Strengthening Investment Risk Assessments for Non-Profit Portfolios

Strengthening Investment Risk Assessments for Non-Profit Portfolios
June 22, 2026 10 mins

Strengthening Investment Risk Assessments for Non-Profit Portfolios

Strengthening Investment Risk Assessments for Non-Profit Portfolios

Risk management for non-profit portfolios requires a robust process aligned with portfolio objectives and strategy. When done well, it supports downside protection and can enhance long-term returns.

Key Takeaways
  1. Define risk in a way that is most meaningful to the organization.
  2. Assess risk through multiple lenses, including investment, liquidity, and shortfall risk.
  3. Establish a consistent process for reviewing and adjusting risk as circumstances and conditions evolve.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Nothing in this document should be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice.

Risk management has long been an important aspect of investment management. Over time, we have gained a deeper understanding of investors’ risk appetites, the design and effectiveness of risk controls, and the critical role of portfolio stress testing. While major events such as the Dot-Com Bubble, the Global Financial Crisis, and, more recently, the COVID-19 pandemic have pushed risk management to its limits, markets have also experienced numerous other periods of significant stress that have further shaped our approach. Understanding objectives and risk tolerance, assessing exposures, and monitoring how they evolve are all crucial elements of portfolio management. Sound decision-making, good governance, and sophisticated analytical tools are cornerstones to a well-rounded risk management process.

How is Risk Defined?

“Risk” is a broad concept. It is multifaceted and varies based on an investor’s objectives, circumstances, and preferences. For this discussion, our focus is on the oversight and management of endowments, foundations, operating pools and similar portfolios for non-profit organizations. Most of these pools are designed to grow in perpetuity. Some benefit from ongoing cash inflows, while others do not, and objectives vary by asset pool and by organization. In addition, the degree to which operating budgets depend on these pools differs across institutions, leading to a wide range of risk tolerances. Despite these differences, there are quite a few similarities in terms of what should be measured and managed from a risk lens.

Thus, for this conversation, we define risk as the possibility that a portfolio’s actual outcomes deviate from expectations in ways that impair spending stability, liquidity, or the organization’s ability to deliver on its mission. Risk therefore reflects both the uncertainty of investment results and the potential consequences those outcomes have on spending, financial health, and mission delivery.

What Portfolio Risks Should be Assessed?

Understanding how risk is defined and viewed is a foundation of effective investment governance. Strategic asset allocation and spending studies — typically refreshed every 3–5 years — establish not only return objectives, but also the amount and types of risk an organization has agreed to bear. Ongoing risk assessment is most effective when it explicitly references those long-term decisions.

From a top-down portfolio perspective, a comprehensive risk lens includes assessment of investment, shortfall and liquidity risk. The following are some aspects of each of these risk categories.

  • Investment Risk
    • Strategic Asset Allocation Risk: Is the strategic mix still aligned with organization’s objectives?
    • Tactical Asset Allocation Risk: How could deviations from the strategic asset allocation impact portfolio outcomes?
    • Volatility & Drawdown Risk: What level of loss can the organization withstand?
    • Active Manager Risk: How much value or volatility is driven by manager selection?
    • Concentration Risk: Are exposures overly dependent on a single asset class, factor, or strategy?
  • Shortfall Risk
    • Spending Risk: Is the portfolio generating enough return to fund spending needs? Do spending assumptions require reevaluation?
    • Peer Risk: While peers should not drive strategy, meaningful underperformance relative to peers can affect reputation, board confidence and fundraising. Thus, how the portfolio is performing relative to appropriate peer universes is an aspect of risk that should be considered.
  • Liquidity Risk
    • Capital Needs: Can the portfolio reliably meet all projected liquidity needs (operational, grantmaking and capital calls) under both normal and stressed market conditions?
    • Policy Bands: What’s the likelihood the portfolio moves outside policy bands in times of market decline and slow private market distributions? Is there a contingency plan if those bands are breached?

A clear risk lens ensures that committees stay grounded in what matters most: mission stability, spending sustainability and long-term financial health.

How Should These Risks be Evaluated?

Evaluating risk is not only about identifying the risks but also about establishing a structured approach to understanding how those risks evolve over time. Once organizations know what risks matter, the next step is determining how to assess them in a consistent, forward-looking manner. This requires a disciplined oversight process.

Every 3-5 years, institutions typically conduct a full asset allocation study to determine the long-term policy mix that best supports the organization’s objectives. The findings of this periodic review set the foundation upon which the annual risk assessment is built, ensuring that shorter term evaluations remain anchored in a well-considered, long-term strategy.

