arkansas access to justice foundation · investment reviews—your vias investment consultant...

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July 5, 2016 Amy Johnson, Executive Director 1300 West 6th Street, Room 110 Little Rock, AR 72201 Re: Vanguard Institutional Advisory Services® Dear Amy: Thank you for allowing Vanguard Institutional Advisory Services® to participate in the Arkansas Access to Justice Foundation’s search for an investment manager. Based upon our experience, we are confident we have the expertise required to help the Arkansas Access to Justice Foundation achieve its investment goals. Enclosed is a customized proposal that provides an overview of our investment management and service related capabilities. Within the proposal we have included information regarding our performance, strengths, qualifications and fee structure as noted in your cover letter. While this proposal provides excellent insight into our services, we welcome the opportunity to present this material, and address any additional questions you and the investment committee may have. Please call me toll-free at 800-567-5163, ext. 12579, or directly at 610-669-2579, if I can provide additional information, or if you would like to further discuss our capabilities. Once again, thank you for considering Vanguard Institutional Advisory Services in your search. I hope we can be of service as you move forward. Sincerely,

Michael Litz Vanguard Institutional Advisory Services [email protected]

@Client Name

Arkansas Access to Justice Foundation

Vanguard’s Response to Request for Proposal July 5, 2016

Michael Litz, CIMA® Sales Executive Institutional Investor Group

Contents

A. Organization ............................................................................................................................... 1

B. Client service ............................................................................................................................. 5

C. Investment philosophy ............................................................................................................ 10

D. Manager selection ................................................................................................................... 13

E. Performance measurement and reporting ............................................................................. 16

F. Fees .......................................................................................................................................... 18

Confidentiality statement ................................................................................................................ 19

Disclosure ........................................................................................................................................ 20

Arkansas Access to Justice Foundation Page 1

A. Organization 1. Provide a brief overview and history of your firm.

Vanguard Institutional Advisory Services® (VIAS) provides nonprofit organizations and other institutional clients with investment advisory/management and trustee services. VIAS history In 1996, Vanguard began offering investment advice to institutional investors, including nonprofits. In that effort to provide advisory service to the institutional market, we established a group called Vanguard Institutional Advisory Services® (VIAS), dedicated to helping institutional clients such as endowments, foundations, health systems, religious and cultural organizations, and other institutional investors develop and implement investment strategies and policies. VIAS provides advisory services to 546 client relationships with portfolios under $20 million, representing nearly $4.2 billion in assets under advisement.

VIAS operates from Vanguard’s corporate headquarters in Malvern, Pennsylvania and our office in Scottsdale, Arizona. Because of significant increase in new business over the past five years, VIAS has an average client tenure of five years. For clients that have been with us for more than five years—about half of our clients—the tenure is approximately nine years. The longest current client relationship with VIAS began in 1997. History of VIAS’s parent company, The Vanguard Group, Inc. (Vanguard) While its roots can be traced to Vanguard Wellington™ Fund, which was launched in 1929 and is still part of the firm’s fund offerings, John C. Bogle started Vanguard in 1975. Since then it has evolved into an industry leader, serving more than 20 million individual and institutional accounts. Today, Vanguard offers more than 170 separate investment portfolios with broad, yet carefully defined, investment objectives. The firm manages more than $3.6 trillion in assets.

2. Describe your structure and affiliates. VIAS provides investment advisory services through Vanguard Advisers, Inc. (“VAI”), a Pennsylvania corporation established in 1995. VAI is a federally registered investment advisor and provides a number of investment advisory services, including personal financial planning and investment advice. VIAS is a Vanguard affiliate.

Instead of being publicly traded or owned by a small group of individuals, Vanguard is owned by the Vanguard family of mutual funds. The Vanguard funds, in turn, are owned by their shareholders—or client-owners.


Benefits of our structure Because we’re not publicly traded, Vanguard can focus on seeking superior long-term fund performance and making long-term investments to help improve services and lower costs for our client-owners, rather than focusing on outside stockholders or the short-term expectations of Wall Street. Our mutual structure means: We provide services to our U.S.-domiciled mutual funds and exchange-traded funds (ETFs)

“at cost.” As we generate operating efficiencies, economies of scale, and profits, we return those gains to our shareholders in the form of lower expense ratios.

We have never been in a position of having to trade off what’s best for the client for what’s

best for the owners of the company, because they are one and the same.

Because we’re owned by our funds, we are in an uncommon position of stability and strength. There is no threat that Vanguard will be acquired by another company.

In short, with no other parties to answer to—and therefore no conflicting loyalties—we make every decision with only your needs in mind.

Joint ventures/alliances VIAS has no current joint ventures or alliances, other than those with internal affiliates.


3. Is your firm a registered investment advisor under the Investment Advisers Act of 1940? VIAS provides investment services through Vanguard Advisers, Inc., a Pennsylvania corporation and federally registered investment advisor under the Investment Advisers Act of 1940. (SEC file no. 801-49601) VAI’s parent company, The Vanguard Group, Inc. (Vanguard) is the registered transfer agent for the Vanguard family of funds. Vanguard is also registered with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. (SEC file no. 801-11953)

4. Is there any litigation pending against your firm?

There have been no litigation or legal proceedings against any officers or principals of Vanguard Advisers Inc. related specifically to the advisory service activities provided by VIAS. As with similar institutions, Vanguard and certain of its affiliates have at times been involved in litigation, including that related to services provided to defined contribution, defined benefit, or other retirement plans. This includes litigation relating to contractual disputes, provision of investment-related services, employment disputes, and property-liability matters. None of that litigation has been material to the operations or financial condition of Vanguard or its affiliates.

5. How does your firm avoid conflicts of interest?

Vanguard’s unique ownership structure diminishes a conflict of interest challenge that many other firms face—the need to serve the interests of outside shareholders. Because Vanguard is owned by its funds, its best interests align, rather than conflict, with those of its shareholders. To earn and maintain the trust and loyalty of our clients, Vanguard adheres to the highest standards of ethical behavior and fiduciary responsibility. Accordingly, Vanguard has adopted a written Code of Conduct that applies to all Vanguard’s personnel. Our employees must conduct their activities in accordance with the following standards set forth in the Code: Shareholder interests come first. Conflicts of interest must be avoided. Compromising situations must be avoided. VIAS employs investment consultants to select portfolio investments for our clients from the broad universe of Vanguard mutual funds. To avoid conflicts of interest that can arise when staff receive incentives or commission as compensation, VIAS’s investment consultants are salaried. This practice helps ensure they construct portfolios with clients’ best interests in mind.

6. Provide an explanation of your insurance coverage. The Vanguard Group of Investment Companies®; The Vanguard Group, Inc.; Vanguard Marketing Company; and select affiliates maintain professional insurance contracts. The organizations carry a joint fidelity bond with coverage up to $400 million per occurrence to protect against external fraud and/or internal fraudulent acts by Vanguard employees. Vanguard National Trust Company and Vanguard Fiduciary Trust Company maintain a separate $25 million bond.


In addition, Vanguard maintains directors and officers liability, fiduciary liability, and errors and omissions insurance with coverage up to $200 million (per loss and aggregate). ICI Mutual Insurance Company is the underwriter for this coverage, which is in force for the term August 1, 2015, through August 1, 2016. Going forward, we fully intend to maintain our current coverage limits. ICI Mutual is an investment industry captive insurer sponsored by the Investment Company Institute, the national association for the mutual fund industry. The company has an A (Excellent) rating from A.M. Best Company. Vanguard also carries commercial general liability insurance underwritten by Sentry Insurance Group.


B. Client service 1. Describe the services available for a typical client.

VIAS is a specialized business unit of Vanguard dedicated to providing discretionary advisory services to a variety of institutional clients including nonprofit organizations and pension plan sponsors. Each client is assigned a senior investment consultant and investment analyst. Your service team works closely with your investment committee to deliver comprehensive advisory services tailored to your organization’s specific needs. VIAS accepts the role of cofiduciary for our clients. This fiduciary responsibility sets Vanguard’s advisory capabilities apart from a traditional consulting arrangement offered by many of our competitors. VIAS assumes significant decision-making responsibility and portfolio oversight, thereby freeing your in-house teams to focus on business priorities.


You’ll receive expert investment advice and research services from VIAS: Asset-allocation analysis—To determine the investment portfolio’s asset allocation, we

perform an asset-allocation analysis/study using the Vanguard Capital Markets Model® (VCMM), a proprietary financial model that applies vector autoregressive Monte Carlo simulation techniques. Your staff can ask the consultant “what-if” questions during development conversations and use the answers to make more informed investment decisions for their specific situations.

Investment management—Your VIAS investment consultant uses Vanguard’s internal

portfolio management team, along with a stable of 30 external institutional investment advisory firms. This allows us to offer investors a diverse array of mutual fund investments, with more than 170 investment portfolios available to U.S. investors. Our range of fund offerings allows your investment consultant to develop a customized portfolio for your organization’s unique needs.

Investment policy consulting—VIAS reviews and offers revisions to your investment-policy

framework, helping to ensure that its design meets your asset pool’s strategic investment goals. We can conduct these reviews whenever needed.

Fiduciary best practices—Your VIAS service team is ready to deliver the ongoing education

needed as a result of staff and committee turnover, as well as the dynamic nature of markets and legislation. We work with clients to deliver training specific to your Vanguard managed portfolio, as well as industry and fiduciary best practices. These training opportunities ensure that the people charged with meeting organizational goals have the tools and knowledge necessary to achieve them.

Research—Vanguard bases all of its investment principles on research, and in particular,

proprietary research conducted by Vanguard Investment Strategy Group (ISG). ISG researchers investigate issues and trends in capital markets, the economy, and portfolio construction, and publish white papers reflecting Vanguard’s best thinking. These opinion pieces provide opportunities for education and discussion between clients and the VIAS service team.

Portfolio construction—Your VIAS investment consultant uses Vanguard funds to construct

a portfolio for you. Our wide range of fund offerings allows your consultant to develop a portfolio that will help achieve your investment goals while fulfilling your fiduciary duties to diversify investments at a reasonable expense.

Investment reviews—Your VIAS investment consultant presents reviews of your asset allocation, your portfolio performance relative to benchmarks, information about fee disclosure regulations, and insight about the market and economic outlook.

Comprehensive performance reporting—Each month, you receive a monthly performance

report and each quarter, you receive a comprehensive investment performance report. You can use these reports to:

o Keep your board and investment committee members current on investment status. o Monitor portfolio investment performance. o Ensure that investment policies are followed.

Portfolio monitoring/rebalancing—We monitor your portfolio regularly and rebalance it

periodically to ensure its asset allocation remains consistent with your guidelines. Rebalancing is a proven risk-management strategy.


When you choose VIAS to manage your investment portfolios, you get the best of both worlds: the intimate relationship you experience from an investment boutique firm and the vast resources of our parent, Vanguard. This combination gives you the support you need, with the quality you deserve and the confidence you want, to help you reach your investment goals.

2. Describe the team that would be assigned to our accounts and their overall qualifications.

You’ll have a dedicated relationship team of experienced investment professionals, including an investment consultant and an investment analyst. Investment consultants Our investment consultants serve as the portfolio-level advisor to the VIAS client base, bringing the investment management and portfolio construction emphasis to the relationship. There are several facets to the consultant role including: Investment policy consultation. Portfolio investment review and monitoring. Asset/liability analysis and consultation. Portfolio construction advice. Vanguard resource and fund manager liaison. The experienced team of investment professionals specialize in providing advice to nonprofit and corporate institutions for a variety of asset pools. All of our investment consultants have at least ten years of experience working at Vanguard and have a number of FINRA licenses, including Series 6, 7, 24, 36, 63, 65, and 66. In addition, most hold the Chartered Financial Analyst®

designation and/or Certified Financial Planner™ certification. Many have earned MBAs as well.

Investment analysts The investment analysts provide behind-the-scenes support for the investment consultants and relationship managers. In addition to their client-facing roles responsibilities include: Investment research and analysis. Performance reporting and report generation. Trade execution—rebalancing and others. Portfolio analytics. Ad hoc reporting. Transaction assistance. The investment analyst team has an average of eight years of general investment management experience and five years with Vanguard. They carry the required FINRA licenses and professional designations, such as CFA® charterholder.

All VIAS investment professionals receive a salary. This compensation structure avoids any potential conflicts of interest that could arise when professionals receive incentives or commissions.


3. Provide the bios of the leaders of your firm. Kevin Jestice Kevin Jestice, CFA, CIPM, is a Vanguard principal and head of Vanguard Institutional Investor Services. Mr. Jestice is responsible for a team of investment and client service professionals who serve defined contribution, defined benefit, corporate asset, endowment, and foundation clients. Previously, Mr. Jestice led Vanguard Consultant Relations, was a senior manager in Corporate Strategy, a senior investment analyst in Portfolio Review, and a senior investment consultant in Institutional Advisory Services. Before joining Vanguard in 2007, Mr. Jestice was an investment consultant with Ennis Knupp & Associates, where he managed consulting assignments for a select number of retainer and project clients, contributed to the firm’s investment manager research efforts, authored topical research papers, and led the firm’s performance analysis team. Mr. Jestice earned bachelor's degrees in finance and management with honors from Loras College and an M.B.A. with honors at The Wharton School of the University of Pennsylvania. He holds FINRA Series 6, 63, and 65 licenses, is a CFA® charterholder, and holds the Certificate in Investment Performance Measurement (CIPM) certification. He is a member of the CFA Institute, the CIPM Association, and the CFA Society of Philadelphia.

Jim Sheeky Jim Sheeky is a department head with VIAS and is responsible for institutional clients. He joined Vanguard in 1998 and brings more than 20 years of management experience in financial services, corporate finance, and procurement services. Mr. Sheeky earned a B.S. in business administration from Millersville University and an M.B.A. from Widener University. He is a Certified Financial PlannerTM professional. He holds FINRA Series 7, 24, and 63 licenses.

Michael Litz Michael Litz is a Sales Executive with VIAS. In this capacity, he focuses on investment management and advisory opportunities within the institutional community. He joined Vanguard in 2010 and has over 10 years of industry experience. Mr. Litz earned a B.B.A. from The George Washington University and an M.B.A. from Villanova University. He holds both FINRA Series 7 and 63 licenses. Mr. Litz also achieved Certified Investment Management Analyst (CIMA®) certification in 2013.

4. Please describe the interaction between our investment consultant and our organization.

Initially, your investment consultant will consult with you to gain an understanding of your organization and to address your initial asset allocation requirements, as well as to review or create an investment policy statement. Once your asset allocation and portfolio have been agreed upon and implemented, your investment consultant will be available both in person and through a variety of other channels, including phone, video conference, and e-mail. Your investment consultant will also reach out to you proactively when necessary.


5. Describe how you would manage the transition of our investments to your firm from our current advisors. VIAS has an experienced account transition team. You’ll be assigned a dedicated transition manager from this team who will assist in all aspects of the transition process to ensure that the transition is as efficient and economical as possible, while minimizing the impact of any investments being out of the market. We do not charge any additional fees for this service.


C. Investment philosophy 1. Please describe your firm’s investment philosophy.

VIAS pairs Vanguard’s 40-year tenure in investment management with consultation and support provided by experienced consultants. These consultants use six key principles to manage client portfolios: 1. Asset allocation is the primary portfolio decision. 2. Broad diversification is crucial. 3. Indexing is a powerful strategy for achieving market exposure. 4. Low cost is a critical success factor. 5. Active management can outperform under the right conditions. 6. Long-term success depends on the disciplined execution of an investment strategy.

These principles are the foundation upon which VIAS consultants construct and maintain client portfolios. They also underlie all of the additional services VIAS clients receive, including investment policy development, portfolio monitoring, and fiduciary support.

2. Describe your asset allocation process.

We use the Vanguard Capital Markets Model® (VCMM), an internally developed, proprietary vector autoregression Monte Carlo simulation model to help clients evaluate the impact different asset allocations may have on their ability to meet their objectives. In the end, our goal is to ensure our clients understand the inherent tradeoffs associated with managing nonprofit pools of money to support mission-funding needs. VCMM considers components, including contribution expectations, spending policy, and other considerations specific to your unique goals and objectives. In projecting asset class returns, we use more than just historical averages. We include current market valuations, asset class correlations, projected economic/market conditions, and other factors in our forecasts for each asset class. We input the asset- and organization-specific parameters into our forward-looking, economically based model to generate potential outcomes under thousands of different scenarios. The model’s approach contrasts with traditional mean-variance optimizations that focus only on the asset side of the equation. Often, these traditional analyses use repeating historical relationships to identify the most historically efficient portfolio, which may not be best for your situation. Resulting analysis helps with decision-making Your senior investment consultant uses the modeling process results to provide you with a quantitative assessment of the implications that different asset allocation choices may have on a portfolio.


This assessment provides insights into: Projected spending levels. Worst-case scenarios. Expected outcomes. Probability of other outcomes, such as the likelihood of experiencing consecutive years with

declines in spending. Your investment consultant uses the model output to contrast the trade-offs of various policy and asset-allocation choices, as well as to clarify how an asset-allocation decision can affect the measures that matter most to you. With combined quantitative assessments and qualitative judgment, the final asset-allocation recommendations form the foundation for sound investment decisions. An iterative process Portfolio management requires continuous oversight and examination. Triggers, short-term goals, or market developments may often result in a need to change the portfolio’s investment strategy.

3. How do you typically construct client portfolios?

VIAS structures portfolios to address the unique needs and circumstances of nonprofit organizations. According to many studies, including Vanguard’s The Global Case for Strategic Asset Allocation (July 2012), asset allocation is the primary determinant of portfolio performance. Before making formal recommendations, your senior investment consultant will work closely with you to understand your long-term goals, risk tolerance, objectives, and constraints. We strive to create portfolios with broad diversification across and within multiple asset classes, employing both index and actively managed funds to temper volatility. Domestic equity funds offer attractive long-term performance Because successfully timing market capitalization, sector, and style is almost impossible, we begin building a domestic equity portfolio by identifying and controlling risk. We adhere to the prudent investment principle of broad exposure to all sectors of the domestic marketplace, without bias toward style (value/growth) or size (market capitalization). While client portfolios can range from 100% passively managed to 100% actively managed, VIAS typically suggests using index funds as a cost-effective strategy to gain broad market exposure.

International equity funds reduce overall volatility VIAS builds portfolios with exposure to many international regions, including Europe, Pacific, and emerging markets. Adding international equities to a portfolio has historically reduced volatility compared with those using only domestic equities, because of the relatively low, albeit rising, correlation between domestic and foreign markets. We expect that foreign markets’ diversification benefits will remain relevant for the longer term because of their differing economic cycles, sector weightings, and currencies.


Fixed income funds provide stability In general, fixed income assets provided current income and stability, while serving to diversify a portfolio’s equity allocation. Although portfolios with an intermediate average duration are typical, VIAS helps you create a portfolio that meets your customized cash-flow objectives. Our core philosophy is to invest in a fixed income portfolio using efficient bond index funds, which are complemented by active bond funds for added diversification. Low expense ratios leave more assets available to invest

Vanguard strives to keep operating expenses as low as possible without sacrificing exceptional quality standards. In fact, Vanguard’s average fund-expense ratio is the lowest in the industry—0.15%, more than five times lower than the industry average of 1.11% in 2015, according to Lipper, a Thomson Reuters Company. These low expense ratios free up more assets for investment.

4. Describe the process and techniques you will use to assist us in the strategic development of our investment policy, spending policies, objectives and guidelines for our portfolio.

The investment policy statement (IPS) is a crucial governing document. We’ll work closely with you to understand your organization’s needs, long-term goals, risk tolerance, objectives, and constraints. Once we understand your organization’s specific circumstances, we can review your organization’s existing investment policy statement or help you create one. Your VIAS senior investment consultant will review and discuss your existing IPS at the start of our relationship. As part of the review, the consultant will ensure that the policy we agree on is acceptable to you and meets the stringent fiduciary standards that VIAS applies to managing investment portfolios.

We believe that policies and guidelines should be written with a long-term orientation, and revisions should occur infrequently, as circumstances dictate. The IPS should include: Committee membership and responsibility. Statement of purpose. Investment objectives. Investment guidelines. Spending/distribution policies. Asset allocation policy ranges. Risk constraints. Rebalancing policy. Portfolio monitoring guidelines and procedures. Criteria for assessing performance. Once your IPS is set, VIAS accepts responsibility for managing your portfolio in accordance with its guidelines. Your investment consultant will continually review your investment policy and, as needed, recommend IPS adjustments to address any situational changes.

Your quarterly investment review report also is an excellent continuous review tool. This report includes a comparison of your current portfolio with policy guidelines. With this information, your investment committee can easily verify that your guidelines are being followed.


D. Manager selection 1. Please provide a detailed description of your firm’s investment manager evaluation and

selection process. Our internal Equity Investment Group and Fixed Income Group manage Vanguard’s index equity and index and active fixed income funds. We hire some of the world’s premier investment management firms to manage our actively managed equity funds and select fixed income mandates. Vanguard’s selection process, which has been refined for 40 years, results in a world-class roster of subadvisors assigned to our active equity and selected fixed income mandates. We are one of the largest buyers of active investment management services with more than $500 billion placed with outside, independent asset managers on behalf of our clients. Fund manager search, evaluation, and oversight Vanguard Portfolio Review Department (PRD) performs manager search, evaluation, and oversight. This team includes approximately 70 investment professionals who use the sound evaluation methods that have helped Vanguard achieve long-term investing success. For Vanguard’s actively managed mutual funds, PRD identifies investment managers who are able to deliver strong long-term investment results for clients. PRD conducts manager searches constantly, seeking to identify subadvisors with which Vanguard can develop and maintain long-term relationships. While many advisors present us with above-average returns and other data, we focus the interview process on a combination of factors, including: Firm—Is the firm stable? What is its ownership structure? What are its account and asset

trends? How does it incent its employees? People—What is the firm’s staff tenure and experience? Does it have depth and stability of

talent? Philosophy—Does it have an enduring, easily articulated philosophy shared by its

investment professionals? Process—Is it stable/proven? Does it generate a portfolio consistent with the stated

philosophy? Portfolio—Does its investment portfolio clearly reflect its philosophy and process? Does it

have consistent characteristics over time? Performance—Does the firm have a history of competitive results versus benchmarks and

peers over the long-term? Has it demonstrated success in different market environments?


If PRD finds an advisor worth pursuing, its experts evaluate the firm further, using some of the above factors as a guide. They travel to the firm’s offices to meet its executives, portfolio managers, research analysts, traders, and other essential personnel. After these interviews, PRD analyzes a select number of such advisors and narrows the list to two or three. The group then summarizes the top candidates’ pros and cons, and presents the summary to Vanguard Global Investment Committee (GIC) officers.

This group—which includes Vanguard Chairman and CEO, F. William McNabb III; Principal and head of Portfolio Review Sean Hagerty; and select Vanguard managing directors—meets with each candidate to evaluate the factors stated above, and makes selection recommendations to the funds’ board of directors. The board has final approval of the managers with whom Vanguard selects to establish relationships. Vanguard board of directors Vanguard’s board of directors ensures that the funds are organized, operated, and managed in the clients' best interests. Board members bring distinguished backgrounds in business, academia, and public service to their task of helping Vanguard's officers oversee fund activities and policy-making. Vanguard's directors generally serve as members of the board of trustees of each Vanguard fund, in addition to serving on the board of The Vanguard Group. Ten board members are independent directors who have no affiliation with Vanguard or the funds they oversee, apart from the personal investments they choose to make as private individuals.

Manager search advantages Vanguard has 40 years of experience successfully selecting and overseeing fund managers. Some of the world’s most talented investment professionals manage our quantitative equity, traditional equity, and fixed income portfolios. Our unique approach adds dimension to the Five Ps—people, philosophy, process, performance, portfolio. Vanguard focuses on five key areas to identify and build relationships with the fund managers that best match our long-term, quality-driven approach to serving our clients: Access to top manager talent. Experience. Multimanager combinations. Oversight. Manager transitions. Access to top manager talent Vanguard’s success in identifying and building relationships with skilled managers makes us a desirable partner. Managers know and appreciate that Vanguard does not churn its fund advisors. Instead, we select managers with an enduring philosophy and process. Vanguard’s size allows us to work with boutique-sized managers, while at the same time enabling us to use our size and ownership structure to offer fees attractive to institutional clients.


Experience With 97% of our actively managed funds outperforming their peers for the ten-year period ended December 31, 2015, according to Lipper, a Thomson Reuters Company, Vanguard demonstrates our skill for choosing capable managers. Our long history with index construction and composition enables us to anticipate performance variances that should occur, even among managers falling within a single style box. This depth of understanding empowers us to differentiate between skill and luck when considering managers. Multimanager combinations Vanguard not only selects individual managers with skill, but equally considers the combination of portfolio managers within multimanager fund structures. We evaluate both process and portfolios to ensure that the combined fund will derive the diversification benefits anticipated by the combination of managers. Oversight PRD often establishes relationships with advisors long before hiring them. Once hired, PRD communicates regularly with our advisors. In addition, each advisor provides formal quarterly reports to the fund board and makes an in-person presentation at least annually. Manager transitions Vanguard rarely makes changes to fund management companies. However, when we believe a fund would benefit from new leadership, we appoint new managers in a skillful and discreet manner. We do not telegraph anticipated manager changes for a variety of reasons that serve the best interest of our shareholders. We announce new managers only when we add them as advisors to a fund. Our experience with the manager transition process ensures that it goes smoothly, with no disruption to our clients. We work closely with both incumbent and new managers on the transition’s timing so that it progresses steadily without jeopardizing our ability to maintain quality controls. We have a deep bench of managers with whom we are comfortable for any given strategy, ensuring that if a need arises, we can meet it quickly with the right relationship.

2. Please describe any circumstances or incentives under which your firm, any subsidiary, related party or any individual in your firm receives compensation, finder's fees, commissions or any other benefit from investment managers or third parties. There are no circumstances under which Vanguard, any subsidiary, related party or any individual at Vanguard receives compensation, finder’s fees, commissions or any other benefit from Vanguard’s investment managers or third parties for VIAS-related activity.


E. Performance measurement and reporting 1. Comment on your ability to provide performance measurement reports to suit the needs

of the investment committee. VIAS provides all its clients with regular ongoing reporting in order to keep the investment committee and all interested parties up-to-date on transaction activity and overall portfolio performance. The standard reporting package is as follows: Monthly Investment Performance Report This consolidated report provides VIAS clients with a snapshot of the portfolio and includes the following: Month-end market value. Month-end asset allocation. Policy asset allocation. Fund-level performance. Portfolio-level performance. Composite benchmark performance. Quarterly Investment Performance Report The Quarterly Investment Performance Report includes the following sections: Executive summary—Including portfolio commentary and significant portfolio events. Market and economic overview—Summarizes the economic environment for the period. Asset allocation—Lists asset allocation by investment and summarizes portfolio activity. Performance—Compares your portfolio performance with its relevant benchmarks. Fund details—Includes annualized risk/return, style map, and subadvisors for each fund.

2. Describe the internet access and what information would be available online.

All VIAS clients have access to Vanguard’s secure website, vanguard.com, 24 hours a day, 7 days a week. Your investment consultant assists you with your initial logon.

Through the website, you can: Access comprehensive views of your account. View detailed dollar and share balances for each fund and account. View holdings by fund. Access monthly statement and quarterly Investment Performance Reports. View detailed transaction history.


Educational resources are also available online, including Vanguard’s Nonprofit Fiduciary Resource Center. The Nonprofit Fiduciary Resource Center helps nonprofit organizations: Understand fiduciary roles and laws. Create a mission and planning strategy. Specify an investment purpose and strategy. Maintain ongoing governance.

