NonProfit News Profile: Antonio DiCosola

Antonio DiCosola, Senior Consultant, was interviewed by NonProfit News. Below are some highlights from his interview about creating and utilizing a customized investment strategy. The complete Profile is available here.


Consultant Finds Success In Customization For Nonprofits’ Varied Philosophies, Biases
by Colin Rajala | August 13, 2015

Truly understanding the investment philosophies and biases of the staff and board members involved in decision making at foundations and endowments is a key component to structuring a customized investment strategy that provides a framework for outperformance while taking into consideration an institution’s needs, according to Pavilion Advisory Group Consultant Antonio DiCosola.

To create a customized program, Pavilion works with clients to develop an investment philosophy and model multiple asset allocations to determine the best fit for the portfolio over a long-term horizon.

Building On An Investment Philosophy

A client’s investment philosophy is shaped by inherent biases the staff or committee members may have, which DiCosola says is inevitable. When delving into staff or committee members’ biases, which includes confirmation bias, negativity bias and loss aversion bias, Pavilion makes sure to be very clear in letting a client know what biases they agree with and which ones they do not, DiCosola said.

“We want to pick our clients’ brains to see if they have a perspective on active versus passive investing, a preference of reducing downside risk or capturing upside and whether they want to be opportunistic within the portfolio,” DiCosola said. Beyond a client’s biases and investment philosophy, Pavilion wants to understand the organization’s liquidity profile, cash flow needs, risk tolerance and constraints, among other factors, as they play a strong role in influencing the asset allocation models that are recommended.

Asset Allocation Modeling

After meeting with a client and understanding their view on the current portfolio, broader investment themes and the restraints and needs, the firm begins asset allocation modeling to ultimately determine the best way to add value without impacting the corpus or triggering any risk, liquidity or cash flow issues.

“Asset allocation is number one in terms
of driving value and you can’t create an
appropriate asset allocation without
knowing a client’s constraints and objectives.”

The asset allocation modeling process features a variety of techniques and mathematical models utilized by Pavilion, including mean variance optimization.

“I think that liquidity and risk tolerances are driving forces into what types of asset allocation models we present,” DiCosola said. “…At the end of the day, selecting the right asset allocation is more of an art than a science.”

Structuring the Portfolio

In the current market environment where forward price-to-earnings multiples “look fairly valued to a little stretched,” the firm tends to favor portfolios that include hedge funds and select private assets, DiCosola said.

Because of the low level of fixed-income yields, foundations and endowments are looking at unconstrained fixed-income strategies, but DiCosola has found some problems with recommending the strategies to clients because no two are the same, making it difficult to understand what risks are being taken to generate returns. He also noted that there are concerns with paying higher fees for a product that has pretty low return expectations, noting that you could pay 30 to 50 basis points for a core-plus mandate, while you might pay 60 to 90 basis points for an unconstrained mandate.

Liquidity may also be a concern for some clients, as trying to reach the expected return target is a significant barrier for nonprofits today, DiCosola said. To maintain a portfolio’s corpus, an organization has to accommodate for the spending rate, which may be in the 5% range, plus a percentage for fees and operations, as well as 2% for inflation, according to DiCosola.

Read the complete profile.