds returned -15%. At the end of the year, the portfolio weights would have shifted to 67% stocks, 33% bonds. That's a very different portfolio, and far riskier, than what the lodge said it wants to maintain. In that case, Prudence's investment committee might seek to rebalance the portfolio by selling enough stocks and buying enough bonds to get back to the original 60/40 allocation it's comfortable with.
Phillip Welshans is Senior Warden of Palestine Lodge #189 in Catonsville, MD under the Grand Lodge of Maryland A.F. & A.M. He is also a member of the Maryland Masonic Lodge of Research #239, and the Hiram Guild of the Maryland Masonic Academy. As a member of the Ancient and Accepted Scottish Rite, S.J. in the Valley of Baltimore, he has completed the Master Craftsman programs and is a member of the Scottish Rite Research Society. His interests are primarily in Masonic education, particularly the history of the Craft, esotericism, and the philosophy of Masonry.