Visit vanguard.com/nonprofitresourcecenter for more information.

http://vanguard.com/nonprofitresourcecenter


F. Fees 1. Please explain, in complete detail, the total fee structure associated with your investment

management/consulting services. There are two fees in the all-in cost structure—the investment management fee assessed by VIAS and the fund expenses inherent in the Vanguard funds as set forth in each fund’s prospectus. The sample portfolio in the Exhibits section of this response includes an all-in fee estimate for your organization. VIAS investment management fee The annual VIAS investment management fee covers the following services:

Investment policy consulting. Investment research. Asset allocation analysis. Reporting services. Portfolio construction. Client services team support. Portfolio monitoring. Account administration and transition. Fund expense ratios Clients will also incur fees, separate from the annual VIAS investment management fee, as a result of their investments. VIAS builds portfolios primarily using Vanguard mutual funds (Vanguard Funds). While investments in the Vanguard Funds are not subject to loads, commissions, or asset-based distribution fees (commonly known as “12b-1” fees), the Vanguard Funds pay advisory and other fees and expenses as set forth in the prospectus of each of the funds.

VIAS investment management fee calculation Assets under management Investment management fee First $1,000,000 0.70% Next $1,000,000 0.35% Subsequent amounts 0.20%

Fund expenses calculation We calculate fund expenses by using the weighted annual expense ratio.

Vanguard reserves the right to withdraw or amend its proposal if not accepted within 12 months of submission or if it determines that the assumptions/terms of the request for proposal have changed materially.

Vanguard

Confidentiality statement The Vanguard Group ("Vanguard") asks and expects that the Arkansas Access to Justice Foundation, will regard as confidential and retain in strict confidence all knowledge of Vanguard's business or technical information, and any information relating to Vanguard's clients and/or personnel (including but not limited to the identity thereof), products, services, research and development, processes, techniques, designs, financial planning practices, and marketing plans—and such information of third parties that Vanguard may be obligated to hold as confidential,—whether in tangible or intangible form that may be obtained from any source as a result of this RFP, the RFP process, or any related discussion and/or investigation either designated by Vanguard as proprietary or confidential or which is reasonably or customarily considered to be such (collectively, "Confidential Information"). To that end, the Arkansas Access to Justice Foundation shall not use, disclose, or distribute to any person, firm, or entity any Confidential Information, except as strictly necessary to evaluate Vanguard's response and such information in the context of this RFP. Further, neither the Arkansas Access to Justice Foundation nor its officers, directors, employees, consultants, representatives, or agents shall make known, divulge, or communicate any Confidential Information to any person, firm, or enterprise. Vanguard expects that the Arkansas Access to Justice Foundation will use reasonable efforts at all times to ensure that Vanguard's expectations regarding confidentiality are met.

Vanguard

Disclosure For more information about Vanguard funds, visit institutional.vanguard.com or call 800-523-1036 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. All investing is subject to risk, including the possible loss of the money you invest. Funds that

concentrate on a relatively narrow market sector face the risk of higher share-price volatility. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets. It is possible that tax-managed funds will not meet their objective of being tax-efficient. While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates.

All purchase or redemption fees are paid directly to the fund(s) to compensate long-term

shareholders for the costs of trading activity, and therefore are not loads. For all Vanguard funds with adjusted returns, fees are assessed on redemptions made within certain time periods after a purchase to discourage short term trading.

Admiral, Broker Choice, Explorer, FES, LifeStrategy, MoneyWhys, Morgan, Of Mutual Interest,

One Step, One Step Enroll, One Step Invest, One Step Retire, One Step Savings Escalator, PlainTalk, Plan Sponsor Bridge, STAR, Tele-Account, The Vanguard Group, Unmatchable value for investors, Vanguard, Vanguard Advantage, Vanguard Brokerage Services, Vanguard Institutional Advisory Services, Vanguard Financial Education Series, Vanguard Plan Sponsor Bridge, Vanguard Portfolio Watch, Vanguard Unmatchable Excellence, Vanguard.com, VBS, VBO, Vanguard ETF™, Vanguard ETFs ™,Vision, VOICE, VUE, Wellesley, Wellington, Windsor and the ship logo are trademarks of The Vanguard Group, Inc. “FTSE®” and “FTSE4Good™” are trademarks jointly owned by the London Stock Exchange plc and The Financial Times Limited and are used by FTSE International Limited under license. The FTSE4Good US Select Index is calculated by FTSE International Limited. FTSE International Limited does not sponsor, endorse, or promote the fund; is not in any way connected to it; and does not accept any liability in relation to its issue, operation, and trading.

Financial Engines is a trademark of Financial Engines, Inc. All rights reserved. Used with permission. The Vanguard Group has partnered with Financial Engines to provide the Vanguard Managed Account Program and Personal Online Advisor, powered by Financial Engines. Financial Engines is an independent, federally registered investment advisor that does not sell investments or receive commission for the investments it recommends.

Vanguard

All advisory services are provided by Vanguard Advisers, Inc. (VAI) a federally registered investment advisor and an affiliate of The Vanguard Group, Inc. (Vanguard). Vanguard is owned by the Vanguard funds, which are distributed by Vanguard Marketing Corporation, a registered broker-dealer affiliated with VAI and Vanguard. Neither Vanguard nor Financial Engines guarantees future results.

Morningstar data © 2016 Morningstar, Inc. All Rights Reserved. The information contained

herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use

by Vanguard. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); S&P® and S&P 500® are trademarks of S&P; and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Vanguard. Vanguard product(s) are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the index.

The Russell Indexes and Russell® are registered trademarks of Russell Investments and have

been licensed for use by The Vanguard Group, Inc. The products are not sponsored, endorsed, sold or promoted by Russell Investments and Russell Investments makes no representation regarding the advisability of investing in the products.

Vanguard funds are not sponsored, endorsed, sold, or promoted by the University of Chicago or

its Center for Research in Securities Prices, and neither the University of Chicago nor its Center for Research in Securities Prices makes any representation regarding the advisability of investing in the funds. All other marks are the exclusive property of their respective owners.

The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI,

and MSCI bears no liability with respect to any such funds or securities. The prospectus or the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with Vanguard and any related funds.

Vanguard

London Stock Exchange Group companies include FTSE International Limited ("FTSE"), Frank Russell Company ("Russell"), MTS Next Limited ("MTS"), and FTSE TMX Global Debt Capital Markets Inc. ("FTSE TMX"). All rights reserved. "FTSE®", "Russell®", "MTS®", "FTSE TMX®" and "FTSE Russell" and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under licence. All information is provided for information purposes only. No responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication. Neither the London Stock Exchange Group companies nor any of its licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Indexes or the fitness or suitability of the Indexes for any particular purpose to which they might be put. The Vanguard funds are not sponsored, endorsed, sold or promoted by Barclays Capital Inc. or its affiliates (“Barclays”). Barclays does not make any representation regarding the advisability of investing in the Vanguard funds or the advisability of investing in securities generally. Barclays’ only relationship with Vanguard is the licensing of the Index which is determined, composed and calculated by Barclays without regard to Vanguard or the [Products]. Barclays has no obligation to take the needs of Vanguard or the owners of the Vanguard funds into consideration in determining, composing or calculating the Index. Barclays has no obligation or liability in connection with administration, marketing or trading of the Vanguard funds.

For institutional use only. Not for distribution to retail investors. Vanguard Marketing Corporation, Distributor.

© 2016 The Vanguard Group, Inc. All Rights Reserved.

Vanguard

Exhibits Description

I. Fund information

Sample portfolio A sample portfolio of Vanguard funds including an all-in fee estimate for your organization

II. Policy

Advisory Services Disclosure Brochure This brochure describes the qualifications and

business practices of Vanguard Advisers, Inc. (VAI)

Advisory Services Supplement This brochure supplement provides information about Vanguard Institutional Advisory Services

III. Reports

Performance report A sample of Vanguard Institutional Advisory

Services (VIAS) Quarterly Portfolio Investment Report

IV. Nonprofit information

Vanguard Gives Back An overview of Vanguard’s community involvement initiatives and charitable giving

Best practices for nonprofit fiduciaries

Nonprofit Resource Center web link

https://institutional.vanguard.com/VGApp/iip/site/institutional/clientsolutions/endowmentfoundation/NPResourceCenter/fiduciarytoolkit

Advice services offered through Vanguard Institutional Advisory Services® are provided by Vanguard Advisers, Inc., a registered investment advisor.For institutional investor use only. Not for public distribution. Client-specific data is considered CONFIDENTIAL.

Arkansas Access toJustice FoundationSample Portfolio

For institutional investor use only. Not for public distribution. 1

Portfolio construction: Index centric

Diversified portfolio low costs

Vanguard funds Portfolioweight

Investment style Underlying manager Expense ratio*

Total Stock Market Index 12% Index Broad Market Vanguard Equity Investment Group 0.05%

Total International Stock Index 8% Index Broad Market International Vanguard Equity Investment Group 0.12%

Total Bond Market Index 28% Index Broad Market Bond Vanguard Fixed Income Group 0.06%

Intermediate-Term Investment Grade 17% Active Intermediate-Term Bond Vanguard Fixed Income Group 0.10%

Short-Term Investment Grade 11% Active Short-Term Bond Vanguard Fixed Income Group 0.10%

Total International Bond Market Index 24% Index Broad Market Bond Vanguard Fixed Income Group 0.14%

Portfolio weighted annual expense ratio 0.09%

Source: Vanguard.* As of the fund’s most recent prospectus as of 03/31/2016. The current expense ratio may be higher or lower.


Sample portfolio returns: Index centric

Vanguard funds Total StockMarket Index

Total Int’lStock Index

Total BondMarket Index

IT InvestGrade

ST InvestGrade

Total Intl Bond

Market Index

Sample Portfolio

Sample Benchmark*

Weight 12.0% 8.0% 28.0% 17.0% 11.0% 24.0% 100%Cumulative periodsLast three months 0.94 -0.17 3.09 3.57 1.76 3.45 2.59 2.74Year-to-date 0.94 -0.17 3.09 3.57 1.76 3.45 2.59 2.74Annualized periods1 year -0.45 -8.18 1.82 2.90 1.86 2.35 1.08 1.133 years 11.11 0.82 2.38 3.12 1.79 — 3.88 3.965 years 10.99 0.67 3.71 5.08 2.36 — 4.81 4.9310 years 7.04 1.91 4.86 5.91 3.69 — 5.38 5.36Calendar years

2015 0.39 -4.26 0.40 1.63 1.13 1.06 0.52 0.422014 12.56 -4.17 5.89 5.91 1.86 8.82 6.15 6.712013 33.52 15.14 -2.15 -1.27 1.07 — 4.14 3.712012 16.38 18.21 4.15 9.24 4.63 — 8.01 6.832011 1.08 -14.52 7.69 7.62 2.02 — 4.23 5.752010 17.26 11.04 6.54 10.59 5.32 — 9.48 8.672009 28.83 36.73 6.04 17.87 14.17 — 15.27 11.152008 -36.99 -44.10 5.15 -6.06 -4.65 — -8.71 -5.262007 5.57 15.52 7.02 6.26 5.98 — 7.24 7.392006 15.63 26.64 4.36 4.55 5.11 — 7.57 7.18Expense ratio** 0.05 0.14 0.07 0.10 0.10 0.19 0.09

The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors' shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month–end, visit our website at www.vanguard.com/performance. Performance data for periods of less than one year does not reflect the deduction of purchase or redemption fees that may apply. If these fees were included, performance would be lower. All other performance data are adjusted for purchase and redemption fees, where applicable.

Data from Morningstar. Returns as of 03/31/2016. Returns represent Admiral Shares for all funds.*†Returns for fixed income portfolio allocate 80% to US bonds through May 31, 2013, and then 56% to US bonds and 24% international bonds thereafter.

* Benchmark is 12% Spliced Total Stock Mkt Index (equal to CRSP US Total Market Index as of 6/2/13, MSCI US Broad Market Index through 4/22/05, prior DJ Wilshire 5000 Index)/ 8% Spliced Total International Composite Index (Consists of the Total International Composite Index through August 31, 2006; the MSCI EAFE + Emerging Markets Index through December 15, 2010; the MSCI ACWI ex USA IMI Index through 6/2/13; and the FTSE Global All Cap ex US Index thereafter) /Fixed income allocation contains 80% Spliced Barclays US Aggregate Float Adjusted Bond Index through May 2013, 56% Spliced Barclays US Aggregate Float Adjusted Bond Index and 24% Barclays Global ex US USD Float Adjusted RIC Capped Index thereafter.

**Fund Expense ratios are all Admiral® Shares


VIAS management fee structure

* These costs are estimated. Actual weighted annul expense ratio is determined by the actual funds chosen for the portfolio.Importantly, there are no sales commissions or 12b-1 fees for Vanguard funds. The cost of our investment management services (i.e., custodial fees, manager costs, trading costs) are reflected in the expense ratios of our funds and are deducted from each fund's earnings before they are distributed to shareholders. Vanguard is committed to maintaining operating expenses at the lowest possible level, without sacrificing premier quality service.

Asset level Management fee

First $1 million 0.70%

Next $1 million 0.35%

Balance over $ 2 million 0.20%

VIAS charges a management fee based on assets under management

Annual fee schedule

Assets under management $4,000,000

Management fee 0.36%

Fund expenses* 0.09%

Commingled funds 0.00%

Incentive fees 0.00%

Custodial fees 0.00%

Additional travel fees 0.00%

Total all-in fee 0.45%

Total estimated expenses


Important information

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. Thetheoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty andrandomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.



For more information, visit vanguard.com, or call 800-662-7447 for Vanguard funds and 800-992-8327 for non-Vanguard funds offered through Vanguard Brokerage Services®, to obtain a prospectus. Visit our website, call 866-499-8473, or contact your broker to obtain a prospectus for Vanguard ETF Shares. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

Vanguard ETF® Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Mutual funds and all investments are subject to risk. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Funds that concentrate on a relatively narrow sector face the risk of higher share-price volatility. It is possible that tax-managed funds will not meet their objective of being tax-efficient. Because company stock funds concentrate on a single stock they are considered riskier than diversified stock funds.Investments in bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings. Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax. Diversification does not ensure a profit or protect against a loss.Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date. Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency. Advice services offered through Vanguard Institutional Advisory Services are provided by either Vanguard Advisers, Inc., a registered investment advisor, or Vanguard Fiduciary Trust Company, a Pennsylvania registered bank. Vanguard Financial Planning Services are provided by Vanguard Advisers, Inc., a registered investment advisor. Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, Member FINRA.Vanguard Marketing Corporation, Distributor of the Vanguard Funds. U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623.



CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. Financial Engines is a registered trademark and Financial Engines Investment Advisor service is a registered service mark of Financial Engines, Inc. Financial Engines Advisors LLC, a federally registered investment advisor and wholly owned subsidiary of Financial Engines, Inc., provides all advisory services. The Vanguard Group has partnered with Financial Engines to provide the Vanguard Managed Account Program and Personal Online Advisor, powered by Financial Engines.

The Vanguard ETFs® are not sponsored, endorsed, sold or promoted by Barclays. Barclays does not make any representation regarding the advisabili ty of Vanguard ETFs or the advisability of investing in securities generally. Barclays' only relationship with Vanguard is the licensing of the Index which is determined, composed and calculated by Barclays without regard to Vanguard or the Vanguard ETFs. Barclays has no obligation to take the needs of Vanguard or the owners of the Vanguard ETFs into consideration in determining, composing or calculating the Index. Barclays has no obligation or liability in connection with administration, marketing or trading of the Vanguard ETFs.

All rights in a FTSE index (the “Index”) vest in FTSE International Limited (“FTSE”). “FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license. The Vanguard Fund(s) (the “Product”) has been developed solely by Vanguard. The Index is calculated by FTSE or its agent. FTSE and its licensors are not connected to and do not sponsor, advise, recommend, endorse or promote the Product and do not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b )investment in or operation of the Product. FTSE makes no claim, prediction, warranty or representation either as to the results to be obtained from the Product or the suitability of the Index for the purpose to which it is being put by Vanguard.

S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Vanguard. The S&P Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by Vanguard. The Vanguard Fund(s) is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates, and none of S&P Dow Jones Indices LLC, Dow Jones, S&P nor their respective affiliates makes any representation regarding the advisability of investing in such product(s).

Morningstar data ©2014 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The Russell Indexes and Russell® are registered trademarks of Russell Investments and have been licensed for use by The Vanguard Group. The products are not sponsored, endorsed, sold or promoted by Russell Investments and Russell Investments makes no representation regarding the advisability of investing in the products.

“Dividend Achievers” is a trademark of The NASDAQ OMX Group, Inc. (collectively, with its affiliates, “NASDAQ OMX”) and has been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by NASDAQ OMX and NASDAQ OMX makes no representation regarding the advisability of investing in the funds. NASDAQ OMX MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE VANGUARD MUTUAL FUNDS.

The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. The prospectus or the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with Vanguard and any related funds.

Apple®, iPhone®, and iPad® are trademarks of Apple Inc., registered in the United States and other countries. App Store is a service mark of Apple Inc. Android™ is a trademark of Google Inc.

© 2014 The Vanguard Group, Inc. All rights reserved.

Connect with Vanguard® > institutional.vanguard.com > 888-725-6605

Vanguard Advisers, Inc. 100 Vanguard Boulevard Malvern, PA 19355

This brochure describes the qualifications and business practices of Vanguard Advisers, Inc., (VAI). If you have any questions about its contents, please contact us at 888-725-6605. The information presented here has not been approved or verified by the U.S. Securities and Exchange Commission (SEC) or by any state securities authority.

Additional information about VAI is available on the SEC’s website at www.adviserinfo.sec.gov

VAI is registered with the SEC as an investment advisor. Registration does not imply a certain level of skill or training.

Vanguard Institutional Advisory Services® March 31, 2015

Advisory Servicesdisclosure brochure for Vanguard Advisers, Inc.

2

Material changesThere have been no material changes to VIAS’s advisory business, fees and compensation, disciplinary information, or other practices.

Contents

Advisory business 3

Fees and compensation 4

Performance-based fees and side-by-side management 6

Types of clients 6

Methods of analysis, investment strategies, and risk of loss 6

Disciplinary information 10

Other financial industry activities and affiliations 10

Code of Ethics, participation or interest in client transactions, and personal trading 11

Brokerage practices 11

Review of accounts 12

Client referrals and other compensation 12

Custody 12

Investment discretion 12

Voting client securities 13

Financial information 13

Requirements for state-registered advisors 13

3

Advisory businessVanguard Advisers, Inc., (VAI) is a Pennsylvania corporation that provides investment advisory services to a wide variety of clients. VAI was incorporated and has been in business since 1995. VAI is 100% owned by Goliath, Inc., a Delaware corporation. As such, VAI is an indirect, wholly owned subsidiary of The Vanguard Group, Inc. (Vanguard), the sponsor and manager of the family of mutual funds comprising The Vanguard Group of Investment Companies (the “Vanguard funds”), which VAI typically recommends as investments.

Vanguard Institutional Advisory Services (VIAS) is an investment advisory service offered by VAI. VIAS provides investment advisory and administrative services to institutional clients in the endowment, foundation, and defined benefit (DB) markets. VAI has provided asset allocation guidance and portfolio advisory services to its clients since 1997.

VIAS services include:

• Assetallocationadvisoryservices.

• Analysisandevaluationofeachclient’sfinancialsituation (current investments, spending, and policy needs).

• Performingsensitivityanalysisofeachclient’sportfolio using various spending assumptions under diverse economic and financial scenarios.

• Developingandcommunicatingclient-specificasset allocation recommendations.

• Preparingupdatedassetallocationrecommendations and investment policy revisions that incorporate changes in a client’s situation, risk tolerance, and assumptions.

• Analyticalsupport,includingbutnotlimited to asset rebalancing, investment policies, and fund selection.

• Identificationandanalysisofclientriskscenarios(e.g., funding shortfalls, loss of purchasing power, increased or volatile pension contributions, and financial statement reporting of pension liabilities).

• Investmentpolicyconsulting.

Customized advisory servicesVIAS provides continuous investment advice to clients based on their specific situations. VIAS makes investment recommendations after a thorough analysis of client requirements using various analytic techniques and assumptions, taking into consideration a client’s risk tolerance, current investments, spending requirements, investment policy guidelines, and other relevant factors. VIAS’s recommendations are then customized to the individual client’s needs and are designed to strike a balance between a client’s goals and the risk/reward characteristics of various asset classes and Vanguard investments.

VAI offers both discretionary and nondiscretionary investment advice through VIAS. Regarding nondiscretionary investment advice, VIAS representatives will assist clients in implementing VIAS’s recommended investment strategy. It is the client’s responsibility to decide whether to act on the advice provided by VIAS and to ensure that the recommendations acted upon, with or without the assistance of VIAS, have been carried out correctly.

VIAS offers investment advice principally on Vanguard investments, generally limited to Vanguard’s registered investment companies. VIAS also provides advice on issues, including investment return potential and risk, diversification, liquidity, and costs. VIAS generally will not recommend or solicit orders to buy or sell non-Vanguard investments or individual securities, such as U.S. government securities, equity securities, warrants, corporate debt securities, commercial paper, certificates of deposit, municipal securities, option contracts, futures contracts, interests in real estate, and oil and gas partnerships. However, where appropriate, VIAS may offer advice about non-Vanguard securities. VIAS will not recommend any broker or dealer.

VIAS manages $23,902,465,433 (as of December 31, 2014) on a discretionary basis.

4

Fees and compensationThe advice provided by VAI through VIAS may include recommendations to sell, hold, or purchase the mutual funds and exchange-traded funds (ETFs) that compose The Vanguard Group of Investment Companies®. Acting in accordance with such advice will result in the payment of fees to the Vanguard funds and to Vanguard, an affiliate of VAI. The purchase or sale of Vanguard funds and ETFs through Vanguard (whether or not suggested by VIAS) is not subject to a load, sales charge, or commission. However, each Vanguard fund incurs advisory, administrative, and custodial fees, as well as other fees and expenses paid out of the fund’s own assets. The advisory, administrative, custodial, and other costs make up the funds’ expense ratios. Also, some Vanguard funds impose purchase and redemption fees.

Clients that are invested in Vanguard funds are subject to the applicable expense ratios and to any purchase and redemption fees. Thus, acting in accordance with VAI’s advice to purchase Vanguard funds will result in the payment of fees to the Vanguard funds and trusts, in addition to any advisory fees assessed by VAI. Such fees are paid at the fund level and do not reduce the account-level fees described in the following fee schedules. Please consult the funds’ prospectuses for information about a specific fund’s expense ratio.

Defined benefit plan clients may also indirectly bear the fees assessed by Vanguard for recordkeeping services provided by Vanguard to a retirement plan. In connection with its services, Vanguard receives fees that are separate from and in addition to any fees assessed by VAI. Thus, defined benefit plan clients who are receiving advice from VAI may indirectly bear the fees assessed by Vanguard in connection with its services to the plan, in addition to any fees assessed by VAI.

Defined benefit plans for which Vanguard provides recordkeeping services may also be permitted to invest in collective trusts, company stock funds, or certain customized investment options for which an affiliate of VAI provides services and receives compensation. Because advice provided may include recommendations to transact in these investment options, acting in accordance with such advice may result in the payment of fees to an affiliate of VAI.

Defined benefit plans for which Vanguard provides recordkeeping services may be permitted to invest in non-Vanguard mutual funds. Because the advice provided by VAI may include recommendations to transact in non-Vanguard mutual funds, acting in accordance with such advice may result in payments to Vanguard as compensation for client-level recordkeeping and administrative services provided by Vanguard for such funds. This payment may be made by the fund company sponsoring the non-Vanguard mutual fund, by the plan sponsor, by the client investing in the non-Vanguard mutual fund, or by some combination thereof.

The purchase or sale of third-party fund shares through Vanguard or its affiliates may be subject to a load or sales charge, although VAI generally recommends the purchase of no-load mutual funds. In addition, VIAS clients who are invested in third-party mutual funds indirectly bear the annual fund operating expenses charged by those mutual funds. A fund’s expenses are detailed in the fund’s prospectus.

In the event that VIAS recommends that the client transact in non-Vanguard investments or individual securities, clients may incur additional fees, including transaction fees, brokerage charges, sales charges, expense ratios, commissions, markups, or other fees or expenses. In addition, Vanguard or its affiliates may receive other compensation, including asset-based sales charges, service fees, revenue- sharing payments, 12b-1 fees, or other fees in connection with such investments. VIAS does not take into consideration whether Vanguard or any of its affiliates would receive fees from its recommendation to transact non-Vanguard investments.

Clients may have the option to purchase investment products that VIAS recommends through other financial intermediaries that are not affiliated with VAI.

VIAS negotiates fees individually with each client. The agreed-upon fee will be set forth in the client’s advisory contract.

5

Standard annual fee schedules for non-ERISA portfolios*

Portfolios of $250 million and above:Vanguard investments Advisory asset level fee





More than $500 million Negotiable

Minimum annual fee $0

Portfolios of $20 million to $250 million:Vanguard investments Advisory asset level fee





More than $100 million 0.02%

Minimum annual fee $20,000

Portfolios of $10 million to $20 million:Asset level Advisory fee



Minimum annual fee $0

Portfolios of under $10 million:Asset level Advisory fee




Minimum annual fee $4,500

*Separate fee schedules apply for portfolios of qualified plans subject to ERISA. To arrive at the final net fee schedule for an ERISA portfolio, VIAS reduces the gross advisory fee percentage. The gross advisory fees are offset by the weighted average expense ratio charged on all Vanguard funds used in the client’s portfolio. In most instances, the fee reduction will be greater than—and in no cases less than—the investment advisory fee charged on the fund or funds selected for the plan. You may request an ERISA fee schedule from your VIAS financial professional.

6

Payment of feesFees for both non-ERISA and ERISA portfolios are collected in quarterly installments. The market value of the portfolio is determined as of the last business day of each calendar quarter. Fees may be changed by VIAS upon 90 days’ written notice to the client. If the client does not object in writing within the 90-day period, fees shall be revised in accordance with the written notice.

A client may designate one or more Vanguard funds from which VIAS may deduct applicable fees. The client must provide the designation and any changes in writing to VIAS, and VIAS is entitled to rely upon such designation when making the deduction. Where a client has not designated any Vanguard funds from which to deduct fees, VIAS determines the appropriate fund from which to make the deduction. A client also may arrange through VIAS to pay the fee directly, rather than as a deduction.

Clients terminating investment advisory services after five days but within the first six months of service are subject to an early cancellation fee of $7,500 to be offset by any fees paid to VIAS for investment advisory services during the first six months of the advisory services agreement. This cancellation fee is intended to cover VIAS’s costs incurred in analyzing the portfolio under management and preparing the initial investment recommendations. Fees collected before the termination date will not be refunded.

Performance-based fees and side-by-side managementVIAS does not receive performance-based fees for advisory services provided to clients.

Types of clientsVIAS provides investment advisory and administrative services to institutional clients in the endowment, foundation, and defined benefit markets.

Methods of analysis, investment strategies, and risk of lossIn formulating investment advice for clients, VIAS relies on information from a wide variety of sources, both public and private, regarding short-term and long-term economic and financial market characteristics and trends. Importantly, our overall investment approach incorporates our investment philosophies while adhering to our fiduciary role in the advisory relationship.

Key features of VIAS’s methodology include:

• Goals-based methodology. The asset allocation strategy and investment choices that VIAS recommends are based on long-term financial goals and not on short-term investment performance.

• Broad diversification of assets. VIAS seeks to control risk through broad diversification among asset classes and by choosing investments that reflect a variety of market segments. VIAS does not attempt to predict which investments will provide superior performance at any given time.

VIAS believes clients should be broadly diversified across all segments of a securities market because proper diversification is one of the most effective ways to reduce risk without sacrificing expected returns.

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Vanguard Capital Markets ModelOur Investment Strategy Group (ISG) developed VIAS’s advisory methodology and continually analyzes the most up-to-date academic and practical applications, as well as research obtained from external investment organizations. VIAS employs ISG’s Vanguard Capital Markets Model® (VCMM) to assist in the formulation of investment advice to clients. VCMM is a proprietary financial simulation tool created to help clients make effective asset allocation decisions.

The VCMM is based on the empirical foundation that the returns of various asset classes reflect the compensation investors receive for bearing different types of systematic risk (or beta). To reasonably forecast the potential distribution of future asset returns, the VCMM is designed to identify the primary macroeconomic and financial risk factors and how they influence asset returns over time. Using a long span of monthly financial and economic data from as early as 1960, the VCMM estimates a dynamic statistical relationship between risk factors and asset returns. Based on these calculations, the model uses regression-based Monte Carlo simulation methods to project these relationships in the future.

