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Good time to retool investment strategies

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Jeffrey W. Steed

Foundations and other institutional investors experienced storms within the financial markets at the end of 2008 and beginning of 2009.

However, some rebuilding has begun to take place in foundations and the market in general.

This is an optimal time for foundations to get back to investment basics and review areas that may help provide strong footing for the future.

Critical to the rebuilding process within the portfolios of foundations are:

  • Manager evaluations

Even though it is typical to blame investment managers in times of market storms because of monthly or quarterly performance results, intermediate-term evaluations are a fairer and more realistic assessment of managers. It may be more rational to let the storm pass and then evaluate manager performance over the last three to five years, comparing managers to appropriate benchmarks.

  • Fees

Revisit the fees being charged by managers.  This may be an optimal time to negotiate fee structures downward when performance has been down.  It may also be an optimal time to re-bid custodial fees among competitors, especially in light of the amount of reshuffling in the market.

  • Risk

Risk, specifically downside risk, should be a constant concern when monitoring individual managers.  Investment managers or custodial consultants, or both, should provide various risk measures to foundations periodically.  A custodial relationship should be able to provide a consistent overview of each manager related to risk measures.  The custodial relationship can also help assist in evaluating risk measures in light of a foundation’s specific risk tolerance.

  • Liquidity/cash needs

Because of planned and projected distributions, appropriate liquidity needs to be maintained.  Because a foundation may have some non-liquid assets through gifts or through purchases, a constant percentage of assets needs to be kept liquid for periodic distributions to prevent a cash “squeeze” in the short-term or at some point in the future.

  • Income/spending rate

For foundations that use a spending plan rate in one or more endowments, considerations for limiting the spending rate may be appropriate.  Otherwise, when asset values are down, the actual spending rate may be too high because of trailing market averages from previous time periods.

  • Problematic investments

If a foundation’s portfolio contains problematic investments, a plan needs to be developed by the foundation’s leadership to address the problem.  A plan monitored periodically can provide a prudent and systematic process for minimizing the problem with the eventual objective of eliminating the problematic investments.

  • Benchmarks

Foundations should periodically evaluate performance benchmarks of the various investment managers.  Custodial relationships and other investment advisors can help with this evaluation process by examining correlations and the underlying portfolio holdings to help insure appropriate performance benchmarking.

  • Investment policies

While they realistically do not change often, investment policies should be reviewed periodically to ensure that they do not need to be updated.  As foundation portfolios increase in size, their complexity also tends to increase. *

  • Portfolio diversification

Having various managers with differing management styles and objectives can help provide further diversification within asset classes.  A foundation also should review its rebalancing process to help ensure that the proper rebalancing within pre-determined boundaries takes place at the right time.

  • Long-term objectives

An evaluation of the underlying vision of the foundation and its long-term objectives may help remind a foundation’s leadership of the appropriate amount of return that should be expected within an acceptable level of risk.

Market storms remind investors of vulnerabilities that need to be addressed and minimized for strong, effective futures.  Despite the storms, the rebuilding process can strengthen the long-term viability and effectiveness of foundations.


Jeffrey W. Steed is vice president of the Arkansas Baptist Foundation and Christian Ministry Services.

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