Annually, many committees will want to undertake an assessment of the portfolio’s overall risk posture, which could include:

  • Alignment with Long-Term Objectives: Confirm that the portfolio’s expected return, volatility and drawdown potential remain consistent with its spending needs, enterprise risk tolerance and long-term goals.
  • Forward Looking Risk Projections: Evaluate how risks may evolve under different macroeconomic environments, current capital market assumptions and different spending rates.
  • Liquidity Assessment: Review the ability to meet operational and capital call obligations.
  • Stress and Scenario Testing: Assess how the portfolio behaves in adverse but plausible markets, and whether those outcomes remain tolerable given the organization’s financial profile.

Committees also benefit from concise quarterly updates to stay aware of meaningful changes. Quarterly checks should not attempt to replicate the annual risk review; instead, they serve to highlight potential issues that may require discussion or adjustment. They may include:

  • Changes in asset class, factor or manager exposures
  • Shifts in liquidity relative to short-term obligations
  • Notable changes in volatility, drawdown risk or tracking error
  • Early deviations from expected return paths
  • Peer relative observations (as a contextual input, not a driver of strategy)

These updates ensure that risk awareness remains continuous, even though formal evaluation is anchored annually. They are not just informational but can also point toward key areas where portfolio tweaks may be desirable. Importantly, good risk management is not just about risk reduction, as it may also identify areas where the portfolio could benefit from taking more risk in pursuit of higher returns.

3-5

Most institutions revisit their full strategic asset allocation and spending studies only every 3–5 years but are encouraged to conduct a comprehensive portfolio risk assessment annually, supplemented by concise quarterly updates.

Implications

Ultimately, effective risk oversight is not about predicting markets but about ensuring portfolios remain aligned with mission, spending needs and long term financial health. By grounding governance in three core questions — How do we define risk? What portfolio risks should be assessed? How should they be evaluated? — organizations gain a clearer, more consistent lens for navigating uncertainty.

This framework encourages committees to look beyond performance alone and instead focus on the underlying drivers of risk, the sustainability of spending, and the liquidity needed to support ongoing operations and commitments. When applied thoughtfully, it strengthens decision making, improves communication, and supports continuity across changing markets and governance structures.

Committees that anchor their discussions in these three questions put themselves in a stronger position to fulfill their mission, not only during moments of stress, but also in the everyday decisions that determine long-term success.

Non-Profit Investment Strategy

In today’s dynamic environment, non-profit organizations must clearly define their objectives while navigating economic, regulatory, demographic, and geopolitical forces that create both challenges and opportunities. If you are evaluating your next steps, our team can provide tailored perspectives to help align your investment strategy with your goals.

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Aon’s Thought Leaders
  • Ryan Murphy
    Client Service, Aon Investments USA Inc.
  • Heather Myers
    Non-Profit Solutions Leader, Aon Investments USA Inc.

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Investment advice and consulting services provided by Aon Investments USA Inc. (“AIUSA”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting an investment strategy. Diversification and asset allocation do not ensure a profit or guarantee against loss. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. Investment themes and potential action items are intended to help illustrate our investment and research process. It should not be assumed that any investment themes or potential action described will prove to be profitable or result in positive investment performance. Any forward-looking statements speak only as of the date they are made, and AIUSA assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. By receiving and reviewing this material, the recipient acknowledges the following: This material is a general communication being provided for informational and educational purposes only. It is not designed to be a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. This material was not prepared and is not intended, to address the needs, circumstances, and objectives of any specific institution, plan, or asset pool. AIUSA is not providing advice in a fiduciary capacity under applicable law in providing this material, which should not be viewed as impartial, because it is provided as part of the general marketing and advertising activities of AIUSA, which earns fees when clients select its services. Prior to making any investment or financial decisions, any recipient of this material should seek individualized advice from their personal financial, legal, tax, and other professional advisors that takes into account all of the particular facts and circumstances of their situation. The content of this document is made available on an “as is” basis, without warranty of any kind. AIUSA disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AIUSA reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AIUSA. Aon Investments USA Inc. is a federally registered investment advisor with the U.S. Securities and Exchange Commission. AIUSA is also registered with the Commodity Futures Trade Commission as a commodity pool operator and a commodity trading advisor and is a member of the National Futures Association. The AIUSA ADV Form Part 2A disclosure statement is available upon written request to: Aon Investments USA Inc. 200 E. Randolph Street Suite 600 Chicago, IL 60601 ATTN: Aon Investments USA Inc. Compliance Officer

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