The VCMM process can be divided into two phases. The first phase uses a dynamic model to simulate forward-looking return distributions on a wide array of broad asset classes. The model generates a range of returns and volatility for each asset class. The second phase combines the asset class simulations to create potential investment portfolios. Together, these two features provide clients with a framework to examine portfolio options and, ultimately, to tailor investment solutions.

For instance, the VCMM can demonstrate for our institutional clients:

• Potentialquantitativetrade-offsofalternativeportfolio allocations based on forward-looking and dynamic risk-and-return assumptions.

• Thepossibleeffectofaddingcertainassetclassesto an existing strategic asset allocation.

• Differencesinexpectedportfolioreturnsandriskmetrics under alternative financial and economic conditions.

• Thepossibleeffectofalternativeassumptionsandscenarios on an institution’s asset-to-liability (A/L) ratio or spending plans.

Key elements of investment return forecastsThe return-forecast portion of the VCMM involves three fundamental processes: the core module, the attribution module, and the simulation module.

The core module is a dynamic statistical model of global macroeconomic and financial risk factors. Its main function is to generate forecasts of these economic and financial risk factors over different time horizons. The model measures the interrelationship of the various risk factors with each other. This process begins with the model estimating relationships (more specifically, regression betas) among the system of risk factors, based on historical data. The module can then be used to project the estimated relationships into the future over any time horizon.

When making recommendations, VIAS evaluates a stock portfolio’s mix of active management and index approaches and its exposure to large-, mid-, and small-capitalization stocks, to growth and value stocks, and to U.S. and international companies. For bond portfolios, VIAS evaluates the mix of short-, intermediate-, and long-term bonds, along with the mix of U.S. Treasury, government agency, and corporate securities, as well as international bonds. VIAS also evaluates certain alternative investment portfolios, including market-neutral funds and real estate investment trusts.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.

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The attribution module relates the global economic and financial risk factors to the returns of various asset classes, including international equities. The module’s main function is to map the returns of those asset classes to contemporaneous changes in the VCMM’s core global risk factors. This mapping is based on observed historical relationships and is estimated using regression techniques.

The simulation module constructs scenarios for all risk factors and asset classes represented in the first two modules. Here, the VCMM creates a distribution of future returns, which means that the model simulates a broad range of possible asset-return outcomes (as opposed to a single-point forecast). In this way the VCMM accounts for the volatility of asset-return forecasts. For each quarter in the forecast horizon, the VCMM simulates 10,000 scenarios, yielding a distribution of potential future paths for the various risk factors and asset returns at various forecast horizons.

Portfolio-level analysisThe return forecasts lead to further analysis and simulation at the portfolio level during the second phase of the VCMM process. VCMM outputs are assessed in the context of investors’ objectives, risk tolerance, and investment horizon to derive customized client solutions. The VCMM’s simulated distribution of asset returns can be used to identify the set of portfolios most likely to meet the client’s goals.

Based on these simulations and analyses, Vanguard determines the subset of portfolios yielding maximum return with minimum volatility—the efficient frontier for the client’s investment objectives. The efficient frontier quantifies the trade-offs that clients face in the portfolio selection process. More aggressive portfolios yield higher returns on average, but they are also more volatile and thus subject to more downside risk.

Based on this portfolio optimization and taking into account the client’s investment horizon and risk tolerance, Vanguard can help clients narrow down the menu of possibilities to a few potential portfolios on the frontier. The VCMM output is used once more to conduct an in-depth portfolio analysis. Based on the simulated distribution of underlying asset returns from the model, Vanguard analysts can compute several measures of expected investment performance, such as a portfolio’s return, volatility, terminal asset values, and probability of achieving desired or required returns.

For defined benefit plan sponsors, VCMM output is used to provide an in-depth analysis of liability funding and duration matching. A pension plan sponsor’s main objective is to be able to fund a plan’s expected liabilities, as computed from actuarial calculations, with the plan’s assets. The model can be used to simulate all possible investment portfolios that lead to different A/L ratios for the plan. In this case, the efficient frontier can be recast in terms of A/L ratios and A/L volatility. Portfolio duration also changes along the frontier; thus, part of the decision consists of selecting the portfolios that provide the desired duration matching.

The investment objective of endowments and foundations is often to increase the real corpus (i.e., the inflation-adjusted spending power of the capital invested) over time. The VCMM’s simulated distributions of asset returns are used to construct efficient frontiers showing portfolio allocations that maximize return and minimize volatility. Several measures of expected investment performance—such as a portfolio’s return, volatility, extreme-risk events, and terminal asset values—can be computed. In particular, the model’s simulations enable investors to study different spending scenarios for the endowment or foundation. This spending scenario analysis leads to optimal spending rates that maximize both spending and wealth accumulation.

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VAI recommendations and riskProjections generated by the VCMM are based both on estimated historical relationships and on assumptions about the risk characteristics of various asset classes. As a result, the accuracy of VCMM forecasts depends on the relevance of the historical sample in simulating future events.

Forecasting is both an art and a science. The VCMM’s quantitative output alone will not always provide the most accurate answer. That is why Vanguard investment teams complement the model’s raw quantitative predictions with additional qualitative analysis. These qualitative overlays are based on the professional judgment and industry experience of Vanguard analysts and on objective but qualitative information, such as market-consensus expectations, consumer-sentiment indicators, and other information from external sources not captured within the VCMM.

It’s important to emphasize that the VCMM was not designed as a short-term tactical asset allocation model. Generally speaking, portfolio analyses based on VCMM output focus on expected long-run returns over horizons of ten years or more. The VCMM core module is updated quarterly and re-estimated with the additional historical observation. New return forecasts for the core risk factors are then generated from the recently added data, and attribution modules are re-estimated. As a result, the model parameters used to generate the simulations will change.

The time-dependency of VCMM forecasts can be one of its strengths, because the forecasts are the direct result of changes in current market conditions. Since VCMM forecasts are initialized to current market conditions (i.e., the most current quarter of available data), simulation results are heavily influenced by the last data point. This is especially true for shorter forecast horizons.

VAI generally recommends investments in mutual funds and investment company securities. Although VAI will recommend investment strategies designed to be prudent and diversified, please remember that all investments, including mutual funds and investment company securities, involve some risk, including the possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss in a declining market. There is no assurance that you will achieve positive investment results by using VAI. VAI cannot guarantee the future performance of your investments. Please consult a fund’s prospectus for more information about fund-specific risks. You should carefully consider all of your options before acting upon any advice you receive.

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Disciplinary informationVAI has no disciplinary information to disclose.

Other financial industry activities and affiliations

The Vanguard GroupVAI is 100% owned by Goliath, Inc., a Delaware corporation, which is wholly owned by The Vanguard Group, Inc., (Vanguard). Vanguard, also a registered investment advisor, provides a range of investment advisory and administrative services to the Vanguard family of mutual funds (Vanguard funds). Vanguard is truly a mutual mutual fund company. It is owned jointly by the funds it services and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a private group of individuals, or by public investors who own the management company’s stock. The management fees charged by these companies include a profit component over and above the companies’ cost of providing these services. By contrast, Vanguard provides services to its member funds on an at-cost basis*, with no profit component, which helps to keep the funds’ expenses low.

When giving advice to clients, VAI will recommend the purchase of Vanguard funds serviced by VAI’s corporate parent, Vanguard. VAI addresses the competing interests that could arise between us and our clients as a result of recommending proprietary funds by relying on our time-tested investment philosophies and beliefs—such as the benefits of low costs, diversification, and indexing—when formulating target allocations for clients. VAI discloses to prospective clients that it recommends Vanguard funds prior to or at the establishment of the advisory relationship. Although acting in accordance with VAI’s advice to purchase Vanguard’s proprietary funds will result in the payment of fees to the Vanguard funds and ETFs that are separate from, and in addition to, any fees assessed by VAI, any competing interests that could arise are mitigated by the at-cost nature of Vanguard’s services to the funds.

Vanguard Marketing CorporationShares of the Vanguard funds are marketed and distributed by Vanguard Marketing Corporation (VMC), a registered broker-dealer that is a wholly owned subsidiary of Vanguard and an affiliate of VAI. VMC’s marketing and distribution services are conducted on an at-cost basis in accordance with the terms and conditions of a 1981 exemptive order from the Securities and Exchange Commission, which permits Vanguard funds to internalize and jointly finance such activities. Each Vanguard fund (other than a fund of funds) or each share class of a fund (in the case of a fund with multiple share classes) pays its allocated share of VMC’s marketing costs. VMC does not receive transaction-based compensation in connection with the distribution of the Vanguard funds.

When giving advice to clients, VAI will recommend the purchase of Vanguard funds distributed by VAI’s affiliate, VMC. Since VMC performs its marketing and distribution services on an at-cost basis and does not receive transaction-based compensation in connection with the distribution of the Vanguard funds, no competing interests arise from VAI’s affiliation with VMC. Certain members of VAI’s management and the VIAS service are registered representatives of or are affiliated with VMC. Please refer to the VIAS supplement for further information.

Vanguard Fiduciary Trust Company (VFTC)VAI is also affiliated with Vanguard Fiduciary Trust Company (VFTC), a limited purpose trust company incorporated under the banking laws of the Commonwealth of Pennsylvania and a wholly owned subsidiary of Vanguard. VFTC serves as trustee and investment advisor for certain collective investment funds and collective investment trusts offered by Vanguard as eligible investment options by some retirement plans.

*Vanguard provides its services to the Vanguard funds and ETFs at cost.

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Code of Ethics, participation or interest in client transactions, and personal tradingVAI operates under a Code of Ethics that complies with Rule 17j-1 of the Investment Company Act of 1940 and Rule 204A-1 of the Investment Advisers Act of 1940.

The code sets forth fiduciary standards that apply to all employees, incorporates Vanguard’s insider trading policy, and governs outside employment and receipt of gifts. In addition, the code imposes restrictions on the personal securities trading of Vanguard employees, as well as reporting requirements. The trading restrictions and reporting requirements are more involved for employees that have access to information about Vanguard fund trading activity or Vanguard client trading activity and are designed to ensure that Vanguard employees do not misuse fund and/or client information for their own benefit.

Vanguard will provide a copy of its Code of Ethics to any client or prospective client upon request at no charge.

Please see the section of this brochure titled “Other financial industry activities and affiliations” for a discussion of VAI’s affiliations with other Vanguard entities and how those affiliations may affect clients of VAI.

Brokerage practices VAI does not recommend broker-dealers in connection with client transactions arising out of VAI’s advice, as VAI generally recommends the purchase of Vanguard investments. However, if clients are interested in receiving brokerage services apart from the advisory services provided by VAI, VAI may inform clients of the availability of such services through Vanguard Brokerage Services® (VBS). VBS is a division of VMC. VAI’s clients decide whether they want to trade through VBS or not. Clients may open a VBS account for the purposes of consolidating assets or transferring and liquidating assets previously held through another institution in advance of implementing VAI’s recommended allocation of Vanguard investments. VBS would receive brokerage fees and commissions if a client opens a VBS account and executes trades.

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Review of accountsAt the outset of an advisory relationship, VIAS will formulate investment guidelines customized to a client’s investment objectives after a thorough analysis of the client’s requirements. This analysis will use various analytical techniques and assumptions, taking into consideration the client’s financial situation, investment experience, investment objectives, risk tolerance, current investments, spending requirements, investment policy statement, and other relevant factors. The guidelines are based on the output from the VCMM. Upon approval by the client, the guidelines are implemented. VIAS conducts regular portfolio reviews, generally quarterly, to ensure adherence to the approved investment guidelines.

As registered owners of Vanguard fund shares, VAI clients will receive or have access to communications about those funds. These communications include transaction confirmations, quarterly account statements, prospectus updates, annual and semiannual reports, and proxy statements relating to their fund holdings (as appropriate), as well as general Vanguard newsletters, emails, and other communications. In addition, VAI clients who receive investment advisory services also will receive periodic customized account statements and quarterly performance reports.

Client referrals and other compensationVAI receives referrals through its affiliate, VMC, pursuant to a referral arrangement under which compensation is provided to representatives of VMC. These representatives of VMC are not employees of VAI. The advisors and consultants providing advisory services through VIAS do not receive any additional or special compensation for referrals. Any fees paid under the referral arrangement with VMC do not result in any additional charges to clients. In addition to their normal compensation, certain VMC representatives may receive additional compensation

based in part on the assets that they bring in to the VIAS advisory service. This is one of several components of a compensation plan that is designed to reward VMC representatives for providing world-class service to clients.

CustodyThe Vanguard Group, Inc., the transfer agent of the Vanguard funds, acts in the capacity of a qualified custodian and sends quarterly or more frequent account statements directly to VAI clients. Client will also receive periodic account statements from VIAS. Clients should carefully review and compare these account statements and contact Vanguard with any questions.

Investment discretionVIAS clients have the option to retain VIAS on a nondiscretionary or discretionary basis. Nondiscretionary clients review and determine whether to act on investment recommendations provided by VIAS.

Discretionary clients allow VAI full authority to invest assets in Vanguard funds as VIAS deems advisable. Clients grant VAI discretionary authority in the investment management agreement executed between the parties. VAI has the discretionary authority to (1) invest any monies that the client designates for inclusion within their account; (2) initiate, exchange, and direct dividend transactions among Vanguard funds; and (3) initiate the payment of Vanguard (or non-Vanguard, as applicable) fund distributions or redemption proceeds to the client at the client’s address or bank of record.

VAI’s discretionary authority to buy or sell securities, including the amount to be bought or sold, is based on the client’s investment objectives, risk tolerance, time horizon, tax status, saving and spending patterns, or other factors determined by Vanguard to be appropriate. The client provides these characteristics to VAI by completing an investor profile questionnaire; the characteristics are then matched to a series of investment asset mixes and to Vanguard funds.

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Voting client securitiesVAI will not vote or exercise similar rights for client securities. The exercise of all voting rights associated with any security or other property held in the portfolio shall be the responsibility of the client. Proxies will be delivered to the client by the issuer of the security, the custodian or its agent. VAI will not advise or act for the client in any legal proceedings, including bankruptcies or class actions, involving securities held or previously held by the portfolio or the issuers of those securities.

Financial informationVAI is not aware of any financial condition that is reasonably likely to impair its ability to meet contractual commitments to clients.

Requirements for state-registered advisorsVAI is a federally registered investment advisor.

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CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Advice services offered through Vanguard Institutional Advisory Services are provided by Vanguard Advisers, Inc., a registered investment advisor.

Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, Member FINRA.

Vanguard Institutional Asset ManagementP.O. Box 2900 Valley Forge, PA 19482-2900

© 2015 The Vanguard Group, Inc. All rights reserved. VIASBRO 032015


Supplementary information about Vanguard Institutional Advisory Services

Vanguard Institutional Advisory Services® April 13, 2016

Vanguard Advisers, Inc. 100 Vanguard Boulevard Malvern, PA 19355

This brochure supplement provides information about Vanguard Institutional Advisory Services (VIAS), a service of Vanguard Advisers, Inc. (VAI), the registered investment advisor. It is a supplement to the VIAS brochure that you should have received. Please contact VIAS at 800-662-0106 if you did not receive the brochure or if you have any questions about the contents of this supplement.


Educational background and business experienceIn general, VIAS financial professionals:

• Have several years of experience with investment products and with Vanguard mutual funds.

• Have earned an M.B.A. or related postgraduate degree; hold Certified Financial Planner™ (CFP®) certification, Chartered Financial Analyst® (CFA®) designation, or Certified Investment Management Analyst® (CIMA®) certification; or are actively pursuing such certification or graduate education.

• Are registered as investment advisor representatives and hold Series 65 or 66 licenses.

In general, candidates for CFP, CFA, or CIMA must meet the following criteria set by the respective organizations.

CFP certification—Certified Financial Planner Board of Standards:

• Earn a bachelor’s degree, its equivalent, or a higher degree in any discipline from an accredited college or university and successfully complete a CFP board-registered program, a challenge status, or a transcript review.

• Pass the CFP certification examination to determine his or her ability to apply financial planning knowledge in an integrated format to financial planning situations.

• Have three years of full-time, relevant personal financial planning experience.

• Agree to adhere to the Code of Ethics of the Certified Financial Planner Board of Standards and to standards on professional responsibility, rules of conduct, and financial planning practice.

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CFA designation—CFA Institute:

• Have four years of qualified investment work experience.

• Become a member of the CFA Institute.

• Pledge to adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct on an annual basis.

• Apply for membership to a local CFA member society.

• Complete all three levels of the CFA program, each culminating in a six-hour exam.

CIMA certification—Investment Management Consultants Association (IMCA):

• Have three years of financial services experience and an acceptable regulatory history.

• Complete a one-week classroom program at an accredited university business school and pass online qualification and certification exams.

• Pledge to adhere to IMCA’s Code of Professional Responsibility, Standards of Practice, and Rules and Guidelines for Use of the Marks.

• Report 40 hours of continuing education credits, including two ethics hours, every two years.

CAIA designation—CAIA Association®:

• Have four years of professional experience, or a bachelor’s degree and one year of professional experience, in alternative investments analysis or other regulatory, banking, financial, or related field.

• Two professional references.

• Member of the CAIA Association (Chartered Alternative Investment Analyst Association, Inc.).

• Pledge to adhere to the CAIA Candidate and Member Agreement.

• Complete two exam levels: Principles and Application.

CIPM certification—CFA Institute:

• Have at least two years of qualified professional experience in one or more positions related to qualifying activities related to the investment decision-making process.

• Become a member of the CIPM (Certificate in Investment Performance Management) Association.

• Complete two exam levels: Principles and Expert.

VAI has no affiliation with the Certified Financial Planner Board of Standards, the CFA Institute, the Investment Management Consultants Association, or the CAIA Association.

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VIAS professionals

Consultants

David Brown (1964) Senior Investment Consultant, VIAS

• B.S., East Stroudsburg University (1989); M.B.A., Saint Joseph’s University (2012).

• Joined Vanguard in 1991.• Previously led nonprofit client

service team in Vanguard Institutional Investor Group. Before that role, Mr. Brown served as department head for Vanguard’s retail financial planning team providing advice to high-net-worth clients.

• Holds the following professional certifications:– CFP professional– Securities licenses: Series 7, 24,

26, 63

– Advisor license: Series 65

William J. Burns (1975) Senior Investment Consultant, VIAS

• B.S., University of Scranton (1997); M.B.A., Saint Joseph’s University (2001).

• Joined Vanguard in 1997.• Previously served as manager

for VIAS.• Holds the following professional

certifications:– Securities licenses: Series 6, 63


Michael T. Chance (1982) Senior Investment Consultant, VIAS

• B.S.B.A., Shippensburg University (2005); M.B.A., Saint Joseph’s University (2009); M.S., Saint Joseph’s University (2014).

• Joined Vanguard in 2005. • Previously served as a senior

investment analyst for VIAS. Before that role, Mr. Chance served as an analyst for Vanguard Institutional Asset Management.

• Holds the following professional certifications:– Securities licenses: Series 6, 63– Advisor license: Series 65

Charles J. Corrigan (1946) Senior Investment Consultant, VIAS

• B.S., La Salle University (1971); M.B.A., Eastern Michigan University (1981).

• Joined Vanguard in 1997. • Previously served as an investment

manager for Vanguard Asset Management ServicesTM.

• Holds the following professional certifications:– CFP professional– Securities licenses: Series 7, 63


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Leo P. Corrigan Jr. (1977) Senior Investment Consultant, VIAS

• B.S., Seton Hall University (2000); M.B.A., Villanova University (2003).


manager for Vanguard Asset Management Services. Before that role, Mr. Corrigan served as a financial advisor for Vanguard Asset Management Services.

• Holds the following professional certifications:– CFA charterholder– CFP professional– Securities licenses: Series 7, 63


Phil C. Daubney (1956) Senior Investment Consultant, VIAS

• B.S., Worcester Polytechnic Institute (1981); M.B.A., Boston University (1985).

• Joined Vanguard in 1997. • Previously served as a manager

for Vanguard Asset Management Services.

• Holds the following professional certifications:– CFA charterholder– CFP professional– Securities licenses:

Series 7, 24, 63– Advisor license: Series 65

Christopher J. Dennis (1983) Senior Investment Consultant, VIAS

• B.S., New Mexico State University (2005).

• Joined Vanguard in 2006.• Previously served as an investment

consultant for Vanguard Business Development Group and as an investment analyst for VIAS.


James J. Episcopo (1958) Senior Investment Consultant, VIAS

• B.S., The Pennsylvania State University (1980); M.B.A., Saint Joseph’s University (1989).

• Joined Vanguard in 1996.• Previously responsible for all

aspects of the institutional advisory business for Vanguard Asset Management Services.

• Holds the following professional certifications:– CIMA professional– Securities licenses: Series 6, 26, 63– Advisor license: Series 65

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Sterling R. Gabbitas (1979) Senior Investment Consultant, VIAS

• B.S., Utah Valley University (2005); M.B.A., The Thunderbird School of Global Management (2009).

• Joined Vanguard in 2009.• Previously served as an M.B.A.

associate and relationship manager in Vanguard Institutional Investor Group.

• Holds the following professional certifications:– CFA charterholder– CAIA professional– Securities licenses: Series 6, 63

James R. Gorman (1966) Senior Investment Consultant, VIAS

• B.S., Franciscan University of Steubenville (1988).


manager for Vanguard Asset Management Services.

• Holds the following professional certifications:– CFP professional– CIMA professional– Securities licenses: Series 7, 63– Advisor license: Series 65

Keith Guido (1973) Senior Investment Consultant, VIAS

• B.S., State University of New York (1996); M.S., University of Michigan (2012).

• Rejoined Vanguard in 2014 after serving as assistant portfolio manager for the Arizona State Retirement System. From 1998 to 2011, Mr. Guido served as a relationship manager and portfolio assistant for VIAS.


Eric W. Klein (1974) Senior Investment Consultant, VIAS

• B.A., Moravian College (1996).• Joined Vanguard in 1997. • Previously served as an investment

analyst for VIAS.• Holds the following professional

certifications:– CFA charterholder– CFP professional– Securities licenses: Series 6, 63– Advisor license: Series 65

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Marcus J. Lerman (1971) Senior Investment Consultant, VIAS

• B.S., Arizona State University (1996).



• Holds the following professional certifications:– CFP professional– Securities licenses: Series 7, 63– Advisor license: Series 65

Andrew M. Maslick (1973) Senior Investment Consultant, VIAS

• B.S., Binghamton University (1995).• Joined Vanguard in 1998.• Previously served as an investment

manager for Vanguard Asset Management Services. Before that role, Mr. Maslick served as a financial planner for Vanguard Asset Management Services.


Chris P. Milionis (1972) Senior Investment Consultant, VIAS

• B.S., University of Delaware (1995); M.S., The Pennsylvania State University (2002).

• Joined Vanguard in 1997.• Previously served as a relationship

manager for VIAS.


Carol A. Misus (1962) Senior Investment Consultant, VIAS

• B.S., The Pennsylvania State University (1985).



• Holds the following professional certifications:– CFA charterholder– Securities licenses: Series 7, 63– Advisor license: Series 65

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Matt D. Ruhl (1979) Senior Investment Consultant, VIAS

• B.S., University of Virginia (2002).• Joined Vanguard in 2004.• Previously served as an investment

analyst for Vanguard Portfolio Review Department.

• Holds the following professional certifications:– CFA charterholder– Securities licenses: Series 6, 63

Thomas P. Russo (1969) Senior Investment Consultant, VIAS

• B.B.A., Loyola University Maryland (1991); M.B.A., Saint Joseph’s University (1996).



• Holds the following professional certifications:– CFP professional– Securities licenses: Series 7, 63– Advisor license: Series 65

Wendy O. Simenson (1961) Senior Investment Consultant, VIAS

• B.B.A., Stetson University (1983); M.B.A., Drexel University (1988).

• Joined Vanguard in 1997.• Other business activities:

– Investment advisory board member for the Sisters and Servants of the Immaculate Heart of Mary.

• Holds the following professional certifications:– CFA charterholder– Securities license: Series 7– Advisor license: Series 66

Lisa M. Swatkoski (1979) Senior Investment Consultant, VIAS

• B.A., Lafayette College (2001).• Joined Vanguard in 2008. • Previously served as an

investment analyst for VIAS.• Holds the following professional

certifications:– CFA charterholder– Securities licenses: Series 6, 63– Advisor license: Series 65

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George Toulson (1972)

Senior Investment Consultant, VIAS

• B.A., Yale University (1994).• Joined Vanguard in 2000.• Previously served as an investment

analyst for VIAS. Before that role, Mr. Toulson served as a sales executive for Vanguard Financial Advisor ServicesTM.

• Other business activities:– Advisory committee member

of the Phoenixville YMCA.• Holds the following professional

certifications:– CFA charterholder– CFP professional– Securities licenses: Series 7, 24, 63– Advisor license: Series 65

Analysts

Jean Basson (1987) Investment Analyst, VIAS

• B.S., University of Arizona (2011).• Joined Vanguard in 2013.• Previously served as a brokerage

investment professional for Vanguard Retail Services. Before that role, Mr. Basson served as a client relationship administrator for Vanguard Retail Services.


Bikram Chadha (1985) Investment Analyst, VIAS

• B.A., Stony Brook University (2007); M.B.A., Villanova University (2013).

• Joined Vanguard in 2007.• Previously served as a performance

reporting analyst. Before that role, Mr. Chadha served as a client relationship administrator in Vanguard Institutional Participant Services.


Mario Crociata (1974) Investment Analyst, VIAS

• B.A., Hunter College (City University of New York) (1998); M.B.A., University of Washington (2010).

• Joined Vanguard in 2010.• Previously served as a project

manager in the development of Vanguard Personal Advisor Services®. Before that role, Mr. Crociata served as the manager of Vanguard Corporate Governance.

• Holds the following professional certification:– CFA charterholder

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Julie Gunderson (1987) Senior Investment Analyst, VIAS

• B.S.B.A, Villanova University (2009).• Joined Vanguard in 2014.• Previously served as a financial

advisor in Vanguard Personal Advisor Services. Before that role, Ms. Gunderson served as an assistant portfolio manager at Veritable, LP.


Jamila J. Hashem (1987) Investment Analyst, VIAS

• B.S., Arizona State University (2014).• Joined Vanguard in 2014.• Previously served as a project lead

for Vanguard Retail Operations and Institutional Recordkeeping Services.


Joseph Hess (1986) Investment Analyst, VIAS

• B.B.A., Temple University (2009).• Joined Vanguard in 2009.• Previously served as a relationship

manager in Vanguard Institutional Investor Services.


Yoona Koh (1987) Investment Analyst, VIAS

• B.S., Drexel University (2011).• Joined Vanguard in 2011.• Previously served as a client service

analyst in Vanguard Institutional Investor Group.


10

Nicholas Piccarreta (1984)Investment Analyst, VIAS

• B.S., Arizona State University (2012).

• Joined Vanguard in 2012.• Previously served as a client

relationship administrator for Vanguard Flagship Services®.


Michael Plink (1982) Investment Analyst, VIAS

• M.B.A., Millersville University (2006).• Joined Vanguard in 2007.• Previously served as a sales analyst

in Vanguard Consultant Relations.• Holds the following professional

certifications:– Securities licenses: Series 6, 63– Advisor license: Series 65

11

Eric Salzer (1983) Senior Investment Analyst, VIAS

• B.A., Bucknell University (2006).• Joined Vanguard in 2006.• Previously served as a research

associate for Vanguard Fixed Income Group and an analyst for Vanguard Fund Financial Services.

• Holds the following professional certifications:– CFA charterholder– Securities licenses: Series 6, 63– Advisor license: Series 65

Matthew K. Underwood (1984) Investment Analyst, VIAS

• B.I.S., Arizona State University (2009); M.B.A., University of Arizona (2012).

• Joined Vanguard in 2011.• Previously served as a portfolio

analyst and consultant in Vanguard Advisor Portfolio Analytics & Consulting Group. Before that role, Mr. Underwood served as an investment specialist for Vanguard Business Development Group.


