Jeffrey W. Steed
On a recent vacation trip, my family and I drove through a stretch that provided the opposing views of the magnificent oceanfront neighborhoods and the older, challenged neighborhoods that needed revitalization.
The current financial markets are like those challenged neighborhoods.
Some believe the current investment environment is staying around a while and has been termed the “new normal.”
With lower investment returns than historically have been experienced, philanthropic professionals working in the area of investments will likely continue having challenges in the near future.
Following are some variables to consider while traveling through difficult investment environments.
- Manager exposure: Possible exposure to some outside managers that have not been performing well in the current investment environment compared to their stylistic peers may need to be decreased or eliminated.
- Multiple advisers: Seek advice from multiple consultants from different firms. Firms with obviously different research departments will provide differing opinions. Differences of opinion can help endowment and foundation managers better evaluate advice for planning purposes.
- Alternative investments: Alternative Investments have different meanings to individuals. However, consider the ongoing evaluation of asset classes for investment purposes that have performance in an alternative or non-correlated fashion to the traditional stocks and bonds.
- Decision documentation: Document investment-related decisions based upon analytics as a way to back up those decisions and reduce potential liability.
- Spending rate: Evaluate the current spending rate in the current investment return environment. Even though a decision to reduce a spending rate can be potentially difficult with constituent relationships, the rate needs to be fair in balancing short-term needs and the long-term viability of the underlying endowments.
- Managing liquidity: Ongoing projections of needed liquidity for required funding must be evaluated and updated periodically.
- Management outsourcing: The individual management outsourcing of various investment styles and assets classes allow for endowment and foundation management to more easily change individual managers when needed instead of having to restructure internally.
- Asset bubbles: Managing potential asset bubbles such as treasury bonds and gold is crucial. The top three methods for managing potential bubbles are diversification, diversification and diversification.
- Manager evaluation: Work with endowment and foundation consultants to determine the best performing managers in past environments that seem consistent with the current environment. As we all know, past performance is no guarantee of future performance, but it can provide some insight about a manager’s performance in the current environment.
- Portfolio volatility: Recalculate the portfolio volatility that includes the most recent months of activity against the volatility of appropriate benchmarks. Make any management changes that are needed if such a comparison of volatility warrants a change to decrease overall portfolio volatility.
- Ongoing awareness: For the sake of ongoing evaluation of investment opportunities and the critical evaluation of evolving investment management theory, meet periodically with colleagues in other organizations or attend high-quality investment management conferences.
Even though there are some challenging investment neighborhoods to travel through in the near future, the oceanfront is still attainable.
It will be worth the work for the better view that will emerge hopefully sooner rather than later.
Jeffrey W. Steed is vice president of the Arkansas Baptist Foundation and Christian Ministry Services.