Portfolio Theory & Major Donor Portfolios
A Modern View of Portfolio Optimization.
I hate wasted motion. Not like the extra cup of coffee you feversihly seek out in the morning, or that internal strategy meeting that exists as part of the internal kubuki theatre at many nonprofits. I’m talking about the place where we tolerate the most wasted motion in the advancement profession: your portfolio of major donor prospects. And because I think A LOT about these sorts of things, I started wondering whether there were parables in other industries, which got me thinking about investment management and modern portfolio theory.
Yeah, I’m kind of a dork like that.
So I booted up Audible and downloaded a lecture titled “Portfolio Theory and the Asset Pricing Model”, by Raghavendra Rau at Cambridge University. This was a delightful break from the steady diet of Taylor Swift and SZA that usually rocks my ride to and from my kids school. No hate on the artists, but my brain needed something…else.
Anyhow, in the lecture, Rau lectures on the optimum allocation of investment capital discounted cash flows, asset pricing, and risk distribution…the sorts of things we think about (but don’t always act on) when we craft major donor portfolios for CEOs, major gift officers, or our volunteer fundraising leaders.
He talked about Harry Markowitz's Portfolio Theory and the strategic intricacies and strategies of optimizing investment returns - the same ideas we use when thinking about how to allocate our time and talent against the cultivation of major gift prospects.
Back in the day, Markowitz's theory revolutionized investment management by emphasizing diversification to optimize returns while minimizing risk. Similarly, major gifts fundraising hinges on diversifying donor portfolios to maximize philanthropic impact and mitigate the risk of overreliance on a single funding source. Just as a balanced investment portfolio comprises various asset classes, a robust major gift donor portfolio should encompass a spectrum of donors with varying capacities, interests, and motivations.
The concept of risk and return trade-off is central to Markowitz's theory, and should be considered by any manager of MGOs, or major donor portfolios. That’s because even though high-capacity donors offer substantial contributions, they often entail higher cultivation and stewardship time and effort. Conversely, mid-level donors might require less investment but contribute steadily over time. MGOs can optimize their time while also maintaining sustainable revenue streams for their organizations by strategically balancing high, medium, and low-risk prospects within the portfolio.
Furthermore, Markowitz's principle of efficient frontier—the optimal combination of assets for a given level of risk—demonstrates how fundraisers should aim to identify and prioritize prospects capable of yield the highest returns relative to the resources invested - i.e. lower maintenance, high access prospects who have a demonstrated history of philanthropy. Through data analysis, prospect research, and relationship mapping, fundraisers can construct the equivalent of the “efficient frontier” within their donor portfolios, maximizing outcomes within their personal/organizational constraints.
But what I love the most is that Markowitz stresses the importance of vigilant portfolio monitoring and frequent rebalancing. Just as financial markets evolve, donor dynamics shift over time. Effective fundraisers must continuously assess donor interests, capacities, and engagement levels, reallocating resources to capitalize on emerging opportunities and mitigate potential risks. Sometimes, that means moving on from a prospect and reallocating cultivation activities to other, more engaged prospects (or at least those receptive to your organizational mission).
Who would have guessesd that major gifts fundraising and Markowitz's Portfolio Theory are like two peas in a pod? They both believe in diversification, risk management, and optimization of resources - the only difference is that Markowitz won the Nobel Prize for his effort (there’s no Nobel Prize - yet - in Philanthropy)…