Managers

Christopher Philips (1977) Manager, VIAS

• B.A., Franklin and Marshall College (2000).

• Responsible for the teams of investment professionals who provide asset allocation modeling, investment policy consulting, portfolio construction recommendations, and ongoing investment management to endowment, foundation, and defined benefit clients.

• Joined Vanguard in 2000. • Before his current role, Mr. Philips

led a team of relationship managers for Vanguard’s Institutional Investment Only clients, focusing on defined benefit, defined contribution, nonprofit, and corporate assets. He spent 12 years in Vanguard Investment Strategy Group where he was responsible for creating and presenting investment thought leadership; consulting with retail, institutional, and intermediary clients; and serving as a subject matter expert on special projects. He began his Vanguard career in Vanguard’s accelerated development program.


Kiesha Earle (1976) Manager, VIAS

• B.S., New York University Stern School of Business (1998).

• Leads a team of investment professionals who provide asset allocation modeling, investment policy consulting, portfolio-construction recommendations, and ongoing investment management to endowment, foundation, and defined benefit clients.

• Joined Vanguard in 2012. • Before her current role, Ms. Earle

was a senior investment analyst in Vanguard Portfolio Review Department.

• Before joining Vanguard, Ms. Earle spent nine years at BNP Paribas where she held a variety of positions, including trading, structuring, and marketing corporate bonds; debt syndication; and debt capital markets.

• Holds the following professional certifications:– Securities licenses: Series 6, 63

12

James Sheeky (1963) Manager, VIAS

• B.S., Millersville University (1985); M.B.A., Widener University (1992).

• Leads a team of investment professionals who provide asset allocation modeling, investment policy consulting, portfolio-construction recommendations, and ongoing investment management to endowment, foundation, and defined benefit clients.

• Joined Vanguard in 1998. • Before his current role, Mr. Sheeky

managed investment professionals in Vanguard Asset Management Services, and held leadership roles in Vanguard’s Procurement Services/Supplier Management, Corporate Financial Services, Retirement Services, and Advice Services.

• Holds the following professional certifications:– CFP professional– Securities licenses: Series 7, 24, 63

VIAS supervisorKevin Jestice (1980) Principal, VIAS

• B.A., Loras College (2002); M.B.A., The Wharton School of the University of Pennsylvania (2012).

• Responsible for the team of investment professionals who provide asset allocation modeling, investment policy consulting, portfolio-construction recommendations, and ongoing investment management to endowment, foundation, and defined benefit clients.

• Joined Vanguard in 2007. • Before his current role, he led

Vanguard Consultant Relations, which is responsible for establishing and maintaining relationships with institutional asset management and retirement plan consultants outside of Vanguard.

He was a senior manager in Vanguard Corporate Strategy, charged with addressing the most important strategic questions to Vanguard and providing robust leadership development; and a senior investment analyst in Vanguard Portfolio Review Department. He began his Vanguard career as a senior investment consultant in VIAS.

• Holds the following professional certifications:– CFA charterholder– CIPM professional– Securities licenses: Series 6, 63– Advisor license: Series 65

13

Disciplinary informationThere are no material legal or disciplinary events to disclose for the professionals and supervisor listed.

SupervisionVAI and VIAS financial professionals are governed under the Investment Advisor’s Act of 1940 as regulated by the U.S. Securities and Exchange Commission (SEC).

Financial professionals’ emails are monitored by random sample. Results of the monitoring are reviewed with the individual by his or her direct supervisor and are reviewed in aggregate at the department level by the department head.

Verification that the monitoring is taking place as required is reviewed in aggregate at the department level by the department head.

Kevin Jestice is the principal and is the person responsible for supervision of the VIAS financial professionals. He can be reached at 610-669-6449

Requirements for state-registered planners

There are no material legal or disciplinary events to disclose for the professionals and supervisor listed. There are no bankruptcies to disclose for the professionals and supervisor listed.

Other business activitiesOther than those included with an individual’s information above, there are no business activities to report for the professionals or supervisor.

Additional compensationVIAS professionals and the supervisor receive no special or additional compensation in connection with the advisory services provided.

14

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

For institutional use only. Not for distribution to retail investors.

Vanguard Institutional Investor GroupP.O. Box 2900 Valley Forge, PA 19482-2900

© 2016 The Vanguard Group, Inc. All rights reserved. VIASSUPP 042016


Vanguard Institutional Advisory Services® > institutional.vanguard.com

VIAS SAMPLE Investment Performance Report

June 30, 2014 Table of Contents

Executive Summary I

Market & Economic Overview II

Asset Allocation III

Performance IV

Appendix V

Vanguard Institutional Advisory Services® > institutional.vanguard.com 1

Executive Summary VIAS SAMPLE

VIAS SAMPLE


Executive Summary Portfolio Objectives Policy Statement The primary objective of the Pension Plan is to provide a source of retirement income for its beneficiaries. Plan assets are to be invested with two objectives; to earn income to provide sufficient funding for current and future retirement obligations; and control the volatility of the Plan’s funded status.

The investment policy is to control the volatility of the plan’s funded status through a blend of long-term corporate bonds and Treasuries with overall interest rate sensitivity characteristics similar to the plan’s liabilities. Growth may be achieved through current income while ensuring that cost (defined as contributions) and risk (defined as funding level volatility) are manageable for the Sponsor. The securities selected within the portfolio include low-cost index funds, which are expected to track a given benchmark with little deviation. The portfolio will be rebalanced in accordance with your investment policy statement.

Cumulative Performance

39,000,000

40,000,000

41,000,000

42,000,000

43,000,000

44,000,000

45,000,000

Portfolio Value ($)

Total Market Value

Cumulative Cash Flow ($)

VIAS SAMPLE


Total Portfolio Return Summary

Returns for the period 12/31/2013 - 06/30/2014

ThreeMonths

(%)

Year toDate

(%)

OneYear

(%)

ThreeYears

(%)

FiveYears

(%)

Since ClientInception

(%)

Total Portfolio 4.89 8.74 - - - 8.74

Composite Benchmark^ 4.93 8.81 - - - 8.81

^ 44% Spliced Total Stock Market Index/45% Barclays U.S. Long Gov't/Credit Float-Adjusted Bond Index/11% Spliced Total Int'l

Stock Index since 03/31/2014; 42% Spliced Total Stock Market Index/40% Barclays U.S. Long Gov't/Credit Float-Adjusted Bond

Index/18% Spliced Total Int'l Stock Index since 12/31/2013

Cash Flow Summary

($)

Market Value as of 03/31/2014 42,544,876.19

Net Cash Flow -24,011.03

Income 346,221.25

Market Experience 1,754,949.87

Market Value as of 06/30/2014 44,622,036.28

† Further details on the calculations used in this table can be found in the Guide to Selected Charts in the Appendix.

Asset Allocation Summary

For the period ending 06/30/2014

Current Allocation

(%)

PolicyAllocation

(%) Difference

(%)

Equity Domestic 44.4 44.0 0.4

Equity International 11.1 11.0 0.1

Total Equity 55.5 55.0 0.5

Fixed Income Investment Grade 44.5 45.0 -0.5

Total Fixed Income 44.5 45.0 -0.5

Total 100.0 100.0


Market and Economic Overview

VIAS SAMPLE


Market and Economic Overview Market Return Summary

Returns for the period ending 06/30/2014

ThreeMonths

(%)

Year toDate

(%)

One Year

(%)

ThreeYears

(%)

FiveYears

(%)

TenYears

(%)

Barclays US Aggregate Bond Index 2.04 3.93 4.37 3.66 4.85 4.93

Spliced Total Stock Market Index 4.87 7.00 25.21 16.49 19.45 8.43

FTSE All-World ex US Index 5.21 5.75 21.93 5.88 11.40 8.42

FTSE Emerging Index 7.53 7.40 13.72 -0.38 9.21 12.30

FTSE Developed ex North America Idx 4.29 4.86 23.57 7.81 12.03 7.45

Market Return Commentary The capital markets rally continued during the second quarter amid stimulative central bank policy. Both the broad U.S. and international stock markets returned about 5%; their bond counterparts returned about 2% to 3%. Investors propelled some U.S. stock market gauges to fresh record highs, looking beyond challenges—such as the U.S. economy’s nearly 3% contraction in the first quarter, rising oil prices, and the World Bank’s reduced estimate for 2014 global growth. Instead, they focused on positives including lower unemployment, strong corporate earnings, livelier merger and acquisition activity, and continued low borrowing costs. And although the Federal Reserve lowered its U.S. 2014 growth forecast from about 3% (as of March) to just over 2% in June, it deemed the economy healthy enough for another reduction of its stimulative bond-buying program. The broad U.S. stock market returned 4.87%, as measured by the Russell 3000 Index, with similar results for value and growth stocks. Large-company stocks generally outpaced their smaller counterparts. Overseas, the FTSE Global All Cap ex US Index returned 5.08%. Emerging markets reclaimed the lead from developed countries: The FTSE Emerging Index returned 7.53%. A “soft landing” for China’s economy, the world’s second-largest, seemed more likely as some economic indicators improved. China’s reduction of bank reserve requirements, to stimulate lending and growth, was viewed favorably—as was the election of a pro-business prime minister in India, the world’s largest democracy. Among developed countries, Japan’s stock market resumed its advance in May after four consecutive monthly declines, gaining about 7% for the quarter. Investors were encouraged by robust first-quarter

economic growth and by the “third arrow” of Prime Minister Abe’s stimulus plans—which included a proposed cut in the corporate tax rate. While the Fed tapered its bond purchases, U.S. bond prices rose—confounding expectations. The yield on the benchmark 10-year Treasury note closed at 2.54%, down from 2.72% as of March 31 (and 2.97% as of December 31, 2013). “Safe haven” demand was strong amid heightened geopolitical tensions in Ukraine and Iraq. The Barclays U.S. Aggregate Float Adjusted Index returned 1.97%. Higher-yielding bonds with longer maturities and/or lower credit ratings had some of the best returns. Outside the United States, the Barclays Global Aggregate ex-USD Float-Adjusted Index Hedged returned 2.08%. As with stocks, emerging market bonds were some of the best performers, but are only a small slice of the international bond market: The Barclays USD Emerging Markets Government RIC Capped Index returned almost 5%. To ward off possible deflation, the European Central Bank (ECB) cut the rate at which it pays banks for their overnight deposits of reserves to –0.10%. (This unprecedented negative rate means that banks must pay the ECB, the central bank for 18 European Union countries, to keep their reserves on deposit.) In contrast, the Bank of England signaled that rates might rise sooner than anticipated as the United Kingdom’s economy gains steam. Another exceptional development: The nominal yield (before considering foreign exchange rates) of Spanish government 10-year bonds dipped below that of the 10-year U.S. Treasury, underscoring the dramatic turnaround in investors’ assessment of southern European sovereign debt.

VIAS SAMPLE


US Equity Sector Return Summary Three Months ending 6/30/2014

One Year ending 6/30/2014

US Equity Style Return Summary Three Months ending 6/30/2014


7.75%

3.56%

5.24%

5.77%

3.66%

4.39%

2.39%

12.18%

4.74%

3.20%

-32 -21 -11 0 11 21

US IMI Utilities 25/50

US IMI Telecom 25/50

US IMI Materials 25/50

US IMI Info Tech 25/50

US IMI Industrials 25/50

US IMI Health Care 25/50

US IMI Financials 25/50

US IMI Energy 25/50

US IMI Consumer Stapl

US IMI Consumer Discr

22.19%

15.54%

31.76%

32.29%

29.35%

30.91%

18.72%

30.52%

16.52%

21.20%

-52 -35 -17 0 17 35 52

US IMI Utilities 25/50

US IMI Telecom 25/50

US IMI Materials 25/50

US IMI Info Tech 25/50

US IMI Industrials 25/50

US IMI Health Care 25/50

US IMI Financials 25/50

US IMI Energy 25/50

US IMI Consumer Stapl

US IMI Consumer Discr

4.30%

4.78%

2.54%

4.97%

4.06%

6.19%

-26 -17 -9 0 9 17 26

Spliced Value Index

Spliced Small Cap Value Index

Spliced Small Cap Growth Index

Spliced Mid Cap Value Index

Spliced Mid Cap Growth Index

Spliced Growth Index

22.47%

28.36%

24.38%

28.49%

24.07%

28.16%

-48 -32 -16 0 16 32

Spliced Value Index

Spliced Small Cap Value Index

Spliced Small Cap Growth Index

Spliced Mid Cap Value Index

Spliced Mid Cap Growth Index

Spliced Growth Index

VIAS SAMPLE


Non US Equity Country Return Summary Three Months ending 6/30/2014


Non US Equity Region Return Summary Three Months ending 6/30/2014


6.05%

7.17%

10.69%

6.66%

-0.12%

12.67%

8.26%

1.65%

1.70%

5.52%

9.88%

2.77%

-33 -22 -11 0 11 22

MSCI United Kingdom Index

MSCI Spain Index

MSCI Russia Index

MSCI Japan Index

MSCI Italy Index

MSCI India Index

MSCI Hong Kong Index

MSCI Germany Index

MSCI France Index

MSCI China Index

MSCI Canada Index

MSCI Brazil Index

MSCI Australia Index

26.57%

57.17%

7.92%

9.85%

51.53%

27.40%

17.73%

29.35%

28.07%

15.67%

26.29%

20.80%

-77 -51 -26 0 26 51

MSCI United Kingdom Index

MSCI Spain Index

MSCI Russia Index

MSCI Japan Index

MSCI Italy Index

MSCI India Index

MSCI Hong Kong Index

MSCI Germany Index

MSCI France Index

MSCI China Index

MSCI Canada Index

MSCI Brazil Index

MSCI Australia Index

7.53%

3.38%

5.90%

-28 -18 -9 0 9 18

FTSE Emerging Index

FTSE Developed Europe Index

FTSE Developed Asia Pacific Idx

13.72%

29.61%

14.50%

-50 -33 -17 0 17 33 50

FTSE Emerging Index

FTSE Developed Europe Index

FTSE Developed Asia Pacific Idx

VIAS SAMPLE


US Treasury Yield Curve (%)

VIAS SAMPLE


Fixed Income Sector Return Summary Three Months ending 6/30/2014


Fixed Income Quality Return Summary Three Months ending 6/30/2014


2.41%

2.41%

1.34%

2.71%

-23 -15 -8 0 8 15 23

Barclays US Mortg.-Backed Sec

Barclays US High Yield Bond Idx

Barclays US Government Index

Barclays US Credit Bond Index

4.66%

11.73%

2.08%

7.44%

-32 -21 -11 0 11 21

Barclays US Mortg.-Backed Sec

Barclays US High Yield Bond Idx

Barclays US Government Index

Barclays US Credit Bond Index

2.41%

3.18%

2.41%

1.86%

2.35%

-23 -15 -8 0 8 15

Barclays US High Yield Bond Indx

Barclays BAA Index

Barclays AAA Index

Barclays AA Index

Barclays A Index

11.73%

9.41%

5.77%

4.87%

6.79%

-32 -21 -11 0 11 21

Barclays US High Yield Bond Indx

Barclays BAA Index

Barclays AAA Index

Barclays AA Index

Barclays A Index


Asset Allocation

VIAS SAMPLE


Asset Allocation Asset Allocation by Investment

For the period ending 06/30/2014

Market Value

($)

CurrentAllocation

(%)

PolicyAllocation

(%)Difference

(%)

Vanguard® Total Stock Market Index Fund Instl. Shares 19,812,646.52 44.40 44.00 0.40

Total Equity Domestic 19,812,646.52 44.40 44.00 0.40

Vanguard® Total Intl Stock Index Fund Institutional Shares 4,944,909.36 11.08 11.00 0.08

Total Equity International 4,944,909.36 11.08 11.00 0.08

Total Equity 24,757,555.88 55.48 55.00 0.48

Vanguard® Long-Term Bond Index Fund Instl Shares 19,864,480.40 44.52 45.00 -0.48

Total Fixed Income Investment Grade 19,864,480.40 44.52 45.00 -0.48

Total Fixed Income 19,864,480.40 44.52 45.00 -0.48

Total Portfolio 44,622,036.28 100.00 100.00

† Rows within the Current Allocation column may not add because of rounding.

Portfolio Active/Index Allocation! Active 0.0

! Index 100.0

VIAS SAMPLE


Activity by Investment

03/31/2014 Market Value

($)

NetCash Flow

($)Income

($)

MarketExperience

($)

06/30/2014 Market Value

($)

Vanguard® Total Stock Market Index Fund Instl. Shares 18,764,198.40 105,672.93 82,368.49 860,406.70 19,812,646.52

Total Equity Domestic 18,764,198.40 105,672.93 82,368.49 860,406.70 19,812,646.52

Vanguard® Total Intl Stock Index Fund Institutional Shares 4,719,884.18 -12,000.01 54,768.69 182,256.50 4,944,909.36

Total Equity International 4,719,884.18 -12,000.01 54,768.69 182,256.50 4,944,909.36

Total Equity 23,484,082.58 93,672.92 137,137.18 1,042,663.20 24,757,555.88

Vanguard® Long-Term Bond Index Fund Instl Shares 19,060,793.61 -117,683.95 209,084.07 712,286.67 19,864,480.40

Total Fixed Income Investment Grade 19,060,793.61 -117,683.95 209,084.07 712,286.67 19,864,480.40

Total Fixed Income 19,060,793.61 -117,683.95 209,084.07 712,286.67 19,864,480.40

Total Portfolio 42,544,876.19 -24,011.03 346,221.25 1,754,949.87 44,622,036.28



Performance

VIAS SAMPLE


Performance - Total Portfolio Asset Class and Total Portfolio Return Summary


ThreeMonths

(%)

Year toDate

(%)

OneYear

(%)

ThreeYears

(%)

FiveYears

(%)

Since ClientInception

(%)

Equity Domestic 4.86 6.99 - - - 6.99


Equity International 5.03 5.88 - - - 5.88

Spl Total International Stock Index 5.08 6.04 22.50 5.95 11.09 6.04

Total Equity 4.90 6.45 - - - 6.45

Fixed Income Investment Grade 4.84 12.14 - - - 12.14

Spliced Barclays USAgg Float Adj Ix 1.97 3.86 4.34 3.72 4.90 3.86

Total Fixed Income 4.84 12.14 - - - 12.14

Total Portfolio 4.89 8.74 - - - 8.74

Composite Benchmark^ 4.93 8.81 - - - 8.81

^ 44% Spliced Total Stock Market Index/45% Barclays U.S. Long Gov't/Credit Float-Adjusted Bond Index/11% Spliced Total Int'l

Stock Index since 03/31/2014; 42% Spliced Total Stock Market Index/40% Barclays U.S. Long Gov't/Credit Float-Adjusted Bond

Index/18% Spliced Total Int'l Stock Index since 12/31/2013

† Sub-asset class returns reflect the client inception date of their respective sub-asset class.

VIAS SAMPLE


Total Portfolio Ratio of Cumulative Outperformance


1.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2013 2014

Ratio Benchmark

Total Portfolio Annualized Risk/Return Summary Total Portfolio Annualized Risk/Return Summary is only available for clients with at least three years of performance history.

VIAS SAMPLE


Total Portfolio Fund Return Summary

Returns for the period ending 06/30/2014

ThreeMonths

(%)

Year toDate

(%)

OneYear

(%)

ThreeYears

(%)

FiveYears

(%)

TenYears

(%)

Vanguard® Total Stock Market Index Fund Instl. Shares 4.86 6.99 25.18 16.47 19.43 8.43


Multi-Cap Core Fund Average 4.28 6.21 23.92 13.99 17.31 7.17

Vanguard® Total Stock Market Index Fund Investor Shares 4.83 6.93 25.04 16.33 19.29 8.31


Multi-Cap Core Fund Average 4.28 6.21 23.92 13.99 17.31 7.17

Vanguard® Total Intl Stock Index Fund Institutional Shares 5.03 5.88 22.45 5.91 - -

Spliced Total Int'l Stock Index 5.08 6.04 22.50 5.95 11.09 7.52

International Fund Average 3.78 4.16 21.39 6.66 11.39 6.63

Vanguard® Total Intl Stock Investor Shares 5.02 5.82 22.34 5.83 11.01 7.42

Spliced Total Int'l Stock Index 5.08 6.04 22.50 5.95 11.09 7.52

International Fund Average 3.78 4.16 21.39 6.66 11.39 6.63

Vanguard® Long-Term Bond Index Fund Instl Shares 4.84 12.14 10.55 9.55 9.56 -

Barclays U.S. Long Gov't/Credit Float-Adj Spliced Bond Idx 4.94 11.81 10.78 9.57 9.60 7.60

Corporate Debt Fund A-Rated Average 2.56 5.53 6.67 4.80 6.54 4.70

Vanguard® Long-Term Bond Index Fund 4.80 12.07 10.41 9.41 9.41 7.51

Barclays U.S. Long Gov't/Credit Float-Adj Spliced Bond Idx 4.94 11.81 10.78 9.57 9.60 7.60

Corporate Debt Fund A-Rated Average 2.56 5.53 6.67 4.80 6.54 4.70

VIAS SAMPLE


Fund Activity by Investment

03/31/2014Market Value

($)

NetCash Flow

($)Income

($)

MarketExperience

($)

06/30/2014Market Value

($)

Vanguard® Total Stock Market Index Fund Instl. Shares 18,764,198.40 105,672.93 82,368.49 860,406.70 19,812,646.52

Vanguard® Total Intl Stock Index Fund Institutional Shares 4,719,884.18 -12,000.01 54,768.69 182,256.50 4,944,909.36

Vanguard® Long-Term Bond Index Fund Instl Shares 19,060,793.61 -117,683.95 209,084.07 712,286.67 19,864,480.40

Total Portfolio 42,544,876.19 -24,011.03 346,221.25 1,754,949.87 44,622,036.28


VIAS SAMPLE


Fund Details Vanguard® Total Stock Market Index Fund Instl. Shares Return Summary

Returns for the period 07/07/1997 - 06/30/2014Three

Months(%)

Year toDate(%)

OneYear(%)

ThreeYears

(%)

FiveYears

(%)

SinceInception

(%)

Vanguard® Total Stock Market Index Fund Instl. Shares 4.86 6.99 25.18 16.47 19.43 7.13

Spliced Total Stock Market Index 4.87 7.00 25.21 16.49 19.45 -

Multi-Cap Core Fund Average 4.28 6.21 23.92 13.99 17.31 - Vanguard Style View Index portfolio of large-, mid-, and small-capitalization stocks diversified across investment styles.

Expected range of fund holdings

Central tendency

VIAS SAMPLE


Fund Ratio of Cumulative Outperformance

Five years ending 06/30/2014

Fund Annualized Risk/Return Summary


1.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2009 2010 2011 2012 2013 2014Ratio Benchmark

0.00

5.00

10.00

15.00

20.00

25.00

0 5 10 15

Ann

ualiz

ed R

etur

n (%

)

Annualized Risk (%)

Fund Benchmark T-bills Peer Group

VIAS SAMPLE


Vanguard® Total Intl Stock Index Fund Institutional Shares Return Summary


Months(%)

Year toDate(%)

OneYear(%)

ThreeYears

(%)

FiveYears

(%)

SinceInception

(%)

Vanguard® Total Intl Stock Index Fund Institutional Shares 5.03 5.88 22.45 5.91 - 8.07

Spliced Total Int'l Stock Index 5.08 6.04 22.50 5.95 11.09 -

International Fund Average 3.78 4.16 21.39 6.66 11.39 - Vanguard Style View Vanguard Style View is not available. The fund is not accurately defined by style, either because of the fund's investment mandate or asset class.

VIAS SAMPLE



Fund Ratio of Cumulative Outperformance is only available for funds with at least five years of performance history.


The Fund Annualized Risk/Return Summary is only available for funds with at least five years of performance history.

VIAS SAMPLE


Vanguard® Long-Term Bond Index Fund Instl Shares Return Summary


Months(%)

Year toDate(%)

OneYear(%)

ThreeYears

(%)

FiveYears

(%)

SinceInception

(%)

Vanguard® Long-Term Bond Index Fund Instl Shares 4.84 12.14 10.55 9.55 9.56 7.51Barclays U.S. Long Gov't/Credit Float-Adj Spliced Bond Idx 4.94 11.81 10.78 9.57 9.60 -

Corporate Debt Fund A-Rated Average 2.56 5.53 6.67 4.80 6.54 - Vanguard Style View Invests in U.S. Treasury, agency, and investment-grade corporate securities with long duration.

Expected range of fund holdings

Central tendency

VIAS SAMPLE






1.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2009 2010 2011 2012 2013 2014Ratio Benchmark

0.00

2.00

4.00

6.00

8.00

10.00

12.00

0 2 4 6 8 10

Ann

ualiz

ed R

etur

n (%

)

Annualized Risk (%)

Fund Benchmark T-bills Peer Group


Appendix


Guide to Selected Charts Activity by investment reflects transactions, fund distributions, and market performance of the funds held in the portfolio during the reporting period. The columns include: Net Cash Flow

(+) Fund purchases (not counting reinvested dividends or capital gains) (-) Fund redemptions (-) Dividends and fund capital gain distributions that are not reinvested

Income: all dividends and fund distributions, whether reinvested or paid out Market Experience

Ending Market Value – Beginning Market Value – (Net Cash Flow + Income) Fund annualized risk/return shows two key metrics of a fund's performance: five-year annualized return and standard deviation, a common measurement of risk. This long-term relationship between a fund’s risk and return is plotted alongside that of its benchmark, peer group, and T-bills, which represent a risk-free asset. Performance attribution takes the performance of an actively managed fund’s holdings over a specified period of time and compares it, by sector, to its benchmark. The amount of contribution reflects a combination of the return from those sector holdings and their weight in the portfolio. Ratio of cumulative outperformance illustrates the ratio of the portfolio or fund’s cumulative performance (represented by the blue line) relative to that of its benchmark (the black line). When the line slopes upward from one point to another, the portfolio is outperforming its benchmark. At any given point, the line will plot above or below the benchmark line if it has cumulatively outperformed or underperformed the benchmark since the initial time period. Returns for periods less than one year are cumulative; those for one year or greater are annualized. Style view indicates both the expected range and the central tendency of the fund's holdings. The four-quadrant box is divided by market capitalization and investment style (growth versus value) for domestic equities, by market focus (developed markets versus emerging markets) and investment style for international equities, and by credit quality and duration for bonds.


Legal The performance data shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors’ shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Total Portfolio Net of Fees returns reflect the deduction of fund expense ratios, purchase or redemption fees, and any advisory service fee applied to the client portfolio. Total Portfolio returns represent client-specific time-weighted returns (TWR) are presented gross of any applicable service fees with the exception of mutual fund expense ratios and other security-level expenses. Internal rates of return (IRR) are net of any applicable service fees, include account-specific cashflows, and are not directly comparable to a benchmark, since benchmarks do not include cashflows. Client performance inception date is generally the first month-end after initial funding. Performance figures assume the reinvestment of dividends and capital gains distributions. The fund performance percentages are based on fund total return data, adjusted for expenses, obtained from Lipper, a Thomson Reuters Company. The total return data was not adjusted for fees and loads. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Benchmark comparative indexes represent unmanaged or average returns on various financial assets, which can be compared with funds' total returns for the purpose of measuring relative performance. Fund inception date refers to the date on which performance measurement began. Returns do not reflect subscription periods. The Russell 1000 Growth Index is used as the comparative benchmark for the PRIMECAP Fund in this report; The S&P 500 is the fund’s primary benchmark, as indicated in the fund prospectus. The Spliced Core Bond Funds Average contains the returns of the Intermediate Inv-Grade Debt Funds Average through 8/31/2013; Core Bond Funds Average thereafter. The Spliced Barclays U.S. Aggregate Float Adjusted Index contains the returns of the Barclays U.S. Aggregate Bond Index through December 31, 2009; Barclays U.S. Aggregate Float Adjusted Index thereafter. The Spliced Barclays U.S. Long Government/Credit Float Adjusted Index contains the returns of the Barclays Capital U.S. Long Government/Credit Bond Index through December 31, 2009; Barclays U.S. Long Government/Credit Float Adjusted Index thereafter. The Spliced Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index contains the returns of the Barclays Capital U.S. 1-5 Year Government/Credit Bond Index through December 31, 2009; Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index thereafter. The Spliced Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index contains the returns of the Barclays Capital U.S. 5-10 Year Government/Credit Bond Index through December 31, 2009; Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index thereafter.


The Spliced Total Stock Market Index contains the returns of the Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index) through May 31, 2005; MSCI US Broad Market Index through June 2, 2013; and CRSP US Total Market Index thereafter. The Spliced Institutional Total Stock Market Index contains the returns of the Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index through April 8, 2005; the MSCI US Broad Market Index through January 14, 2013; and the CRSP US Total Market Index thereafter. The Spliced EAFE + Emerging Markets Index contains the returns of the Total International Composite Index through August 31, 2006; MSCI EAFE + Emerging Markets Index thereafter. Returns for the MSCI EAFE + Emerging Markets Index are adjusted for withholding taxes applicable to Luxembourg holding companies. The Spliced Extended Market Index contains the returns of the Dow Jones U.S. Completion Total Stock Market Index until June 17, 2005; S&P Transitional Completion Index through September 16, 2005; S&P Completion Index thereafter. The Spliced Mid Cap Index contains the returns of the S&P MidCap 400 Index through May 16, 2003; the MSCI US Mid Cap 450 Index through January 30, 2013; and the CRSP US Mid Cap Index thereafter.

The Spliced Mid Cap Growth Index contains the MSCI US Mid Cap Growth Index through April 16, 2013; CRSP US Mid Cap Growth Index thereafter. The Spliced Mid Cap Value Index contains the MSCI US Mid Cap Value Index through April 16, 2013; CRSP US Mid Cap Value Index thereafter. The Spliced Value Index contains the S&P 500 Value Index (formerly known as the S&P 500/Barra Value Index) through May 16, 2003; MSCI US Prime Market Value Index through April 16, 2013; CRSP US Large Cap Value Index thereafter. The Spliced Growth Index contains the S&P 500 Growth Index (formerly known as the S&P 500/Barra Growth Index) through May 16, 2003; MSCI US Prime Market Growth Index through April 16, 2013; and CRSP US Large Cap Growth Index thereafter. The Spliced Small Cap Index contains the returns of the Russell 2000 Index through May 16, 2003; the MSCI US Small Cap 1750 Index through January 30, 2013; and the CRSP US Small Cap Index thereafter. The Spliced Small Cap Value Index contains the SmallCap 600 Value Index (formerly known as the S&P SmallCap 600/Barra Value Index) through May 16, 2003; MSCI US Small Cap Value Index through April 16, 2013; CRSP US Small Cap Value Index thereafter. The Spliced Small Cap Growth Index contains the S&P SmallCap 600 Growth Index (formerly known as the S&P SmallCap 600/Barra Value Index) through May 16, 2003; MSCI US Small Cap Growth Index through April 16, 2013; and CRSP US Small Cap Growth Index thereafter. The Spliced Small and Mid Cap Index contain the returns of the Russell 2800 Index through May 31, 2003; then the MSCI US Small + Mid Cap 2200 Index thereafter. The Convertibles Composite Index contains the returns of the CS First Boston Convertible Index until November 30, 2004; Bank of America Merrill Lynch All US Convertibles Index through December 31, 2010; and 70% Bank of America Merrill Lynch All US Convertibles Index and 30% Bank of America Merrill Lynch Global 300 Convertibles ex-US Index thereafter. The Spliced Emerging Markets Index contains the returns of the Select Emerging Markets Index through August 23, 2006; the MSCI Emerging Markets Index through January 9, 2013; and the FTSE Emerging Transition Index through June 27, 2013; and FTSE Emerging Index thereafter.


The Spliced Precious Metals and Mining Index contains the returns of the MSCI Gold Mines Index through December 31, 1994; S&P/Citigroup World Equity Gold Index through June 30, 2005; S&P Global Custom Metals and Mining Index thereafter. The Spliced International Index contains the returns of the MSCI EAFE Index through May 31, 2010; MSCI All Country World Index ex USA thereafter. The Spliced Total International Stock Index consists of the Total International Composite Index through August 31, 2006; MSCI EAFE + Emerging Markets Index through December 15, 2010; MSCI ACWI ex USA IMI Index through June 2, 2013; and FTSE Global All Cap ex US Index thereafter. The Spliced Energy Index contains the returns of the S&P 500 Index through November 30, 2000; S&P Energy Sector Index through May 31, 2010; MSCI All Country World Energy Index thereafter. The Spliced Health Care Index contains the returns of the S&P 500 Index through December 31, 2001; S&P Health Care Index through May 31, 2010; MSCI All Country World Health Care Index thereafter. The Spliced Total World Stock Index consists of the FTSE All-World Index through December 18, 2011; FTSE Global All Cap Index thereafter. The S&P 500/Citigroup Value Index contains the returns of the S&P 500/Barra Value Index through December 16, 2005; S&P 500/Citigroup Value Index thereafter. The S&P 500/Citigroup Growth Index contains the returns of the S&P 500/Barra Growth Index though December 16, 2005; S&P 500/Citigroup Growth Index thereafter. The Spliced Large Cap Growth Index contains the returns of the MSCI US Prime Market 750 Index through January 30, 2013, and the CRSP US Large Cap Index thereafter. The Spliced Large Cap Index contains the returns of the MSCI US Prime Market 750 Index through January 30, 2013; CRSP US Large Cap Index thereafter.

The S&P MidCap 400/Citigroup Growth Index contains the returns of the S&P MidCap 400/Barra Growth Index though December 16, 2005; S&P MidCap 400/Citigroup Growth Index thereafter. The S&P MidCap 400/Citigroup Value Index contains the returns of the S&P MidCap 400/Barra Value Index though December 16, 2005; S&P MidCap 400/Citigroup Value Index thereafter. The S&P SmallCap 600/Citigroup Growth Index contains the returns of the S&P SmallCap 600/Barra Growth Index though December 16, 2005; S&P SmallCap 600/Citigroup Growth Index thereafter. The S&P SmallCap 600/Citigroup Value Index contains the returns of the S&P SmallCap 600/Barra Value Index though December 16, 2005; S&P SmallCap 600/Citigroup Value Index thereafter. The Tax-Managed Balanced Composite Index contains the weighted returns of 50% Russell 1000 Index and 50% Barclays 7 Year Municipal Bond Index through January 31, 2002 and 50% Russell 1000 Index and 50% Barclays 1-15 Year Index thereafter. The Spliced Intermediate-Term Tax-Exempt Index contains the returns of the Barclays 7 Year Municipal Bond Index through January 31, 2002; Barclays 1-15 Year Municipal Bond index thereafter. The Spliced MA Tax-Exempt Index contains the returns of the Barclays 10 Year Municipal Bond Index through August 31, 2003; Barclays MA Municipal Index thereafter.


The NJ Long-Term Tax-Exempt Index contains the returns of the Barclays 10 Year Municipal Bond Index through August 31, 2003; Barclays NJ Municipal Index thereafter. The Spliced PA Tax-Exempt Money Market Funds Avg contains the returns of the PA Tax-Exempt MM Funds Average through 8/31/2013; Other States Tax-Exempt MM Fds Avg thereafter The Spliced European Stock Index contains the MSCI Europe Index through March 26, 2013; and the FTSE Developed Europe Index thereafter. The Spliced Pacific Stock Index contains the MSCI Pacific Index through March 26, 2013; and the FTSE Developed Asia Pacific Index thereafter. The Spliced Developed Markets Index contains the MSCI EAFE Index through April 16, 2013; FTSE Developed ex North America Index thereafter. The Spliced Developed Markets ex North America Index contains the MSCI EAFE Index through May 28, 2013; FTSE Developed ex North America Index thereafter. The REIT Spliced Index contains MSCI US REIT Index adjusted to include a 2% cash position (Lipper Money Market Average) through April 30, 2009; MSCI US REIT Index thereafter. The Spliced Social Index contains Calvert Social Index through December 16, 2005; FTSE4Good US Select Index thereafter. The Spliced Intermediate-Term Investment Grade Debt Funds Average contains the returns of the Intermediate-Term Inv-Grade Debt Funds Average through 09/01/2013; Core Bond Funds Average thereafter. The Wellington Composite Index contains 65% S&P 500 Index and 35% Lehman U.S. Long Credit AA or Better Bond Index through February 29, 2000; 65% S&P 500 Index and 35% Barclays U.S. Credit A or Better Bond Index thereafter. The Wellesley Income Composite Index is weighted 65% bonds and 35% stocks. For Bonds: Lehman U.S. Long Credit AA or Better Bond Index through March 31, 2000, and Barclays U.S. Credit A or Better Bond Index thereafter. For stocks: 26% S&P 500/Barra Value Index and 9% S&P Utilities Index through June 30, 1996, when the utilities component was split into the S&P Utilities Index (4.5%) and the S&P Telephone Index (4.5%); as of January 1, 2002, the S&P Telephone Index was replaced by the S&P Integrated Telecommunication Services Index; as of July 1, 2006, the S&P 500/Barra Value Index was replaced by the S&P 500/Citigroup Value Index; as of August 1, 2007, the three stock indexes were replaced by the FTSE High Dividend Yield Index. The Balanced Composite Index contains two unmanaged benchmarks, weighted 60% Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index) and 40% Lehman Brothers U.S. Aggregate Bond Index through May 31, 2005; 60% MSCI US Broad Market Index and 40% Barclays U.S. Aggregate Bond Index through December 31, 2009; 60% MSCI US Broad Market Index and 40% Barclays U.S. Aggregate Float Adjusted Index through January 14, 2013; and 60% CRSP US Total Market Index and 40% Barclays U.S. Aggregate Float Adjusted Index thereafter.

The Dividend Growth Spliced Index (formerly known as the Utilities Composite Index prior to December 6, 2002) contains the index weightings: 40% S&P Utilities Index, 40% S&P Telephone Index, and 20% Lehman Brothers Utility Bond Index though April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P Telephone Index, and 15% Lehman Brothers Utility Bond Index through March 31, 2000; 75% S&P Utilities Index and 25% S&P Integrated Telecommunication Services Index


through December 6, 2002; 100% Russell 1000 through January 2010; 100% NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index.

The STAR Composite Index contains 62.5% Dow Jones U.S. Total Stock Market Index, 25% Barclays U.S. Aggregate Bond Index, and 12.5% Citigroup Three-Month U.S. Treasury Bill Index through December 31, 2002; 50% Dow Jones U.S. Total Stock Market Index, 25% Barclays U.S. Aggregate Bond Index, 12.5% Barclays U.S. 1–5 Year Credit Bond Index, and 12.5% MSCI EAFE Index through April 22, 2005; 50% MSCI US Broad Market Index, 25% Barclays U.S. Aggregate Bond Index, 12.5% Barclays U.S. 1–5 Year Credit Bond Index, and 12.5% MSCI EAFE Index through September 30, 2010; and 43.75% MSCI US Broad Market Index, 25% Barclays U.S. Aggregate Bond Index, 12.5% Barclays U.S. 1–5 Year Credit Bond Index, and 18.75% MSCI All Country World Index ex USA thereafter. MSCI international benchmark returns are adjusted for withholding taxes.

S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Vanguard. The [S&P 500 index] is a product of S&P Dow Jones Indices LLC and has been licensed for use by Vanguard. [LICENSEE FUND or ETF] is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates, and none of S&P Dow Jones Indices LLC, Dow Jones, S&P nor their respective affiliates makes any representation regarding the advisability of investing in such product(s). The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the prospectus or the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. The Russell 1000 Growth Index®, Russell 1000 Index®, Russell 1000 Value Index®, Russell 2000 Growth Index®, Russell 2000 Index®, Russell 2500 Growth®, Russell 2500 Index®, Russell 2800 Index®, Russell 3000 Growth Index®, Russell 3000 Index®, Russell 3000 Value Index®, Russell Midcap Growth Index®, Russell Midcap Index®, Russell Midcap Value Index® and Russell® are registered trademarks of Russell Investments and have been licensed for use by The Vanguard Group. The Product(s) are not sponsored, endorsed, sold or promoted by Russell Investments and Russell Investments makes no representation regarding the advisability of investing in the Products. MSCI Provisional Index Series returns beginning November 16, 2001. © 2014 The Vanguard Group, Inc. All rights reserved.

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© 2014 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

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Treasure

A guide to best practices for nonprofit fiduciaries

your missionfulfilling


best practicesfiduciary

Introduction 2

Part I: Defining your role Defining the fiduciary role 6 A brief history of U.S. fiduciary law Accounting standards and other criteria Your fiduciary role

Laying a strong foundation 12 Investment committee charter Investment policy statement Investment purpose and strategy

Part II: Building your structure Building out the framework 16 Portfolio construction Risk management Measuring success Spending policy Manager selection

Maintaining the structure 26 Meeting agendas

Conclusion 30

Part III: Glossary and references Glossary of legal, accounting and tax terms 32 References 35

contents

1

The value of nonprofit service in today’s society Serving on the investment committee of a nonprofit or other charitable organization can be a rewarding way to serve your com-munity and society. Nonprofits provide a large share of services critical to the quality of life both domestically and internationally. They are on the frontlines of some of the world’s greatest challenges: providing food, medicine, and college scholarships for the underprivileged; protecting the environ-ment; and eradicating diseases worldwide.

Such service is not without its share of unique challenges, however. Chief among them is often the limited financial resources available to support your institu-tion’s mission. According to a survey conducted by Philanthropic Research Inc., nearly half of all nonprofit personnel cited inadequate financial resources as their number one challenge, far surpassing the number two concern of publicizing their organization’s mission (Figure 1).

Financial constraints deprive organizations of the resources necessary to pursue their missions. To the extent that a nonprofit investment portfolio exists, it may not be large enough to attract and retain qualified staff to manage the daily operations of the investment portfolio. These difficulties underscore the importance of establishing strong financial principles and practices within the nonprofit community.

The investment decision-making group at nonprofits can range from a large, diverse investment committee to a finance com-mittee, board, staff, or other decision-mak-ing entity. For the purposes of this refer-ence manual, we will be referring to such individuals as the investment committee.

Reflecting the resource challenges of many charitable institutions, this reference manual offers investment committee members and their staffs valuable guidance on a number of functions vital to serving a nonprofit in an investment-oriented role, including:

•Thecriticalimportanceofawell-written,thoughtful investment committee charter that clearly defines roles and responsibilities so committees can function efficiently.

2

Figure 1. What is the greatest challenge facing your nonprofit organization?

Finding the money to accomplish our mission 46%Getting the word out about us and what we do 17%Staffing 7%Strategic planning/setting priorities 3%Managing donor and funder obligations 2%Building public trust 1%Incorporating the technology needed to accomplish our mission 1%Complying with state and federal requirements for our organization 1%Other 21%

Source: Coffman, 2005. (Figures rounded to the nearest percentage.)

introduction

•Thevaluableroletheinvestmentpolicystatement plays in specifying your organization’s investment strategy, portfolio construction, risk tolerance, spending policy, manager selection, and criteria for success.

•Theneedtoestablishaneffective communication plan that disseminates information to committee members in a timely manner.

•Theimportanceofmaintainingdiversityof thought and an orderly decision- making process through effective committee meeting agendas.

•Yourresponsibilityasafiduciaryand key statutes and precedents you need to understand to help avoid legal jeopardy.

Unfamiliar territory for some

Nonprofit boards and investment commit-tees may be different in structure from customary corporate board membership (Figure 2).

•Nonprofitinvestmentcommittee members often come from more diverse backgrounds with a wider variety of skill levels. Some are extremely knowledge-able and have professional investment backgrounds, while others are relative newcomers to the financial world, but bring more expertise on their organiza-tion’s mission.

•Serviceonanonprofitinvestment committee is generally performed on a volunteer basis, whereas many corporate board members are compensated for their work.

•Spendingdecisionsfornonprofitscan be more subjective, particularly for a foundation. By comparison, corporate boards are generally restricted by a variety of constraints, including the need to fund regular pension payments.

•Nonprofits,particularlythosewith perpetual endowments or foundations, have much longer investment time horizons, which can encourage a focus on long-term asset allocation and invest-ment structure rather than short-term performance. Longer time horizons also place higher priority on managing the entire portfolio with less attention on the performance of individual asset classes, securities, and sometimes liquidity.

3Introduction

DifferenceMember backgrounds

Compensation

Spending authority

Time horizons

Source: Vanguard.

NonprofitTend to come from more diverse backgrounds with a wider variety of investment expertise.Investment committee service is usually performed on a volunteer basis.Generally have more flexibility.

Some nonprofits, particularly those with perpetual endow-ments or foundations, can have much longer invest-ment time horizons.

CorporationBoard members are more likely to come from profes-sional financial backgrounds.

Board members are more likely to be compensated financially.Restricted by a variety of constraints, including money to fund regular pension payments.

Shorter time horizons because of strict pension funding rules and financial statement impact.

Figure 2. Different roles: Nonprofit and corporate boards

introduction

4

A tool kit for your responsibilities Both seasoned and prospective committee members face new challenges unique to nonprofit investing. Each organization has to tailor its investment practices to fulfill its mission and make adjustments when necessary.

At Vanguard, we adhere to the highest ethical standards and continually strive to help clients achieve their missions. While we provide many services to help our nonprofit clients meet their fiduciary responsibilities, there are other steps investment commit-tees should take on their own. These are presented in this guide, as well as in a number of companion pieces that can be found on Vanguard’s Nonprofit Investment Committee Resources Center at vanguard.com/nonprofitresourcecenter.

Subtle differences among nonprofits

There also is significant diversity within the nonprofit sector in terms of goals, objectives, and investment management strategies. Private foundations and endow-ments held by public charities may appear to share many of the same characteristics, but there are critical differences between the two.

For example, private foundations must distribute at least 5% of the average market value of their investment assets each year or face significant tax penalties. They generally receive few new infusions of capital to boost operations and must rely almost exclusively on investment income to support obligations. Private foundations must also focus on meeting short-term obligations even at the expense of long-term purchasing power. In contrast, endowments held by public charities do not face the same restrictions and can focus on preserving long-term purchasing power.

Introduction

your roledefining

defining the fiduciary role

A brief history of U.S. fiduciary law To better execute your fiduciary responsibil-ities, you should first have an understand-ing of the origins of your legal obligations. While much of the historical context behind the role of a fiduciary pertains to the man-agement of individual trusts, the advances that took place in this area during the second half of the 20th century also are relevant to nonprofits.

Significant events

Fiduciary responsibilities in the United States have evolved over the past half century to the point where today invest-ment committees have much wider latitude to support their organizations’ long-term objectives. This has not always been the case. Until recently, judicially created restrictions based on English common law have mandated that fiduciaries be judged on an individual investment basis rather than on the overall performance of a well-diversified portfolio (Figure 3).2

This perspective reduced potential returns because it forced fiduciaries to rely almost exclusively on conservative investments to meet court approval. Traditional trust law included a number of restrictions on investments, including a prohibition on junior mortgages and new ventures with some states taking the extreme step of creating legal lists of approved trust investments.3 This restrictive environment not only limited potential returns, but also allowed asset values to be eroded by inflation.4

6

1 Foundation for Fiduciary Studies, 2004.2 Borkus, 2001.3 National Conference of Commissioners on Uniform State Laws, 1994.4 Borkus, 2001.

Significance•FinancialcollapseofEnglishcompanyestablishedfiduciarydoctrineinEnglandandAmericaofprotectingportfoliosthrough conservative bond investments.

•MassachusettsSupremeCourtrulingestablishedmodern prudent man standard.

•Permittedfiduciariestoincorporateriskierinvestmentsintoportfolios provided they used good judgment.

•NewYorkCourtofAppealsdecisionrestrictsfiduciariesto government- and mortgaged-backed securities.

•ConceptdevelopedbyHarryMarkowitzthatadiversified portfolio is considered prudent in most cases.

•CaryandBrightreportarguesthattraditionaltrustlawdoesnot apply to endowed funds and fiduciaries for such funds balance current and future spending needs, taking into account loss of purchasing power caused by inflation.

•TheBarkerstudyrecommendsthateducationalendowmentsadopt total return strategies and that the management of those funds be delegated to professional money managers.

Fiduciary: Someone having legal authority for managing another person’s or organization’s money. The primary duty of a fiduciary is to manage a prudent investment process without which the components of an investment plan cannot be defined, implemented, or evaluated.1

Figure 3. Key events in fiduciary history EventSouth Sea Company (1720)

Harvardv.Amory(1830)

Kingv.Talbot(1869)

Modern Portfolio Theory (1952)

Ford Foundation Studies (1969)

Sources: Borkus, 2001; Phillips Jr.; 1997; Schneider, 2002.

In the early 1950s, Harry Markowitz published his landmark paper Portfolio Selection, which has become the generally accepted origin of modern portfolio theory.5 This theory combines speculative and safe investments in an effort to generate consis-tent portfolio returns.6 Markowitz developed the concept that a diversified portfolio is considered prudent in most cases because the expected rate of return increases without substantially increasing the portfolio’s overall risk.7

Modern portfolio theory stands in sharp contrast to the policy of “safe” investing under traditional fiduciary doctrine. The ultimate goal is to balance portfolio risks and returns through diversification of assets. By using a wide range of invest-ments to build a portfolio that more closely reflects the overall market, higher returns are possible.8 A diversified portfolio is considered prudent because it minimizes the specific risk associated with any one investment. Using a broad spectrum of investments, including those once considered speculative, can improve the portfolio’s expected rate of return without inherently increasing its exposure to uncompensated risks.9

In 1969, the Ford Foundation published two studies that were particularly influential in helping to advance portfolio theory for endowed funds. The first report, The Law and Lore of Endowment Funds by William L. Cary and Craig B. Bright, Esq., argued against the traditional trust law concept of prioritizing current income requirements over generating realized gains. Instead, the authors called for endowments to give equal consideration to capital appreciation needs.10

The second Ford Foundation report, Managing Educational Endowments, by Robert R. Barker, analyzed the investment returns of 15 large educational endowments and compared their performance with 21 randomly selected balanced funds, ten large growth funds, and one university endowment from 1959 to1968. The aver-age annual return for the 15 endowments lagged significantly behind the others during this ten-year period (Figure 4). The report attributed its findings to the endowments’ focus on avoiding losses and maximizing present income.11

Markowitz’s work and the Ford Foundation Studies led to the development of the Uniform Management of Institutional Funds Act (UMIFA), the Uniform Prudent Investor Act (UPIA), and more recently the Uniform Prudent Management of Institutional Funds Act (UPMIFA). All of these statutes create a fiduciary standard that essentially warns against exercising extreme conservatism.12

defining the fiduciary role

7Defining the fiduciary role

Cumulative Annual average 134% 8.7% 143% 9.2% 283% 14.4% 295% 14.6%

Figure 4. 1959–68 total return

Fifteen educational institutions—averageTwenty-one balanced funds—averageThe University of RochesterTen large general growth funds—averageSource: Schneider, 2002.

5 Borkus, 2001.6 Phillips Jr., 1997. 7 Phillips Jr., 1997.8 Phillips Jr., 1997.9 Phillips Jr., 1997.10 Schneider, 2002.11 Schneider, 2002.12 Borkus, 2001.

Statutory breakthroughs—UMIFA, UPMIFA, UPIA

In 1972, the National Conference of Commissioners on Uniform State Laws (NCCUSL) adopted UMIFA. The act is significant because it embraced the con-cept of total return. In contrast to previous statutes and policies that restricted endow-ment spending to income investments such as interest and dividends, UMIFA authorizes organizations to spend from capital appreciation on endowment fund assets (Figure 5).

UMIFA also grants investment boards the authority to pursue any investment authorized under law and to delegate investment authority not only within their committees and sponsoring organizations, but also to outside advisors and managers.

At the time, UMIFA was seen as ground-breaking legislation for advocates of modernizing fiduciary standards, but its prohibition on endowments from spending below their historical dollar value limited many smaller organizations to investing in cash equivalents, such as certificates of deposit. This strategy forced these insti-tutions to retain sufficient funds and not break the law by dipping into their corpus.

Twenty years later, the Prudent Investor Rule, ratified by the American Bar Association in 1992, built on many of the advances made by Markowitz and UMIFA. This policy recommendation gives fiducia-ries greater flexibility to consider any investment to create a desirable balance between risk and return for a given trust and includes the following features:

•Duty to balance risks against total returns. In contrast to the previous trust doctrine, which characterized return as income yield alone and condemned trustees for speculative investment practices, the Prudent Investor Rule acknowledges that excessive conserva-tism can prove equally harmful to trust beneficiaries and considers increases in market value as part of the trust’s return.13

•Duty of impartiality. The Prudent Investor Rule expands the concept of trust preservation to include the protec-tion of trust capital and its purchasing power from the threat of inflation. An investment strategy that seeks maximum income yield may minimize growth of trust capital. Such a strategy may satisfy the income needs of current trust beneficiaries, but leaves the trust with diminished purchasing power for future beneficiaries. This approach vio-lates the duty of impartiality by favoring one group’s interest over another’s.14

•Authority to delegate. The Prudent Investor Rule builds on UMIFA by encour-aging trustees to use outside expertise to identify investment opportunities.

•Investing in a cost-conscious manner. The new policy requires trustees to bal-ance transaction costs associated with outside advice, investment fees and commissions, and additional capital gains taxation against the prospect that these activities will lead to increased returns.15

8

13 Phillips Jr., 1997.14 Phillips Jr., 1997.15 Phillips Jr., 1997.

The new rule was codified by the NCCUSL as UPIA in 1994. While UPIA applies primarily to family trusts, the act has served as the foundation for further modernization of fiduciary standards for charitable organizations.

In contrast to UMIFA, which maintains strict prohibitions against spending below endowments’ historical dollar value, UPIA grants fiduciaries more flexibility to spend both principal and income for funds held in trust. This flexibility allows trustees to select investments without having to realize a particular portion of the portfolio’s total return from traditional income investments.

As the focus of endowment management has shifted from growing assets to preserving long-term security, UMIFA has increasingly been seen as obsolete by the fiduciary community. For this reason, the NCCUSL approved UPMIFA in July 2006 to update and replace UMIFA.

In addition to further modernizing best practices for nonprofit fiduciaries, UPMIFA differs from its predecessor in the following ways:

•UPMIFAabolishesUMIFA’shistorical dollar-value limitation, but provides better guidance on prudent investing, which makes the need for a floor on spending unnecessary.

•Investmentmanagersarenotlimited in the kinds of assets they may seek for the portfolio under UPMIFA.

•UPMIFArequiresprudenceinincurringinvestment costs, authorizing only costs that are appropriate and reasonable in relation to the nonprofits’ assets, the purposes of the institution, and skills available to the institution.

Accounting standards and other criteria

In addition to being informed of the legal statutes affecting nonprofits, investment committee members also must be familiar


Significance•CodifiedFordFoundationstudies(seepage7).•Providesuniformrulesfortheinvestmentoffundsheldby

charitable institutions and the expenditure of funds donated as “endowments” to those institutions.

•Embracesconceptoftotalreturn.•Prohibitsendowmentsfromspendingbelowtheirhistorical

dollar value.•FacilitatesimplementationofPrudentInvestorRuleprimarily

for personal trusts.•Evaluatesperformancebasedonthereturnoftheentire

portfolio rather than on individual investments.•Requiresfiduciariestoweighopportunitiesforhigherexpected

returns against the added risk that accompanies them.•Liftsblanketrestrictionsoncertaintypesofinvestments.•Encouragestrusteestodelegateinvestmentmanagementand

other responsibilities.•ExpandsonUMIFAandisgraduallyreplacingitacrossstates.•AbolishesUMIFA’shistoricaldollar-valuelimitationonexpendi-

tures permitting nonprofits to diversify their portfolios and pur-sue investments that would produce greater long-term results.

Figure 5. Key model statutes modernizing U.S. fiduciary law Event Uniform Management of Institutional Funds Act (UMIFA) (1972) Uniform Prudent Investor Act (UPIA) (1994) Uniform Prudent Management of Institutional Funds Act (UPMIFA)* (2006) Source: National Conference of Commissioners on Uniform State Laws, 1994.

*Although no uniform law is effective until a state legislature adopts it, the principles set forth in uniform laws serve as sound guidelines, which state legislatures can adopt in full, or in part, or alter to suit their needs. To find if your state has adopted UPMIFA visit www.upmifa.org.

10

Description•FAS116addressesaccountingforcontributionsreceived

and contributions made.•FAS117establishesstandardsforgeneral-purposeexternal

financial statements provided by nonprofits.•FAS124focusesonaccountingstandardsforcertain

investments held by nonprofits.•Requirespubliclytradedcompaniesandotherentitiesto

adhere to stricter corporate-governance standards that broaden board member roles in overseeing financial transactions and auditing procedures.

•WhileSarbanes–Oxley(SOX)primarilyappliestofor-profit corporations,thespiritofSOXisrelevanttotheaccounting and control standards for nonprofit organizations.

•Prohibitsretaliationagainstwhistle-blowers.•Prohibitsdestruction,alteration,orconcealmentofcertain

documents or the impediment of investigations.

Description•Annualreportingdocumentthatnonprofitsfilewith

the IRS. •Providesinformationonafilingorganization’smission,

programs, and finances.•ThereareseveralvariationsofForm990including990PF

for private foundations.•Investmentbyaprivatefoundationconsideredtojeopardize

the carrying out of the exempt purpose of a private foundation.•Foundationmanagerswhoknowinglyparticipateinjeopardy

investments are subject to substantial excise taxes.

Figure 6. Accounting terms and statutes Accounting standard/lawFAS 116 FAS 117 FAS 124

Sarbanes–Oxley(2002)

Sources: Financial Accounting Standards Board (FASB), 1993, and BoardSource, 2003.

Figure 7. Key filings and investment regulations Tax law/termForm 990

Jeopardy investments

Source:InternalRevenueService,2008.

with other general legal, accounting, and tax terminology impacting their responsibilities. It is beyond the scope of this document to cover all the different types of laws and rules governing charitable organizations. However, nonprofit fiduciaries at a mini-mum should be well-versed in the following accounting standards, laws, and regulations to protect their sponsoring organizations and themselves from potential difficulties. (Figures 6 and 7).


1. Duty of care: Nonprofit fiduciaries must use the same degree of care, skill, and diligence that a prudent person would use in handling corporate affairs. Board members can fulfill their responsi-bility largely by being informed about matters of importance to their sponsoring organization. This means keeping apprised of relevant information before making important decisions or acting on behalf of the nonprofit.

2. Duty of loyalty: Fiduciaries must put any personal or private interests aside and always act in the best interests of their sponsoring organization. Self-dealing, conflicts of interest, and even the appearance of impropriety should be avoided at all costs. Self-dealing occurs when a fiduciary stands to gain financially from a nonprofit decision.

3. Duty of obedience: Nonprofit fiduciaries must comply with applicable fiduciary law while keeping the organization true to its mission.

We have identified five additional responsibilities essential to good fiduciary conduct:

•Fiduciary liability. Investment committee members must understand their fiduciary responsibilities and the potential liabilities of serving on the committee.

•Investment committee organization. Committees should be carefully organized and staffed with individuals who understand their organization’s mission and what they must do to support it.

•Investment selection and monitoring. Fiduciaries must select appropriate investments that are consistent with the unique needs of the organization. They also must decide whether a prospective manager’s approach and philosophy fit the portfolio’s objective.

•Portfolio costs. Costs incurred by the portfolio must be reasonable, paid out by the portfolio, and aligned with your spending policy.

•Administrative oversight. Investment committee members must oversee the creation of committee documents, to ensure the committee is operating in accordance with those docu-ments. They must also satisfy all legal and regulatory rules issued by relevant agencies.

Your fiduciary roleThe modernization of U.S. fiduciary standards has made it considerably easier for nonprofit investment committees to serve the best interests of their sponsoring organizations.

At Vanguard, we view your fiduciary role as focusing beyond the technical meaning of a statute or regulation and concentrating on how that legal requirement can be used to maximize the welfare of your sponsoring organization in pursuit of its mission. This means applying personal experience, judgment, and knowledge in concert with understanding the regulatory framework. More specifically, nonprofit fiduciaries have an obligation to bring the highest level of ethical conduct and care to the operation and ongoing management of the organiza-tion’s portfolio.

Investment committee members should meet certain standards of conduct and attention in fulfilling responsibilities to their sponsoring organizations. Under most state laws, nonprofit fiduciaries have three major duties:

laying a strong foundation

Creating an effective committee charter Many nonprofit investment committees make asset allocation decisions or select investment managers before establishing a charter. Vanguard believes this sequence is ill-advised and that nonprofits should first lay a foundation by having a serious discussion about the structure of an invest-ment committee and the responsibilities of its members.

Given the relatively informal nature of most nonprofit investment committees, which often are composed of volunteers from a wide range of backgrounds and investment skill levels performing multiple tasks, a clear outline of duties is a crucial first step. A nonprofit cannot develop an effective investment strategy without first having identified potential committee members and staff to execute this plan.

To accomplish this, nonprofits should craft a well-written and clearly articulated charter clarifying the role of each committee mem-ber. Even the most thoughtful investment plan will have difficulty succeeding without the right people in place to implement it. Therefore, serious discussion of any other issue related to the formation of the invest-ment committee is somewhat irrelevant

until a committee has determined who is going to serve on its board and in what capacity.

An effective charter helps investment committees avoid the following common mistakes:

•Conferringcommitteemembershipas a reward.

•Relyingtooheavilyonasinglecommitteemember for either financial support or investment expertise.

•Potentialconflictsofinterest.

•Makingportfoliodecisionsbasedsolelyon industry peers.16

A charter should identify the length of time members are expected to serve and be clear about which ex-officio positions are permanent (e.g., CFO) and which should rotate. We recommend that nonprofits consider a minimum of five years of service by members and be wary of rotating more than one-third of the committee members in any one term. Gradual shifts in committee composition are one of the most effective ways to balance the need for continuity and institutional memory with the importance of fresh perspectives.

12 16 Vanguard, 2004.

Investment charter: Clearly defining roles and responsibilities of investment committee members, support staff, and consultants

laying a strong foundation

The charter must also familiarize new committee members with the organiza-tion’s investment goals and approach while educating them on their fiduciary responsibilities. Other important compo-nents of an effective charter include:

•Eligibilityrequirementsforservingon the committee.

•Committeesize.

•Theprocessforappointingacommitteechairman.

•Memberguidelinesforestablishingandmonitoring the portfolio.

•Therolesandresponsibilitiesofperma-nent staff and outside consultants.

•Thefrequencywithwhichthecommitteemeets to review the investment policy statement (IPS), investment manager and fund performance, and financial statements.

A well-formulated investment committee charter not only defines roles and respon-sibilities, but also serves as a useful tool for uniting committee members behind the purpose and mission of your organization. By having members agree upfront to the principles detailed in this document, your charter will encourage the committee to unify behind the organization’s purpose and policies for achieving its goals.17

Developing a strong investment policy statement Once your organization has clarified roles and responsibilities, your next step is to develop a well-written investment policy statement (IPS) that outlines a financial strategy that will support the mission of your nonprofit. An IPS defines the purpose, objectives, and measures of success for your portfolio. It also summarizes the portfolio’s investment strategy and outlines the process for evaluating investment managers.

13Laying a strong foundation

Investment policy statement: Clearly defining your investment plan and how it will be executed

Investment Committee Charter

Definition of Success

I

Investment Strategy

Risk

Management

Investment Policy Statement

Spending Policy

Portfolio Construction

Measurement

of Success

Figure 8. Laying a strong foundation

17 Swensen, 2000.

A clearly articulated, realistic IPS is arguably the most effective way to define a portfo-lio’s purpose and measure a committee’s success at fulfilling its goals. It also can help establish productive communications and expectations with outside investment managers and other fiduciaries.

Finally, a well-crafted IPS can protect a nonprofit from the emotional element that often inhibits a committee’s decision-making process. Nonprofits are too often tempted to follow the investment strate-gies and practices of top-performing organizations. This approach is ill-advised in most cases because larger institutions may have expertise, staff, and other resources beyond those of most nonprofits.

Investment policy statements should always address the organization’s invest-ment purpose and strategy.

Investment purpose and strategyAn investment committee should have an explicit understanding of its portfolio’s purpose and a clear definition of success for fulfilling its objectives. An example of such a strategy would be investing your organization’s assets with the goal of pre-serving their long-term, real purchasing power while providing a relatively pre-dictable and increasing stream of annual distributions in support of the sponsoring organization.18 Committee members must agree on a common purpose for the assets they oversee and articulate that objective as explicitly as possible. A goal without a definition can be difficult to understand and can make it challenging for committee members to evaluate their progress.19

In developing an investment purpose, board members must be wary of the trade-off between the competing goals of supporting short-term operations and preserving long-term assets. Committees that emphasize

the former run the risk of losing long-term purchasing power, while those that focus on the latter may not have the resources to support their organization’s short-term operating budgets.

There are three main investment strategies for nonprofits:

Preservation. The goal of a preservation strategy is to maintain enough growth to preserve equity and purchasing power across generations. This strategy, known as intergenerational equity, establishes a sustainable rate of consumption.

Growth. Nonprofits with unlimited time horizons, such as many university endow-ments, often pursue a growth strategy or a target rate of return greater than spending, inflation, and expenses. These organizations are invested to perpetuity and need to grow their corpus to adequately prepare for future responsibilities.

Consistency. A consistency strategy provides funding for spending needs in real terms. This approach tends to be a more suitable option for nonprofits with shorter time horizons that place higher priority on meeting pending obligations.

Fiduciaries should consider the diversifica-tion of portfolio assets, portfolio liquidity, donor requirements, and short-term income needs before formulating a strategy. Investments should be based on fully funding intended obligations while various factors—including liquidity, risk, return, and funding status—should be used as metrics for success.

These considerations need to be revisited from time to time to ensure that new circumstances within the organization, the markets, or the broader economy haven’t altered the portfolio’s objectives. Fiduciaries should also review the portfolio as a whole and recognize that some assets will outperform while others will lag.

1418 Vanguard, 2004.19 Vanguard, 2004.

your structurebuilding

16

20 Vanguard, 2007.21 Vanguard, 2007.22 Vanguard, 2004.

building out the framework

Portfolio constructionDeveloping and maintaining an asset alloca-tion strategy that meets your organization’s short- and long-term goals is one of the most important responsibilities of a nonprofit investment committee and should be reflect-ed in the investment policy statement.

In a landmark paper published in 1986, Determinants of Portfolio Performance, Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower concluded that asset allocation is the primary determinant of a portfolio’s performance, with security selection and market-timing playing minor roles.20 Based on a combination of this research and our own studies, Vanguard believes that asset allocation is indeed the most important determinant of return volatility and long-term total return in a broadly diversified portfolio with limited market-timing.

The 1986 Brinson et al. study represents a time-series analysis of the effect of asset allocation on performance. The methodology compared the performance of a policy, or

Studies have shown that allocation across asset classes—stocks, bonds, and short-term reserves—far surpasses individual security selection or market-timing as the most important determinant of return variability and long-term total return.

long-term asset allocation represented by appropriate market indexes with the actual performance of a portfolio over time. The findings indicated that, on average, most of a portfolio’s return variability was attrib-uted to its policy of asset allocation return variability. Active investment decisions—market-timing and security selection—had relatively little impact on return variation.21

Forecasting returns is an inexact science requiring experience, intuition, and judg-ment. For this reason, committees should use conservative assumptions and consider a portfolio’s performance history as a guide, but not a predictor of future returns.22 This is especially true for committees respon-sible for assets that an organization needs to meet near-term expectations. If expect-ed returns and spending assumptions aren’t considered together, committees run the risk of having insufficient assets when they are needed to fulfill a spending obligation.

Within the nonprofit world, there is great diversity in the approach to asset allocation strategies. Institutions with urgent distribu-tion commitments and shorter time hori-zons usually opt for lower-risk investments such as short-duration, high-liquidity fixed income products. For example, the IRS guidelines stating that private foundations must in general achieve a minimum annual payout of 5% of investment assets can impact the asset allocation and liquidity requirements for these portfolios.

Organizations with long time horizons, incremental gifts, and rising payout pressures may opt to take on greater risk through more aggressive portfolio strategies such as hedge funds and other absolute return investments, which may achieve higher long-term returns.

17Building out the framework

building out the framework

Risk managementInvestment committees should adopt a clear investment strategy that includes a reasonable set of assumptions about the organization’s risk tolerance and the portfolio’s expected returns. It could be based on a traditional measure such as volatility, a loss of principal, or donor opinions of how the committee is managing its assets. The committee should attempt to identify all possibilities for failure, based on the likelihood of their occurring and their potential impact.

Committees should discuss risk before setting standards and ask themselves the following questions (Figure 9):

•Whataretherisksinvolved?

•Whichrisksaremostlikelytohappenand which ones will have the greatestimpact?

•Howmuchriskismanageable?

Best practices dictate that your organization’s IPS should clearly develop a risk control framework that includes asset allocation and rebalancing as key strategies. Committee members should specifically avoid rebalancing as a market-timing exer-cise.23 Rebalancing requires buying and selling securities on a regular or systematic basis to return your portfolio to its target allocations. Without a disciplined approach, portfolio weightings may quickly become inconsistent with policy targets and under-mine your organization’s funding needs.

Generally, investment committees should review asset allocation targets no more than once a year. However, if there is a fundamental change to your organization’s unique situation, you may need to meet more frequently to discuss this subject.

Annual reviews allow managers to make the changes necessary to move their portfolio in a desired direction. At the same time, limiting such discussions to regularly scheduled intervals diminishes the possibility of ill-advised decisions made in response to short-term market conditions.

Prioritize yourneeds

Developstrategies/set

parameters

Control yourallocation

There is no substitute for judgement & experience

Evaluate yoursituation

Figure 9. Risk management process

23 Vanguard, 2004.

Once you have defined risk, it is easier to discuss how much you are willing to take on to achieve your return objectives. Committees should establish return expec-tations that are commensurate with their organization’s risk/reward profile. Some may decide to assume more risk with the potential reward of higher returns. Other committees may be willing to forgo the potential for large gains in return for a more secure return.

Measuring successNonprofit investment committees can measure success in a variety of ways, such as:

• Inabsoluteterms.

•Againstamarketbenchmark.

•Relativetoapolicyportfolioor competitive group.

Each measure has its potential drawbacks. For example, committees often measure manager performance relative to a market benchmark because of the wide availability of this information. Under this approach, outperformance relative to the benchmark is considered a success, while underperfor-mance causes consternation among invest-ment committee members.24

Measuring success via a competitive group can also be an artificial measure of portfolio success unrelated to the portfolio objective, given the difficulty smaller institu-tions may have competing with larger nonprofits because of lack of scale, staffing, and expertise.

In general, nonprofit investment commit-tees should measure the success of their portfolios relative to their ability to meet the goals of the organizations they serve rather than on how their investments com-pare with a benchmark of portfolios from their peers. Committees should recognize that there might be differences between conventional measurements of perfor-mance and those the committee is using to assess the portfolio’s progress.

An example of an appropriate benchmark would be whether your investment strategy meets a specific payout percentage neces-sary to fund the critical needs of your spon-soring organization. This approach increases the likelihood that your investment strategy will remain consistent over time with your organization’s objectives and goals.25

1824 Vanguard, 2006a.25 Vanguard, 2004.

Range of Investment Committee Benchmarking Behaviors

Benchmark Sensitive Benchmark Aware Benchmark Agnostic

Figure 10. Measuring success against benchmarks


Spending policySelecting a spending policy that best supports your organization’s mission is a major challenge for nonprofit investment committees. Nonprofit fiduciaries generally develop an approach that balances two fundamentally different goals:

•Maintainingthelevelofcurrentspending.

•Growingthesizeofcurrentinvestmentsto keep pace with inflation and support future obligations.

At a minimum, your organization’s spending policy should support the needs of both current and future obligations. Which goal takes on a higher priority will vary depend-ing on the objectives of your organization. A private foundation, required by law to spend 5% of its assets or face significant tax consequences, will generally emphasize short-term spending needs ahead of preserving long-term purchasing power. In contrast, a university endowment invested to perpetuity is likely to assume additional risk to grow current investments and achieve intergenerational equity.

This decision is an important one. An overly aggressive spending policy could force future cutbacks at critical times while underspending to preserve future assets potentially deprives an institution of funds that could be put to productive use. A clearly defined spending policy helps to resolve these conflicts.

We have identified the following four spending policies that are most frequently adopted by nonprofits.26

Dollar amount grown by inflation. A dollar amount of spending is calculated in the organization’s first year on the basis of need or other criteria, usually expressed as a percentage of initial portfolio value. The spending amount for each subsequent year is then determined by multiplying the prior year’s spending by an inflation factor. While this policy typically produces stable annual spending in the short term, it makes no adjustments for spending reductions during periods of poor market performance.

Percentage of portfolio with smoothing term. This policy bases annual spending on a stated portion of the portfolio value at the end of the prior year. A smoothing term modifies this to a percentage of the average ending balance over a period of time. For example, each year’s spending level could be equal to a percentage of the average ending balance for the prior three years. Spending is automatically reduced when markets have been doing poorly and increased after periods of strong market performance. Poor investment returns are at least partially offset by reductions in current spending, helping to preserve the portfolio’s value and sustain future spending.

This approach makes budgeting more difficult in the short run because spending levels vary based on investment returns. On the positive side, the smoothing portion of this policy helps to dampen volatility. For this reason, this approach provides the most consistent spending levels over the long term.

26 Vanguard, 2006b.

0.00

0.25

0.50

0.75

0.53

0.380.46

0.36

1.00

1.25

1.50

$1.75

Milli

ons

$ Amount + inflation

5% of portfoliowith smoothing

5% of portfolio with ceiling and floor

Hybrid

Spending policy

Source: Vanguard Investment Strategy Group.

Percentage of portfolio with ceiling and floor. Instead of using a smoothing term, the amount of spending is held within a fixed range using a ceiling and a floor. If an investment committee selected a 15% ceiling and a 15% floor, the annual spend-ing level would always be between 85% and 115% of the initial dollar amount adjusted for inflation.

The ceiling-and-floor approach can be an effective tool for budgeting purposes because it prohibits market-based spending variations from moving outside a set range. This can result in surplus returns in strong market years that can be reinvested and spent in future years. Its limitation is that while it provides for some downward adjustment to spending in poor markets, these corrections may not significantly reduce the potential for a material decline in principal, necessitating reductions in future spending levels below the spending “floor.”

Hybrid combination of dollar amount grown by inflation and percentage of portfolio. The level of annual spending under this policy is determined by combin-ing a fixed percentage of the dollar amount grown by inflation with a fixed percentage of portfolio spending. The approach, which has increased in popularity recently, may, for example, combine 40% of the prior year’s spending amount adjusted for infla-tion with 60% of an amount determined by calculating a percentage of the portfolio with a three-year smoothing term.

A portion of spending varies, based on market performance, and a portion is predictable, which eases budget concerns. The existence of a hard floor on spending again does not protect a nonprofit’s corpus from being exhausted under extreme market conditions.

20


Real

dol

lars

(Mill

ions

)

Years

$ + Inflation 5% of portfolio

5% of portfolio with ceiling and floor Hybrid

0 5 10 15 20 25 30 35 40 450.00

0.50

1.00

1.50

2.00

2.50

$3.00

Figure 11. Deviation below target spending

Figure 12. Most volatile spending paths

2127 Vanguard, 2006b.28 Vanguard, 2006b. Building out the framework

Vanguard analyzed which of these four spending policies provides the best long-term spending stability and asset growth using 45 variations of return data from 1960 through 2004. The study findings include:27

•The5%ofportfolioassetswithsmooth-ing term strategy provides the most con-sistent spending levels with the tightest range of deviations below target and the second lowest level of average shortfalls (Figure 11). In addition, this approach was the only one of the four spending poli-cies to maintain some level of spending throughout the entire 45-year period under our “worst case” scenario (Figure 12).

•Incontrast,relativelyhighlevelsofdown-side volatility make the 5% of portfolio assets with a ceiling-and-floor strategy (second highest range in deviation below spending target, as well as average shortfalls) better suited for institutions with longer time horizons.

•Thedollaramountgrownbyinflation policy shows the highest range of down-side volatility with spending dropping to zero within 20 years. However, this approach also provided the greatest short-term spending stability and could be the most suitable option for foundations with limited time horizons.

Nonprofit fiduciaries should keep the following considerations in mind before deciding on the spending policy that best fulfills the organization’s mission.28

•Determinetheextenttowhichyour institution can accept volatility in near- term spending. This decision should consider a number of factors including your institution’s level of annual contribu-tions, access to additional funding sources, degree of flexibility in annual spending, and overall risk tolerance.

•Periodicallyevaluateyourspending policies. Rigid spending rules cannot eliminate investment volatility. Spending policies that disregard returns are risky. Assuming that the portfolio will recover before levels reach a crisis point may lead to more dramatic reductions in spending later.

•Determineifyourorganizationcantoler-ate short-term fluctuations in spending. The more a nonprofit can tolerate some short-term fluctuations in spending, the more likely it is to achieve its long-term goals. If the portfolio includes volatile investments likely to produce high aver-age returns, you must accept regular, rel-atively small changes in spending or run the risk of having to make more abrupt and significantly larger adjustments later.

•Becausereturnsfrequentlyfallbelow5%, private foundations should consider reinvesting excess funds during periods of strong market performance to help off-set poor investment returns in the future. This helps to protect the portfolio during periods of severe underperformance.

•Understandhowtheportfolioassets are priced and ensure that the portfolio can support your organization’s spending requirements.

Nonprofits should base their selection of investment managers on multidimensional criteria rather than on a single factor. 29 Investment committees too often overem-phasize past performance at the exclusion of other important criteria. This approach can be problematic because past perfor-mance is often time-period dependent and has little to do with investor skill.

The most widely used data for evaluating manager performance is generally short-term returns, which may not be meaning-ful. Because of the wide availability of this return data, it is not unusual for an invest-ment committee to have a bias toward using it to frame its view of a manager.

However, Figure 13 demonstrates the chal-lenge of using past success as a predictor of future success. Our evaluation of fund performance since 2003 showed that only a substantial minority of funds managed to outperform their benchmarks in consecu-tive 5-year periods. This inconsistency in performance is also a reason why abandon-ing managers simply because their results have lagged can lead to disappointment. In many cases, the most appropriate response is to stick with your original strategy.30

Manager selectionVirtually all nonprofit investment commit-tees hire at least one outside investment advisor to manage their assets, with a majority hiring multiple managers. Many committees don’t make this decision on their own. In general, there are three different approaches for manager selection: 1) hiring an outside consultant to make the decision for you; 2) hiring a consultant to identify several candidates and letting your committee make the final decision; and 3) hiring a manager directly.

Before hiring a manager, you should be convinced that his or her investment philosophy fits within the role you expect it to play in your portfolio. Selecting someone whose investment approach is inconsistent with your portfolio require-ments can jeopardize the ultimate success of your organization.

Fiduciaries face a number of challenges during the manager selection process. Investment committees should clearly spell out guidelines in the IPS governing the selection, compensation, evaluation, and termination of their managers. Fiduciaries also should identify mandates that prospective managers will be expected to fulfill in administering various portions of their portfolio.

2229 Vanguard, 2004. 30 Vanguard, 2013.

Regular review of short-term data, which increases the likelihood that investors will be confronting underperformance, may put pressure on investment committees to take dramatic action such as changing managers or strategies in response to the bad news. The best committees look beyond statistics and test manager credibility by speaking with both current and former clients.31

Other aspects of a manager’s record that should be assessed include his or her compliance history with regulators and any potential conflicts of interest, such as prior relationships with members of the investment committee.



Note: This chart is based on a ranking of all actively managed U.S. equity funds coverd by Morningstar’s nine style categories according to ther excess returns versus their stated benchmarks as reported by Morningstar during the �ve years through 2007. The performance of the funds that outperformed their benchmarks during this period were then compared to the performance of their stated benchmarks as reported by Morningstar during the �ve years through 2012.

7.7% chance of selecting a fund that outperformed its benchmark in both �ve-year periods

January 12003

December 312007

December 312012

3,569 funds (63%) underperformed benchmarks

5, 705 funds

2,136 funds (37%) outperformed benchmarks

1,695 funds (79%) underperformed benchmarks

441 funds (21%) outperformed benchmarks

Figure 13. Fund leadership is quick to change

31 Vanguard 2004.

We recommend the following best prac-tices in evaluating a potential investment advisor (Figure14).

Understand each investment manager’s investment process, which should be consistent over time and reflect your organization’s philosophy. A nonprofit that places top priority on preserving long-term purchasing power and asset growth should be targeting its search for prospective managers willing to take on greater risk in return for higher long-term returns. In contrast, a foundation more concerned about short-term spending stability will be much more focused on finding risk-averse advisors.

Analyze the nature of a manager’s investment team and firm. Assessing the stability of a potential outside advisor’s investment team and firm is an important step because managers can easily be distracted if they operate under uncertain conditions.32

Fiduciaries should, therefore, ask the following questions before hiring an outside manager:33

•Doestheinvestmentmanager’steamhave an individual or collective approach tomakingrecommendations?

•Ifasingleindividualmanagestheportfo-lio, does that individual have strong relationships with the firm’s analytical groupandtradingprofessionals?

•Howlonghastheteamworkedtogether?

Review the firm’s long-term performance in light of its philosophy and process. Past performance should be considered part of the selection process, but should never drive your decision. Investment com-mittees must recognize that markets are cyclical and there will be periods when a manager or group of managers will perform well and periods when they will perform poorly. A keen understanding of what drives results helps committees maintain

2432 Swensen, 2000. 33 Vanguard, 2004.

Firm

Ethics

Stability

Ownership

Account and asset trends

Client list

Incentives

Source: Vanguard.

PeopleDeep investment team

Succession/ contingency

Limited turnover of key professionals

Tenure and experience

Proven expertise in subject matter

Demonstrated ability to handle large mandates

PhilosophyShared by investment professionals

Enduring

Easilyarticulated

ProcessUnderstandable

Stable/proven

Generates a portfolio consistent with philosophy

PortfolioClear reflection of philosophy and process

Consistent characteris-tics over time

Indication of willing-ness to take risks

PerformanceHistoryofcompetitiveresults versus bench-marks and peers

Demonstrated success in different environments

Figure 14. Manager selection criteria

the proper perspective. This requires a sound understanding of the markets and a manager’s investment approach. For exam-ple, one should not expect a value-oriented manager to outperform in a market environ-ment that favors growth investing.

Align manager’s fees to your organization’s goals. Committees must pay close attention to manager fees. Under UPMIFA, investment committees are required to manage expenses prudently in relation to the nonprofit’s assets, the purposes of the institution, and the skills available to the committee.

Excessive investment advisor fees can eat into a nonprofit’s investment return over time. According to industry averages, an organization with a $7.5 million annual distribution can lose more than 1% of a nonprofit’s value to manager expenses (Figure 15). This can seriously damage an institution’s ability to fulfill its mission. Over a period of several decades, the inability to control manager fees and expenses can mean inadequate funding for dozens of scholarships at a university, a multiyear delay or even cancellation of a new hospital wing, or insufficient resources to provide enough vaccines to cure an infectious disease in the underdeveloped world.

Fiduciaries also should ensure that a manager’s fee structure is aligned with their portfolio’s goals and time horizon. Applying a short time frame to analyze a portfolio positioned for long-term results can end in poor investment decisions that compromise the ability to meet established objectives. Fees for an active equity manager whose investment returns can vary significantly over short periods should be based on performance of at least three years.34

Conduct manager reviews

The appropriate time frame for perform-ance review depends on the asset classes involved. While assets in particularly efficient markets, such as certain money market and fixed income products, may require less time to assess investor skill, performance of assets in less efficient markets, such as equities and various alternatives, should be evaluated over a longer time frame; a three- to five-year period, for example.35

More frequent evaluations or a termination may be necessary should a substantial change occur in the mission of the man-ager’s firm, its people, or philosophy.36 A manager change may be warranted if the committee determines, over a sufficient time frame, that manager performance is lagging and unlikely to improve in the foreseeable future.

Once you have hired a manager, Vanguard recommends establishing an ongoing managerial review process. Fiduciaries should regularly revisit the premises on which their original hiring decisions rest, periodically reviewing initial assumptions and subsequent behavior.

25

34 Swensen, 2004. 35 Swensen, 2000. 36 Swensen, 2000. Building out the framework

Initial Portfolio Value

Spending/Distribution (5.0%)

InvestmentManagement/CustodyFees(0.3%–2.0%)

TotalExpenses

Residual Portfolio Value (accounting for spending and expenses)

Difference of residual portfolio values

Source: Vanguard.

$150,000,000

$(7,500,000)

$(450,000) to $(3,000,000)

$(7,950,000) to $(10,500,000)

$142,050,000 to $139,500,000

$2,550,000

Figure 15. Manager expenses can impact nonprofit funding

maintaining the structure

Maintaining diversity of thought and open communicationOnce you have clearly established roles, investment policies, and fiduciary responsi-bilities, your organization must remain vigilant in adhering to its fiduciary duties. Unlike corporate retirement-plan investment committees where the organization plays a more hands-on role, nonprofit investment committees tend to regulate themselves or report to a self-regulated board. While this more ad hoc arrangement can foster an atmosphere of creativity that benefits the institution, it can also lead to a lack of disci-pline and focus if not carefully monitored.

This unique environment makes it even more critical for committee members to establish strong working relationships and discussions with one another. A group’s size, expertise among its members, and approach to conflict resolution are all critical components to productivity and the overall performance of the institution.

There are three basic strategies for protecting a committee from the risk of losing focus.

Establish an effective communications plan

Keeping your fiduciaries apprised of key events and milestones concerning the institution is crucial, given the part- time nature of service on a nonprofit investment committee. Events and mile-stones about which you should be in regular contact with your committee members include:

•Yourorganization’soverallinvestmentstrategy.

•Theperformanceofyourportfolio.

•Theoveralleffectivenessofyour investment strategy.

Ensure that your committee includes members from diverse backgrounds

Heterogeneity is vital for fostering an atmosphere in which unconventional and independent thinking will flourish. Diverse investment boards also are less likely to fall into bad habits, including allowing one person’s opinion to dominate the discus-sions even if that person is an investment professional or a major donor.

Maintain an orderly decision-making process within your committee through effective meeting agendas.

26

maintaining the structure

Common investment committee agenda topicsTopics of discussion and frequency of meetings will vary depending on the investment committee’s charter, the complexity of the portfolio, and the size and capabilities of the staff.

At a minimum, committees should meet semiannually to evaluate the performance of the portfolio and at least annually to review asset allocation characteristics. Other committees may choose to meet on a quarterly basis with at least one of the meetings focusing on education, such as reviewing a particular asset class or investment strategy.37

New committee members in particular should review prior meeting minutes and committee materials from the past one or two years to gain a better historical perspective.

Below is a summary of items that your committee should consider including in its meeting agendas.

At each meeting:

Approve minutes Approval of the prior meeting’s minutes serves as a helpful reminder for members to review recently discussed topics and allows for a common starting ground at each meeting. This step is usually mandated by charter or statute.

Portfolio review Review investment performance. While total portfolio and component performance should be reviewed at each meeting, committees should evaluate them with a longer-term perspective. Best practices dictate that committees evaluate investment performance in the context of overall capital market conditions/returns to provide an attribution and understanding of portfolio returns.

Review asset allocation for rebalancing, as necessary. Asset allocation decisions should be long-term in nature. Rebalancing should be considered at least every one to two years unless there is a major change in strategy or manager investment philosophy. However, a small component of the portfo-lio may be more tactical and opportunistic, based on capital market conditions. In such cases, more frequent reviews of asset allocation may be necessary.

Identify agenda items for subsequent committee meetings Discussion at a meeting often leads to agenda items for subsequent meetings. At each meeting, committees should present a schedule of future meeting dates and proposed agenda items.

27Maintaining the structure

Meeting agendas: Establishing procedures that produce innovative thinking and a collaborative approach to problem-solving.

37 Swensen, 2000.

Annually:

Approve investment committee members Generally, committee members are reviewed and appointed annually. Board members should rotate on a continuous cycle, typically after five years of service, with no more that one third of the mem-bership rotating off the committee at a given time.

Reaffirm objectives It is important for the committee to review and reaffirm the portfolio in light of the organization’s mission statement and goals. Should any of the above mentioned change, the committee should modify its investment strategy as necessary.

Investment policy statement The committee should formally review the IPS. Changes in the asset pool and board constituencies may necessitate modest modifications to the IPS over time. Such a review also creates a shared understanding of the objectives for each asset pool and is particularly useful following turnover among committee members.

Spending policy Similar to the IPS, it is useful to have a regular discussion about spending policy. Many committees need to approve the spending policy annually by charter. While it is unlikely to change often, setting the spending policy is a key role of the investment committee and should be reviewed periodically.

Asset allocation Committees should discuss their asset allocation annually, addressing the risk level, the likelihood of meeting spending and growth objectives, and the impact of changing strategic asset allocation. Major strategic changes to asset allocations should be made infrequently and only after careful consideration. However, conducting an asset allocation assess-ment in conjunction with a spending policy review helps committees evaluate and validate their assumptions.

Major asset classes Committees should review each major asset class throughout the year to analyze the objective of the asset classes, their construction, and success to date in meet-ing their stated objectives.

Risk management review Some committees find it useful to assess portfolio risk annually, either as part of an asset allocation study, or separately. A regular review process should be imple-mented to help committees develop a shared understanding of portfolio risks—from asset class to operational risks— in the portfolio.

28

Review costs associated with the portfolio Because costs diminish a portfolio’s net return, it is always important to keep a close eye on fees and expenses. A regular cost review should include custodian, consultant, accounting, legal, and asset management fees.

Periodically:

Review investment managers Managers should not be evaluated solely on performance, but also on criteria such as consistency of investment philosophy, fees and expenses, and stability of the investment team and firm.

Discuss relevant regulatory changes Because regulatory changes may impact the management of the portfolio, it is important for the committee to discuss such changes.

Review other contractual vendor agree-ments (custodians, consultants, etc.) Typically, these agreements are reviewed every five years. While this responsibility is often delegated to the staff, the committee may be required to review and approve any changes. All insurance policies, including Directors and Officers Liability Insurance and Errors and Omissions Insurance, should be reviewed to ensure they are in good standing and up-to-date. The committee also should discuss its satis-faction with the quality of the service and responsiveness provided by all vendors, including trustees.

Review ancillary pools of assets Nonprofit organizations sometimes receive unique gifts or have pools of assets outside of the endowment/foundation. A review of outside asset pools should be conducted when they require board approval or when the committee feels it is warranted.

29Maintaining the structure

conclusion

We hope this reference manual has provid-ed you with insights into what it means to be an investment committee member for a nonprofit organization, including critical information on the following key subject matters:

•Your role as a fiduciary. Keeping abreast of important legal statutes, accounting practices, and other policies affecting nonprofit fiduciaries.

•Investment committee charter. Identifying and clearly establishing roles and responsibilities of investment committee members through a clearly articulated investment committee charter.

•Investment policy statement. How an effective, multifaceted IPS can lead to nonprofit investment committee success by clearly stating an organization’s invest-ment strategy, asset allocation, manager selection and evaluation criteria, risk management, spending policy, and performance assessment.

•Meeting agendas and communication strategies. The importance of keeping members of your committee apprised of significant events related to their responsibilities through well-defined meeting agendas and effective communications strategies.

The importance of ensuring that nonprofit organizations have sufficient funds cannot be overstated given the crucial role they are playing in solving many of society’s greatest social, cultural, educational, and health-related challenges.

To this end, nonprofit committee members must fully understand their organization’s mission and the investment strategy necessary for achieving success. Nonprofit fiduciaries also must develop an effective organizational structure for meeting goals and achieving successful outcomes.

While there are many unique requirements and practices within the nonprofit market, your main goal should be to promote the success of your charitable organization through sound investment decisions and practices. In Vanguard’s view, the fiduciary standards for nonprofit investment commit-tees can be summarized in a single phrase:

“Providing the financial resources necessary to maximize the welfare of your sponsoring organization’s mission.”

30 Conclusion

This brochure is provided for informational purposes only and is subject to change. It is not legal advice. Consult a nonprofit attorney or other legal or tax counsel for application of the laws referenced herein to your organization and its specific circumstances. For additional information and access to other valuable resources, please visit Vanguard’s Investment Committee Resource Center at vanguard.com/nonprofitresourcecenter.

and referencesglossary

32

38 FAS, 1993.39 BoardSource and Independent Sector, 2003.40 BoardSource and Independent Sector, 2003.41 BoardSource and Independent Sector, 2003.

Financial Accounting Standards Board (FAS). The Financial Accounting Standards Board is the designated organization in the private sector for establishing standards of financial accounting and reporting, which govern the preparation of financial reports. Organizations, including nonprofits, comply with these accounting standards to help ensure their financial reports are credible, trans-parent, and comparable by the users of the financial information presented. FAS 116, 117, and 124 are particularly foundational and relevant for these organizations.

• FAS116addressesaccountingforcontributionsreceivedandcontributionsmade.Ingeneral,this statement requires investment committees to recognize contributions received, including unconditional promises to give, as revenue at their fair values in the period made. The standard also requires recognition of the expiration of donor-imposed restrictions in the period in which the restrictions expire.

• FAS117establishesstandardsforgeneral-purposeexternalfinancialstatementsprovidedbynonprofits. This statement requires nonprofits to provide a statement of financial position, a statement of activities, and a statement of cash flows. In accordance with FAS 117, nonprofits also must report accounts for the organization’s total assets, liabilities, and net assets in a statement of financial position.

The standard extends provisions of FAS 95 (Statement of Cash Flows) to nonprofit organizations and expands its description of cash flows from financing activities to include certain donor-restricted cash that must be used for long-term purposes. It also requires that voluntary health-and-welfare organizations provide a statement of expenses by both functional and natural classifications.

• FAS124focusesonaccountingstandardsforcertaininvestmentsheldbynonprofits.Itrequires that investments in equity securities with readily determinable fair values and all investments in debt securities be reported at fair value with gains and losses included in the statement of activities. FAS 124 also establishes standards for reporting losses caused by a donor’s stipulation to invest a gift in perpetuity or for a specified term.38

Sarbanes–Oxley. In 2002, Congress passed and President Bush signed into law the Sarbanes–Oxley Act. Passed in response to accounting scandals and other corporate malfea-sance, the law requires that publicly traded companies and other entities adhere to stricter corporate-governance standards that broaden board member roles in overseeing financial transactions and auditing procedures.39

Most of Sarbanes–Oxley’s provisions apply directly to publicly traded companies. Two, however, are directly relevant to all organizations, including nonprofits.

• Whistle-blowerprotection.Sarbanes–Oxleyprovidesprotectionsforwhistle-blowersand imposes criminal penalties for actions taken in retaliation against those who risk their careers by reporting suspected illegal activities in the organization. It is illegal for any organization— for-profit and nonprofit alike—to punish a whistle-blower in any manner.40

• Documentdestruction.Theactmakesitacrimetoalter,conceal,falsify,ordestroyany document to prevent its use in an official proceeding such as a federal investigation or bankruptcy proceeding.41

glossary

IRS Form 990. Form 990 is the annual reporting document that nonprofits file with the IRS.

Jeopardy investments by private foundations. An investment is considered to jeopardize the carrying out of a private foundation’s exempt purpose if it is determined that the founda-tion managers have failed to exercise ordinary business care and prudence in providing for the long- and short-term financial needs of the foundation. In exercising the necessary standard of care and prudence, foundation managers may take into account the expected return on the investment, the risks of rising and falling price levels, and the need for diversification within the investment portfolio.

An excise tax equal to 10% of the amount of the investment is imposed on the private foundation for each jeopardy investment. Foundation managers who knowingly participate in jeopardy invest-ments also are subject to a 10% excise tax on the amount of the investment, capped at $10,000 per investment. An additional excise tax equal to 25% is imposed on the private foundation if it does not remove the investment from jeopardy, and an additional excise tax equal to 5% is imposed on any foundation manager who refuses to agree to the removal of the investment from jeopardy, capped at $20,000.

Determinations whether the investment of a particular amount jeopardizes the carrying out of the foundation’s exempt purposes must be made on an investment-by-investment basis, and in each case the foundation managers must take into account the foundation’s portfolio as a whole.

The following investments and practices, while not prohibited, are closely scrutinized by the IRS:

• Tradingonmargin

• Commodityfutures

• Workinginterestsinoilandgaswells

• Puts,calls,andstraddles

• Warrants

• Sellingshort

Foundation managers must be diligent in monitoring the types of investments in their organiza-tion’s portfolio and must be willing to meet with their respective portfolio managers and periodically review asset allocation decisions, to avoid potential harm.

For more information on additional laws, standards, and regulations affecting the nonprofit community, please visit our institutional website at vanguard.com/nonprofitresourcecenter.

Please remember that the materials are provided for informational purposes only; consult your legal and tax counsel for application of the laws to your organization.

33Glossary

glossary

34

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Barker, Robert R., 1969. Managing Educational Endowments, The Ford Foundation, New York, NY.

BoardSource and Independent Sector, 2003. The Sarbanes–Oxley Act and Implications for Nonprofit Organizations, BoardSource and Independent Sector.

Borkus, Randall H., 2001. “A Trust Fiduciary’s Duty to Implement Capital Preservation Strategies Using Financial Derivatives Techniques,” 36 Real Property, Probate & Trust Journal. Chicago, IL.

Cary, William L. and Bright, Craig B., 1969. The Law and Lore of Endowment Funds, The Ford Foundation, New York, NY.

Coffman, Suzanne E., 2005. Nonprofits’ Three Greatest Challenges, Philanthropic Research Inc., Williamsburg, VA.

Financial Accounting Standards Board of the Financial Accounting Foundation, 1993. Norwalk, CT.

Foundation for Fiduciary Studies, 2004. Prudent Investment Practices, Center for Fiduciary Studies, Pittsburgh, PA.

Internal Revenue Service, 2008. IRS Completed 2008 Form 990 Instructions and Background Documents and Instructions for Form 4720. Internal Revenue Service, Washington, D.C.

National Conference of Commissioners on Uniform State Laws, 1994. Uniform Prudent Investor Act. Approved by the American Bar Association.

Phillips, W. Brantley Jr., 1997. “Chasing Down the Devil: Standards of Prudent Investment Under the Restatement (Third) of Trusts,” Washington & Lee University Law Review, Lexington, VA.

Schneider, William, 2002. The Total Return Approach to Trust Investment Management.

Swensen, David F., 2000. Pioneering Portfolio Management. The Free Press. New York, NY.

Vanguard, 2004. Investment Committees: Vanguard’s View of Best Practices. Vanguard Investment Strategy Group.

Vanguard, 2006a. Evaluating Managers: Are We Sending the Right Messages? Vanguard Investment Strategy Group.

Vanguard, 2006b. Endowment and Foundation Spending Guidelines. Vanguard Investment Strategy Group.

Vanguard, 2007. The Asset Allocation Debate: Provocative Questions, Enduring Realities. Vanguard Investment Strategy Group.

Vanguard, 2013. Vanguard’s principles for investing success, Vanguard Investment Strategy Group.

35References

references

your missionfulfilling

Location label

your mission

Institutional Investor Group

P.O. Box 2900Valley Forge, PA 19482-2900



IAMNBPRT 012014

For additional information and one-stop access to other valuable resources, please visit Vanguard’s Investment Committee Resource Center at vanguard.com/nonprofitresourcecenter.


All investing is subject to risk, including possible loss of principal.

Diversification does not ensure a profit or protect against a loss.

Past performance is not a guarantee of future results.

This document will help you, as a fiduciary, develop a charter for the committee that oversees investments for your nonprofit organization.

Committee charters outline the roles, responsibilities, and authority of the investment committee, support staff, outside consultants, and investment managers. Vanguard’s experience working with nonprofits indicates that a committee charter is a key component of a successful investment board and a crucial first step in forming a committee.

Drafting the committee charter will clarify the scope and range of roles, eliminating overlap and duplication. Most importantly, this process will help you meet the fiduciary responsibilities you are required to fulfill on behalf of your organization’s mission.

We think the attached sample charter will serve as a valuable tool to help you create your own committee blueprint that meets your nonprofit’s specific needs. However, this document is not a “one-size- fits-all” template. The sample charter was drafted broadly to address the needs of a variety of nonprofit organizations from foundations with mandatory spend-out rates and short-term missions to university endowments with unlimited time horizons.

Although we include some specific suggestions, you will need to customize the charter’s final version based on your organization’s specific goals. We strongly recommend that you review your charter with your organization’s legal counsel before formal adoption. This sample document is for informational purposes only; it is not legal advice.

Sample Investment Committee Charter


SAMPLE

CHARTER OF THE INVESTMENT COMMITTEE OF XYZ NONPROFIT (insert formal name of organization)

Introduction

The Investment Committee is a standing committee of XYZ Nonprofit Organization [insert formal name of nonprofit].

This Charter outlines the responsibilities of the Committee with respect to the duties of individual members. The Committee is responsible for the investments of XYZ Nonprofit Organization and those investments shall collectively be referred to as the Portfolio.

Purpose of the Investment Committee

The Investment Committee has overall responsibility for the operation and administration of the Portfolio. The members of the Investment Committee are fiduciaries of the Portfolio with respect to all responsibilities allocated to them. The members will discharge their duties solely on behalf of the sponsoring organization’s mission in accordance with its specific terms.

Committee membership

The Committee shall consist of ten members [The smaller the portfolio and the narrower the scope of duties, the smaller the committee can be. Most investment committees have both administrative and investment duties. The members’ competencies should reflect the responsibilities that they will undertake.] Each member shall be appointed by the Committee for a term of five years. The terms of the members shall be staggered to the extent practicable. The Committee shall designate one member to serve as Chair. Each member shall acknowledge his or her membership in writing. Members shall serve at the pleasure of the sponsoring organization.

The Committee may form subcommittees as it deems appropriate. Subcommittees may be formed to address special projects for a limited period or may become standing subcommittees for a particular purpose. [Some investment committees have an investment subcommittee and an administrative subcommittee, which allows members to allocate their duties efficiently while retaining the ability to set policy and make major decisions as a single body. Some committees convene a subcommittee for a special project, such as the evaluation of a particular asset class or investment strategy.]

Organization

The Committee shall hold regular semiannual/quarterly meetings and shall meet more frequently as circum-stances require. The Committee shall keep minutes of the meetings and provide quarterly [set frequency here to at least annually or use “periodic”] reports to the nonprofit. The Chair shall, in consultation with other Committee members, set the agenda for and preside at the meetings. A quorum for the transaction of business at any meeting of the Committee shall consist of a majority of Committee members. Decisions shall be made by a majority of those present at the meeting.

The Committee shall have direct access to and complete and open communications with senior leaders of the sponsoring organization and may obtain advice and assistance from internal staff. The Committee may also retain independent consultants to assist it and determine the compensation for such consultants.

SAMPLE

Authority and responsibilities

[In this section, it is particularly important to tailor the duties to those set forth in the portfolio document, committee resolutions, and other delegations of authority. The duties can be articulated more specifically here than in the portfolio documents. The suggested language is representative of an investment committee’s duties.]

A. Investment duties

1. Understanding the sponsoring organization’s investment goals and how these objectives support the nonprofit’s mission.

2. Adopting, periodically reviewing, and revising an Investment Policy Statement.

3. Monitoring the performance of investment funds and investment managers in accordance with the Investment Policy Statement.

4. Retaining or replacing investment managers and/or investment funds for the Portfolio.

5. Reviewing the backgrounds of Investment Committee members and staff to ensure no conflicts of interest exist.

B. Administrative duties

1. Resolving all questions of interpretation of policy under the Portfolio.

2. Determining the amount of contributions necessary for the Portfolio.

3. Furnishing notices and reports to Investment Committee members and others affiliated with the nonprofit.

4. Reviewing all fees incurred by or on behalf of the Portfolio for reasonableness.

5. Preparing and filing such forms as may be required by government entities.

6. Reviewing the audited and unaudited financial statements of the Portfolio and audit reports of the Portfolio’s service providers.

7. Maintaining records for the administration of the Portfolio and the actions of the Committee.

8. Selecting, monitoring, and replacing third-party advisors of the Portfolio, such as consultants and other providers of Portfolio services.

9. Making adjustments or correcting defects under the Portfolio in a uniform and nondiscriminatory manner.

10. Preparing amendments to the Portfolio for changes in design or applicable laws and regulations.

Compensation

All members receiving full-time compensation from the nonprofit shall serve without additional compensation for the performance of their duties as members of the Committee. The Committee shall reimburse the members for all expenses properly and actually incurred.

Representations by the nonprofit

The sponsoring organization shall provide the Committee with such information as is necessary or desirable to fulfill its responsibilities. The nonprofit may furnish the Committee with such clerical and other assistance as the Committee may need to perform its duties. The sponsoring organization shall be responsible for any reasonable costs or expenses incurred in the Portfolio’s operation or administration. However, any duly authorized Portfolio expenses may be paid by or reimbursed from the Portfolio.


IAMSBCC 012014




Connect with Vanguard® > institutional.vanguard.com > 888-888-7064 All investing is subject to risk, including possible loss of principal.

SAMPLE

I. Introduction

The XYZ Institution Nonprofit Fund (hereafter referred to as the “Fund”) was created to provide perpetual financial support to XYZ Institution (the “Institution”). The purpose of this Investment Policy Statement is to establish guidelines for the Fund’s investment portfolio (the “Portfolio”). The statement also incorporates accountability standards that will be used for monitoring the progress of the Portfolio’s investment program and for evaluating the contributions of the manager(s) hired on behalf of the Fund and its beneficiaries.

II. Role of the Investment Committee

The Investment Committee (the “Committee”) is acting in a fiduciary capacity with respect to the Portfolio, and is accountable to the Board of XYZ and to the Executive Committee, for overseeing the investment of all assets owned by, or held in trust for, the Portfolio.

A. This Investment Policy Statement sets forth the investment objectives, distribution policies, and investment guidelines that govern the activities of the Committee and any other parties to whom the Committee has delegated investment management responsibility for Portfolio assets.

B. The investment policies for the Fund contained herein have been formulated consistent with the Institution’s anticipated financial needs and in consideration of the Institution’s tolerance for assuming investment and financial risk, as reflected in the majority opinion of the Committee.

C. Policies contained in this statement are intended to provide guidelines, where necessary, for ensuring that the Portfolio’s investments are managed consistent with the short-term and long- term financial goals of the Fund. At the same time, they are intended to provide for sufficient investment flexibility in the face of changes in capital market conditions and in the financial circumstances of the Institution.

D. The Committee will review this Investment Policy Statement at least once per year. Changes to this Investment Policy Statement can be made only by affirmation of a majority of the Committee, and written confirmation of the changes will be provided to all Committee members and to any other parties hired on behalf of the Portfolio as soon thereafter as is practical.

III. Investment objective and spending policy

A. The Fund is to be invested with the objective of preserving the long-term, real purchasing power of assets while providing a relatively predictable and growing stream of annual distributions in support of the Institution.

B. For the purpose of making distributions, the Fund shall make use of a total-return-based spending policy, meaning that it will fund distributions from net investment income, net realized capital gains, and proceeds from the sale of investments.

Sample Investment Policy Statement

For institutional use only. Not for public distribution.

SAMPLE

C. The distribution of Fund assets will be permitted to the extent that such distributions do not exceed a level that would erode the Fund’s real assets over time. The Committee will seek to reduce the variability of annual Fund distributions by factoring past spending and Portfolio asset values into its current spending decisions. The Committee will review its spending assumptions annually for the purpose of deciding whether any changes therein necessitate amending the Fund’s spending policy, its target asset allocation, or both.

D. Periodic cash flow, either into or out of the Portfolio, will be used to better align the investment portfolio to the target asset allocation outlined in the asset allocation policy at Section IV. A. herein.

IV. Portfolio investment policies

A. Asset allocation policy

1. The Committee recognizes that the strategic allocation of Portfolio assets across broadly defined financial asset and subasset categories with varying degrees of risk, return, and return correlation will be the most significant determinant of long-term investment returns and Portfolio asset value stability.

2. The Committee expects that actual returns and return volatility may vary from expectations and return objectives across short periods of time. While the Committee wishes to retain flexibility with respect to making periodic changes to the Portfolio’s asset allocation, it expects to do so only in the event of material changes to the Fund, to the assumptions underlying Fund spending policies, and/or to the capital markets and asset classes in which the Portfolio invests.

3. Fund assets will be managed as a balanced portfolio composed of two major components: an equity portion and a fixed income portion. The expected role of Fund equity investments will be to maximize the long-term real growth of Portfolio assets, while the role of fixed income invest-ments will be to generate current income, provide for more stable periodic returns, and provide some protection against a prolonged decline in the market value of Portfolio equity investments.

4. Cash investments will, under normal circumstances, only be considered as temporary Portfolio holdings, and will be used for Fund liquidity needs or to facilitate a planned program of dollar-cost averaging into investments in either or both of the equity and fixed income asset classes.

5. Outlined below are the long-term strategic asset allocation guidelines, determined by the Committee to be the most appropriate, given the Fund’s long-term objectives and short-term constraints. Portfolio assets will, under normal circumstances, be allocated across broad asset and subasset classes in accordance with the following guidelines:

Asset class Subasset class Target allocation

Equity 70% U.S. 60%

Non-U.S. 10%

Fixed income 30% Investment grade 25%

Below-investment grade 5%

Cash 0%

6. To the extent the Portfolio holds investments in nontraditional, illiquid, and/or nonmarketable securities including (but not limited to) venture capital, hedge funds, and real estate investments, these assets will be treated collectively as alternative investments for purposes of measuring the Portfolio’s asset allocation. While not specifically considered within this policy, alternative investments may comprise no more than 15% of total Portfolio assets and, to the extent they are owned, will proportionately reduce target allocations to the three primary asset classes itemized above.

SAMPLE

B. Diversification policy

1. Diversification across and within asset classes is the primary means by which the Committee expects the Portfolio to avoid undue risk of large losses over long time periods. To protect the Portfolio against unfavorable outcomes within an asset class due to the assumption of large risks, the Committee will take reasonable precautions to avoid excessive investment concentrations. Specifically, the following guidelines will be in place:

a) With the exception of fixed income investments explicitly guaranteed by the U.S. govern-ment, no single investment security shall represent more than 5% of total Portfolio assets.

b) With the exception of passively managed investment vehicles seeking to match the returns on a broadly diversified market index, no single investment pool or investment company (mutual fund) shall comprise more than 20% of total Portfolio assets.

c) With respect to fixed income investments, for individual bonds, the minimum average credit quality of these investments shall be investment grade (Standard & Poor’s BBB or Moody’s Baa or higher).

C. Rebalancing

It is expected that the Portfolio’s actual asset allocation will vary from its target asset allocation as a result of the varying periodic returns earned on its investments in different asset and sub - asset classes. The Portfolio will be rebalanced to its target normal asset allocation under the following procedures:

1. The investment manager will use incoming cash flow (contributions) or outgoing money movements (disbursements) of the Portfolio to realign the current weightings closer to the target weightings for the Portfolio.

2. The investment manager will review the Portfolio semiannually (June 30 and December 31) to determine the deviation from target weightings. During each semiannual review, the following parameters will be applied:

a) If any asset class (equity or fixed income) within the Portfolio is +/–5 percentage points from

its target weighting, the Portfolio will be rebalanced.b) If any fund within the Portfolio has increased or decreased by greater than 20% of its target

weighting, the fund will be rebalanced.

3. The investment manager may provide a rebalancing recommendation at any time.

4. The investment manager shall act within a reasonable period of time to evaluate deviation from these ranges.

D. Other investment policies

Unless expressly authorized by the Committee, the Portfolio and its investment managers are prohibited from:

1. Purchasing securities on margin or executing short sales.

2. Pledging or hypothecating securities, except for loans of securities that are fully collateralized.

3. Purchasing or selling derivative securities for speculation or leverage.

4. Engaging in investment strategies that have the potential to amplify or distort the risk of loss beyond a level that is reasonably expected, given the objectives of their Portfolio.

SAMPLE

V. Monitoring portfolio investments and performance

The Committee will monitor the Portfolio’s investment performance against the Portfolio’s stated investment objectives. At a frequency to be decided by the Committee, it will formally assess the Portfolio and the performance of its underlying investments as follows:

A. The Portfolio’s composite investment performance (net of fees) will be judged against the following standards:

1. The Portfolio’s absolute long-term real return objective.

2. A composite benchmark consisting of the following unmanaged market indexes weighted according to the expected target asset allocations stipulated by the Portfolio’s investment guidelines.

a) U.S. Equity: Wilshire 5000 Total Market Indexb) Non-U.S. Equity: MSCI EAFE +EM Indexc) Investment Grade Fixed Income: Barclays Capital U.S. Aggregate Bond Indexd) Non-Investment Grade Fixed Income: Barclays Capital U.S. Corporate High Yield Bond Indexe) Cash: Citigroup 3-Month T-Bill Index

B. The performance of professional investment managers hired on behalf of the Portfolio will be judged against the following standards:

1. A market-based index appropriately selected or tailored to the manager’s agreed-upon investment objective and the normal investment characteristics of the manager’s portfolio.

2. The performance of other investment managers having similar investment objectives.

C. In keeping with the Portfolio’s overall long-term financial objective, the Committee will evaluate Portfolio and manager performance over a suitably long-term investment horizon, generally across full market cycles or, at a minimum, on a rolling five-year basis.

D. Investment reports shall be provided by the investment manager(s) on a (calendar) quarterly basis or as more frequently requested by the Committee. Each investment manager is expected to be available to meet with the Investment Committee once per year to review portfolio structure, strategy, and investment performance.



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Connect with Vanguard® > institutional.vanguard.com > 888-888-7064 All investing is subject to risk, including the possible loss of principal.

Diversification does not ensure a profit or protect against a loss.

Establishing a strong conflict-of-interest policy is particularly important for nonprofits. Conflicts of interest have the potential to jeopardize a nonprofit’s tax-exempt status and damage its reputation with donors. Because of the crucial role many nonprofits play in protecting the public interest, any erosion in public confidence is particularly harmful to these organizations.

For your benefit, Vanguard has provided a sample conflict-of-interest policy statement and questionnaire to guide your committee. As with any fiduciary document, your committee should tailor the policy to your organization and address any specific concerns.

All aspects of a nonprofit’s conflict-of-interest policy should be consistent with the IRS’s model conflict-of-interest policy statement, referenced below, as is required. The IRS also requires nonprofits to provide a copy of their specific policy. Therefore, a nonprofit organization must also include the following items (which are not included in our sample) in its conflict-of-interest policy:

• Aclearrecordofanyproceedingsconcerningindividualswhohaveeitherdisclosedaconflictof interest or were found to have one.

• Adescriptionofcompensationandotherfinancialarrangementswithyourofficers,directors,trustees, employees, and independent contractors, including clearly established rules which prohibit board and committee members who receive compensation from the organization from voting on matters pertaining to their compensation.

• Aperiodicreviewofyourexistingconflict-of-interestpolicytoensurethatitisrelevantandreflects your organization’s specific needs and unique situation.

You can refer to the IRS’s sample conflict-of-interest policy statement for further details. This is available in Appendix A of the instructions for Form 1023 at www.irs.gov/pub/irs-pdf/f1023.pdf.

Sample conflict-of-interest policy statement


SAMPLE

Conflict-of-Interest Policy Statement XYZ Nonprofit Investment Committee

Article I. Purpose

The purpose of a conflict-of-interest policy is to protect an organization’s interest when it is contemplating entering into a transaction or arrangement that might benefit the private interest of one of its officers or directors, or might result in a possible excess benefit transaction. This policy is intended to supplement, but not replace, any applicable state and federal laws governing conflicts of interest.

Article II. Definitions

1. Interested Person

An Interested Person is any director, principal officer, or member of a committee with governing board- delegated powers who has a direct or indirect Financial Interest, as defined below.

2. Financial Interest

A person has a Financial Interest if the individual has, directly or indirectly, any actual or potential ownership, investment, or compensation arrangement with XYZ Nonprofit or with any entity that conducts transactions with XYZ Nonprofit.

A Financial Interest is not necessarily a conflict of interest in all cases. Under Article III, Section 2 of IRS Form 1023, a person with a Financial Interest may have a conflict of interest only if the appropriate governing board or committee decides that a conflict of interest exists.

Article III. Procedures

1. Duty to disclose

In connection with any actual or possible conflict of interest, an Interested Person must disclose the existence of the Financial Interest and be given the opportunity to disclose all material facts to the directors and members of the committees with governing board-delegated powers considering the proposed transaction or arrangement. In an effort to aid such disclosure, each member (board, committee, or staff) shall complete a conflict-of-interest questionnaire as circumstances warrant, but no less frequently than annually.

2. Determining whether a conflict of interest exists

The board shall review each member questionnaire and any other disclosures regarding the Financial Interests of its members. After disclosure of the Financial Interest, the Interested Person shall leave the board meeting while the remaining board members discuss and vote on whether a conflict of interest exists.

3. Procedures for addressing the conflict of interest

After exercising due diligence, the governing board or committee shall determine whether the organization can obtain with reasonable effort a more advantageous transaction or arrangement from a person or entity that would not produce a conflict of interest. The Interested Person shall not be present in the room during the determination.

If an alternative transaction or arrangement is not possible, the governing board or committee shall determine by a majority vote of the disinterested directors whether the transaction or arrangement is in the best interests of the organization, for its own benefit, and fair and reasonable. Based on these determinations, the board or committee shall make its decision on whether to enter into the transaction or arrangement.

4. Disciplinary action

If the committee has reason to believe an individual has failed to disclose actual or potential conflicts of interest, it will inform the member and allow him/her to explain the alleged failure to disclose. If the committee still has reason to believe a conflict of interest exists after the alleged conflict is explained, it will take corrective action.

SAMPLE

Conflict-of-Interest Questionnaire

The following questionnaire must be completed annually by all members and affiliates of XYZ Nonprofit. Answers to this questionnaire should relate to relationships that occurred from <insert month, date, year> through <insert month, date, year>. Once you have completed this questionnaire, please sign and date in the space provided and return it to:

<Contact person’s name> <Contact person’s title> XYZ Nonprofit <Address> <Phone #> <Fax #> <E-mail address>

1. Are you an officer of an organization that conducts business or has a relationship with XYZ Nonprofit?

Yes No

If yes, please define.

2. Have you ever served on the board of a business in which XYZ Nonprofit invests?

Yes No


3. Do you have a family relationship with anyone who has a noted relationship with XYZ Nonprofit? Family connections include an individual’s spouse, parent, child, grandparent, grandchild, great-grandchild, and sibling. The spouses of any children, grandchildren, great-grandchildren, and siblings are considered family relationships as well.

Yes No


4. Have you participated, directly or indirectly, in any employment agreement, compensation relationship, or any other arrangement/investment opportunity with a third-party vendor doing business with the XYZ Nonprofit that has resulted or could result in personal benefit to you?

Yes No


5. Have you received, directly or indirectly, any salary payments, loans, or gifts of any kind or any free service, discounts, or other fees from any person/organization engaged in any transaction with the XYZ Nonprofit?

Yes No


6. Do you share ownership of a business that does business with XYZ Nonprofit? Ownership means voting power in a corporation, profits interest in a partnership, or beneficial interest in a trust.

Yes No


Signature Date

Print name


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Nonprofit investment committee member checklist

Well-informed fiduciaries are critical to the financial strength and ultimate success of your organization’s mission.

Checklist for committee members

The following checklist highlights best practices for individual members of nonprofit investment committees. For more information, please reference our guidebook, Fulfilling your mission: A guide to best practices for nonprofit fiduciaries or feel free to visit our website at vanguard.com/nonprofitresourcecenter.


Your principal fiduciary duties

Organization of committees

Do you:

Read and fully understand the committee charter?

Understand your sponsoring organization’s mission and have the investment skills required to implement a strategy that fulfills its mission?

Understand the portfolio’s investment objectives in terms of organizational goals and spending objectives?

Have the investment skills required to perform your responsibilities on the committee?

Understand your fiduciary responsibilities and the potential financial liabilities of serving on the committee?

Notes:

Manager selection and evaluation

Do you:

Analyze whether a prospective manager’s style and philosophy fit the portfolio’s objective?

Select and evaluate managers based on multidimensional criteria, rather than exclusively on past performance?

Notes:

Investment selection and monitoring

Do you:

Review the committee Investment Policy Statement before regularly scheduled meetings?

Have a clear understanding of why the portfolio holds each of its particular investments?

Periodically review whether the portfolio investments are consistent with the goals of your sponsoring organization?

Notes:

Investment costs

Do you:

Understand what investment costs are being charged and if they are reasonable for the portfolio and your committee standards?

Notes:

Meeting agenda

Do you:

Attend all scheduled meetings?

Review meeting materials before investment review?

Feel comfortable challenging conventional wisdom by providing opposing opinions during committee sessions?

Notes:

Additional fiduciary duties

Administrative oversight

Do you:

Prepare and file forms as required by government entities?

Maintain current portfolio documents and review these documents and processes on a regular basis to ensure their compliance with all relevant laws and regulations?

Ensure that the processes used to manage the portfolio conform in all details with the written portfolio documents?

Make sure the portfolio is operating according to committee documents?

Notes:

Fiduciary education

Do you:

Attend institutional industry conferences?

Regularly visit or reference nonprofit websites and industry publications?

Notes:

In Vanguard’s view, the fiduciary standards for nonprofit investment committees can be summarized by a single phrase: “Providing the financial resources necessary to maximize the welfare of your sponsoring organization’s mission.”


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Nonprofit investment committee checklist

Well-informed fiduciaries are critical to the financial strength and ultimate success of your organization’s mission.

Checklist for investment committees

The following checklist highlights best prac-tices for nonprofit investment committees. For more information, please reference our guidebook, Fulfilling your mission: A guide to best practices for nonprofit fiduciaries, or visit our website at vanguard.com/nonprofitresourcecenter.


Investment selection and monitoring

Does the committee:

Have an appropriate investment strategy for the portfolio’s assets and oversee its execution?

Have clearly established goals and objectives for the portfolio with well-defined metrics for success?

Have an Investment Policy Statement that clearly defines the portfolio’s purpose and accurately measures a committee’s progress toward fulfilling that purpose?

Periodically evaluate whether your committee’s investments are consistent with the goals of your sponsoring organization?

Conduct an updated asset allocation study every three years?

Notes:

Investment costs

Does the committee:

Regularly assess whether portfolio fees are reasonable?

Ensure that all portfolio fees charged are clearly disclosed?

Align fee structures for managers based on the portfolio’s goals and time horizons?

Notes:

Principal fiduciary duties

Organization of committees

Does the committee:

Have an investment committee charter that clearly defines roles and responsibilities?

Ensure that committee documents describe committee structure, composition, role, and purpose?

Have a conflict of interest policy?

Appoint well-qualified and knowledgeable fiduciaries—or ensure that fiduciaries receive appropriate training and support?

Encourage each committee member to fully participate in the committee’s proceedings?

Conduct regular meetings on all aspects of the portfolio, both administrative and investment-related?

Notes:

Manager selection and evaluation

Does the committee:

Maintain a disciplined process for hiring, evaluating, and terminating managers?

Analyze whether a prospective manager’s style and philosophy fit the portfolio’s objective?

Select and evaluate managers based on multidimensional criteria, rather than exclusively on past performance?

Notes:

Meeting agenda

Does the committee:

Provide an agenda for each meeting?

Require a quorum present to begin each meeting?

Approve minutes from the previous meeting?

Review investment performance at each meeting?

Review asset allocation annually and rebalancing decisions every one to two years?

Identify agenda items for subsequent meetings?

Assess portfolio risk annually?

Discuss regulatory changes, contractual vendor agreements, and any ancillary pools of assets when necessary?

Notes:

Additional fiduciary duties

Administrative oversight

Does the committee:

Ensure that the processes used to manage and operate the portfolio conform in all details with the written committee documents?

Make sure the portfolio is operating according to committee documents?

Ensure that the portfolio and accounting standards comply with all necessary rules and regulations (see reference manual)?

Prepare and file forms as required by government entities?

Maintain current portfolio documents and review these documents and processes on a regular basis to ensure their compliance with all relevant laws and regulations?

Notes:

Fiduciary education

Does the committee:

Encourage additional education and training for committee members on relevant investment topics?

Make members aware of upcoming institutional conferences?

Inform members about helpful industry websites, publications, and organizations?

Notes:

In Vanguard’s view, the fiduciary standards for nonprofit investment committees can be summarized by a single phrase: “Providing the financial resources necessary to maximize the welfare of your sponsoring organization’s mission.”


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Investment committee member matrix

Creating the right mixInvestment committees need to have the right blend of capabilities and attributes to be effective. It’s not that everyone needs to be an expert in everything, but roles have to be clear. A diverse group can examine issues from a variety of perspectives to help ensure that decisions reflect the organization’s mission, finances, and culture. By assessing your existing members’ backgrounds, experience, and interests, you can identify any gaps on the committee, and that’s what this tool is designed to help you do.


Taking stock of your committee

Some investment committees excel, while others struggle. What accounts for the difference? In large part, it comes down to the knowledge, skills, abilities, personalities, and attitudes of your committee members. By assessing the backgrounds and qualitative aspects of your members, you’ll be better positioned to identify strengths and weaknesses, assess the overall balance of the committee, and develop a strategy to improve its overall effectiveness.

Benefits of a well-constructed committee

A diverse, well-constructed committee is greater than the sum of its parts. The members know each other well, and work together effectively. Healthy debate is the rule, rather than the exception, because there is a high level of trust. And most importantly, members feel personally responsible for the group’s decisions and for maintaining a harmonious working environment.

In terms of the overall size of your committee, some research suggests that a six-to-ten-member group benefits from being diverse without suffering the coordination problems associated with larger groups.

Using the committee member matrix

This tool will help you catalog committee members’ experience, education, and expertise and allow you to identify any gaps.

Pay special attention to the blue columns, which cover invest -ment, finance, legal, and risk management areas—all key to successful investment committees. We’ve also provided columns for qualitative aspects, such as potential conflicts of interest or donor status. You can also note any fields of interest or back-grounds that may fill gaps on your committee. Remember that the qualitative aspects (such as commitment to the organization’s mission) are just as important to get right as making sure members have the appropriate background or experience.

Finally, because each organization is unique, there are a couple of blank columns where you can list other categories.

Background/expertise

Investment committee member matrix

Member name/position Joining year Career field/degrees/designations Qualitative aspects Eq

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Notes:



IAMMAT 012014




All investing is subject to risk, including possible loss of principal.

Topics of discussion and frequency of meet ings will vary depending on each investment committee’s charter, the portfolio’s complexity, and the staff’s size and capabilities.

At a minimum, committees should meet semiannually to evaluate the portfolio’s performance and at least annually to review asset allocation characteristics. Other committees may choose to meet on a quarterly basis with at least one meeting taking an educational focus, such as reviewing a particular asset class or investment strategy.

New committee members in particular should review meeting minutes and committee materials from the past one or two years to have a better awareness of the committee’s activities.

A summary of some items that investment committees of Vanguard’s institutional clients often include in their agendas follows.

Common investment committee agenda topics


At each meeting

•Approve minutes: Approval of the prior meeting’s minutes serves as a helpful reminder for committee members to review recently discussed topics and allows for a common starting point at each meeting. This is usually mandated by charter or statute.

•Portfolio review:

– Review investment performance: While total portfolio and component performance should be reviewed at each meeting, committees should evaluate them with a longer-term perspective. Best practices dictate that committees evaluate investment performance in the context of overall capital market conditions/returns to provide an attribution and understanding of portfolio returns.

– Review asset allocation for rebalancing as necessary: Asset allocation decisions should be long-term in nature. Rebalancing should be examined at least every one to two years unless there is a major change in strategy or manager investment philosophy. However, a small component of the portfolio may be more tactical and opportunistic based on capital market conditions. In such cases, more frequent reviews of asset allocation may be necessary.

• Identify agenda items for subsequent committee meetings: Discussion at a meeting often leads to agenda items for subsequent meetings. At each meeting, committees should present a schedule of future meeting dates and proposed agenda items.

Annually

•Approve investment committee members: Generally, committee members (and committee officers) are reviewed and appointed annually. Board and investment committee members should rotate on a continuous cycle, with the board determining the appropriate rotation schedule based on the organization’s specific needs and circumstances. Gradual shifts in committee composition are one of the most effective ways to balance the need for continuity with the importance of fresh perspectives.

•Reaffirm objectives: It is important for the investment committee to review and reaffirm the portfolio in light of the organization’s mission statement and goals. The board should also discuss if any part of the objectives has changed, how and whether any changes reasonably fit in with or alter the mission and goals, and the appropriate response to them.

• Investment Policy Statement (IPS): The committee should formally review the IPS. Changes in the asset pool and board constituencies may necessitate modest modifications to the IPS over time. Such a review also creates a shared understanding of the asset pool’s objectives and would be particularly useful following turnover of committee members.

•Spending policy: Similar to the IPS, it is useful to have a regular discussion about the spending policy. Many committees need to approve the spending policy annually by charter. While the policy is unlikely to change often, formally reviewing it is a key role of the investment committee.

•Asset allocation: Committees should discuss their asset allocation annually; addressing the level of risk, the likelihood of meeting spending and growth objectives, and the impact of changing strategic asset allocation. Major strategic changes to asset allocations should be made infrequently and only after careful consideration. However, conducting an asset allocation assessment in conjunction with a spending policy review helps committees evaluate and validate their assumptions.

•Major asset classes: Committees should review each major asset class throughout the year to analyze the objective of the asset classes, their construction, and success to date in meeting their stated objectives.

•Risk management review: Some committees find it useful to assess portfolio risk annually, either as part of an asset allocation study or separately. A regular review process should be implemented to help committees develop a shared understanding of portfolio risks—from asset class to operational risks—that exist in their portfolio.

•Review costs associated with the portfolio: Because costs diminish a portfolio’s net return, it is always important to keep a close eye on fees and expenses. A regular cost review should include custodian, consultant, accounting, legal, and asset management fees. For new Form 990 purposes, asset management fees are amounts paid for investment counseling and portfolio management; monthly account service fees are considered portfolio management expenses; and transaction costs, such as brokerage fees and commissions, are treated as sales expenses and not as investment management fees.

Periodically

•Review investment managers: Managers should not be evaluated solely on performance but also on criteria such as consistency of investment philosophy, fees and expenses, and stability of the investment team and firm.

•Discuss relevant regulatory changes: Periodically, regulatory changes may impact the management of your portfolio, and therefore, such changes are important to bring up for committee discussion.

•Review other contractual vendor agreements (custodians, consultants, etc.): These agreements are typically reviewed every five years. While these responsibilities are often delegated to the staff, there may be review and approval required by the committee to execute material charges or engage a new investment manager or a consultant. All insurance policies, including Directors and Officers Liability Insurance and Errors and Omissions Insurance, should be reviewed by the committee as well as the full board to ensure they are in good standing and current. The committee should also discuss its satisfaction with the quality of the service and responsiveness provided by applicable vendors, including trustees.

•Review ancillary pools of assets: Nonprofit organizations often have ancillary asset pools outside of the endowment/foundation or receive unique gifts. A review of outside asset pools should be conducted when they require board approval or when the committee feels it is warranted.

This sample agenda is for informational purposes only.


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Committees play an important role in many organizations. They can set strategy, determine budgets, and create succession plans. Committees also frequently oversee the organization’s investment portfolio. Any decision-making group faces its own challenges, but groups making investment-related decisions should be particularly aware of some behavioral dynamics that can influence the quality of those decisions.

This assessment tool is designed to help you:

• Identify behaviors that can negatively affect group performance—the first step toward improving a group’s overall quality of performance and decision-making.

• Understand and apply some possible techniques for addressing opportunity areas.

Committee assessment tool

Definitions and examples of suboptimal behaviorAttitudes and behaviors that get in the way of effective decision-making among committee members can take a variety of forms. This section will help you determine the current state of your investment committee in terms of recognized group behaviors.

Groupthink

A style of thinking in which the desire for group harmony discourages healthy dissent, leading to ineffective decision-making.

Symptoms include:• Close-mindedness; committee refuses to discuss

alternative ideas (e.g., real estate, passive manage-ment).

• Pressures toward uniformity; an environment where dissent is unwelcome and self-censorship may occur.

Assessing the risk of groupthink• Do committee members speak their minds?• Do committee members feel free to question group

decisions?

Confirmation bias

A tendency among groups to acquire information that confirms preconceived ideas and to disregard contrary views or data.

Symptoms include:• Seeking more information that supports—rather than

challenges—preconceived beliefs.• Withholding or ignoring evidence that conflicts with

prevailing group views.

Assessing the risk of confirmation bias• Does your committee aggressively seek information

supporting ideas it likes?• Does your committee seek information that conflicts

with prevailing views on the committee?

Group polarization

A situation that occurs when groups as a whole make decisions that are either riskier or more conservative than the leanings of its individual members.

Symptoms include: • Arriving at a final outcome that is more extreme than

would have been expected, given group members’ individual views.

Assessing the risk of group polarization• Does your committee make riskier decisions than

you would make on your own?• Does your committee make more conservative

decisions than you would make on your own?

Shared-information bias

A phenomenon that occurs when information is shared before the discussion but not considered during the discussion.

Symptoms include:• The perceived expert doesn’t feel it’s appropriate to

add opinions because not everyone else is an expert. • Someone shares information, but it’s discounted

because others don’t know about it.

Assessing the risk of shared-information bias• Do committee members welcome fresh insights

during meetings, beyond the information that is shared in advance?

• Do committee members withhold information if it hasn’t been previously circulated?

Herding

The tendency for groups as a whole or group members as individuals to resist being outliers, to make decisions based on what others do.

Symptoms include: • Constantly benchmarking against others in the

industry.• Frequently overriding the investment policy on such

issues as rebalancing to conform to what others are doing.

Assessing the risk of herding• Does your committee benchmark investment decisions

against others in the industry?• Does your committee override its investment policy

if others in the industry are following another direction?

Social loafing

The tendency of individual group members to put forth minimal effort in a group setting.

Symptoms include:• Multiple BlackBerry users at meetings.• Members who attend meetings but do not

make meaningful contributions.• Members who skip majority of meetings but remain

on committee.

Assessing the risk of social loafing• Do all committee members attend scheduled

meetings?• Do all committee members make significant

contributions to the group?

Techniques to address suboptimal behaviors on committeesIf you suspect that your committee is not operating effectively, see below to discover which strategies could potentially address these group behaviors. We have grouped these techniques into three categories—structure, process, and information access and review—and identified the relative value of each strategy in addressing the behaviors that may impede committee effectiveness. • Read through the examples to determine whether

your committee exhibits any suboptimal behaviors.• If so, explore the suggested techniques to identify

those best suited to your committee.

Structure

Diverse members—Ensuring the group has diverse members in terms of knowledge, skills, abilities, personalities, attitudes, and backgrounds. Ethnicity, race, and age can also be considered. Diverse groups can draw on a wider range of knowledge and skills, which improves flexibility and innovativeness and may encourage productive debate.Group size—A group should be large enough to include diverse insights and experiences but small enough to keep organization and coordination manageable and to keep members motivated. Research indicates commit-tees typically benefit from having six to ten members (Investment committees: Vanguard’s view of best prac-tices, Vanguard Investment Counseling & Research, May 2010).

Process

Decision-making tactics—The process of how a group goes about making decisions. Are decisions made before the meetings? Useful techniques include cata-loging pros and cons or reviewing “what if” scenarios.Devil’s advocate—A devil’s advocate can challenge inherited wisdom and the voice of the crowd. The role of devil’s advocate should be assigned to a committee member. This role should rotate and should not always be the same person. Note that an institutional consul-tant or advisor may also play this role.Leadership style—Techniques leaders can use to help avoid suboptimal group behaviors include basic meeting management practices: Set a regular meeting schedule, distribute an agenda in advance, recognize member preferences about how they want to interact, and encourage attendance.

It’s the leader’s job to make sure the group’s tasks are executed. This may be accomplished through a demo-cratic leadership style, which allows members to vote on decisions and promotes an egalitarian atmosphere. Decision-making can also follow autocratic or laissez-faire models.Some techniques leaders can use to help promote effective group behaviors include: • Not stating an opinion before opening up discussion

to the group. • Encouraging the sharing of information and healthy

debate.

Information access and review

Leveraging member expertise—Identifying and using the knowledge, skills, and abilities of group members. A best practice is making sure all group members have information about the backgrounds of other members to ensure each member’s abilities are known and formally acknowledged by the group.Outside expert—A consultant or other expert who brings in expertise or a different perspective that doesn’t exist within the group. This individual can serve as a devil’s advocate, as the bearer of bad news, or as a creative antidote to stale thinking.

Po

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Suboptimal behaviors

Groupthink

Confirmation bias

Group polarization

Shared-information bias

Herding

Social loafing

Techniques to address suboptimal behaviors

Structure Process Information

Diverse members

Group size

Decision-making tactics

Devil’s advocate

Leadership style

Leveraging member expertise

Outside expert

• • ••• •• ••

••• • •• • •

••• • •• •

• ••• • ••

• • •• •••

•• • •••

Techniqueeffectivenessinaddressingbehavior: •Good •• Better ••• Best


VISSCPB 012014


For additional information and one-stop access to other valuable resources, please visit Vanguard’s

Investment Committee Resource Center at vanguard.com/nonprofitresourcecenter.



Where investment committees spend their time

Is your investment committee focusing on the right priorities? Investment committees often spend too much time on things they can’t control and too little time on things they can. For example, a survey conducted several years ago by Vanguard found 40% of committee time is spent reviewing past performance—far more than the time spent making strategy decisions or on other issues. How does your committee stack up?

Take this tool to your next committee meeting and discover if you’re maximizing the use of a limited resource—time.


Let’s be clear: We’re not saying that your investment committee shouldn’t discuss performance and other areas over which it has little control, but it is imperative that your committee finds the right balance. Make sure your investment committee members feel each committee meeting is time well spent.

For information on committee meeting agendas, please see the Common investment committee agenda topics tool.

Using the tool

This tool will help you identify the areas where your committee is spending its time in relation to the level of control you have over the issue. We’ve provided a list of categories, along with space to write in your own. Simply decide in which quadrant each issue belongs.

This exercise can identify opportunity areas and help lay the foundation for more effective investment committee meetings.

Staying focused on what really matters

Many investment committees end up concen-trating too much on things they have little control over. For example, a disproportionate amount of time may be spent discussing performance, but ultimately you cannot foresee or control what happens in the financial markets.

There are, however, important areas where you do have some control—including asset allocation, investment strategies, and rebal-ancing. This is where your committee should focus its discussions. Your committee also has absolute control over costs, which are a key predictor of future performance, according to several studies.

The amount of time you spend on educating committee members and creating a frame-work for addressing your fiduciary responsibilities is also a vital consideration and is within the committee’s control.

Plug the items below into the chart, but add others that you feel may apply, such as:

• Costs.

• Educationofcommitteemembersoninvestmentissues.

• Evaluatingnewinvestmentstrategies.

• Investmentmanagerevaluation(duediligence).

• Investmentmanagerperformance.

• Investmentmanagerchanges.

• Investmentstrategy(assetallocation,rebalancing,etc.).

• Monitoringfinancialmarkets.

• Riskassessment.

• Spendingdecisions.

• Liabilitymanagement.

Rememberthe80–20rule,andspendmoretimeontheareasthatyourcommitteecancontrol, such as costs, diversification, and transparency.

Amount of time spent on the issue

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More

Less MoreTime

Where do you spend your time?


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