You oversee an endowment or foundation for your nonprofit and my bet is that until around mid-March you were disappointed if you – acting as a good steward – constructed a prudently diversified portfolio. While you were thoughtful and patient, stocks rose in nearly unabated fashion from 2009 until the pandemic took root in the U.S., resulting in the swiftest move to bear market territory in history. Moreover, March was the most volatile month ever for stocks!
Beyond genuine health and economic concerns, nonprofit investment committee members confess they were incredibly concerned and shocked by rapid losses in their portfolio, even more so if they lacked diversification. Then almost as suddenly as markets plunged, they staged an implausible comeback. Large cap stocks, small cap stocks, high yield bonds… seems like every risk-on asset participated in the rally (as of this writing the S&P 500 is up more than 35 percent from its recent low).
Either sustain or add prudent diversification in your endowment portfolio
Stocks were hammered in the first quarter but there were places to hide, or at least buffer losses.
However, with the S&P 500, the Dow Jones Industrial Average and The NASDAQ Composite all rallying greatly from their March 23 lows, investors might become complacent… that could prove costly.
Tips for diversified investors – First off kudos, during the crushing downturn your endowment portfolio likely outperformed on a relative basis. Your conviction in thoughtful diversification is bolstered (after a 10+ year test following the financial crisis). Our advice to you: maintain your discipline of prudent diversification and be smart about rebalancing your portfolio.
A second chance for endowments lacking diversification – In a way your nonprofit dodged a portfolio bullet. Sure your endowment suffered losses, but not nearly as great as just a short time ago. It could be more important than ever for you to embrace these three tenets of diversification:
1. Except for the most aggressive investors, most of us seek to minimize our maximum regrets, especially with the vast uncertainty many nonprofits now face. This means foregoing an attempt to stretch for the absolute highest possible returns and instead adopting an investment allocation that provides your nonprofit a fighting chance of achieving important financial goals, ideally with a smoother ride.
2. The Low Volatility Dividend – Contrary to popular opinion, great sums are often accumulated not by gaining more in bull markets, but by losing less in downturns. My colleagues produced exceptional analysis on this topic some years ago with the essence being: if an endowment portfolio drops 50 percent, it must gain 100 percent simply to break even. A portfolio that protects against steep declines can outperform over time, even if that very portfolio may not shine in roaring up markets. The Low Volatility Dividend can help investment committees capitalize on the fact that most endowment portfolios have an in perpetuity time-horizon.
3. Own a portfolio you can stick with – This one is simple. If your endowment portfolio lacks diversification and the recent plunge made investment committee members nervous wrecks, do not allow the rebound to blur your memory. Humans are hardwired to fear loss more than we appreciate gains… and we tend to bail on an investment strategy at just the wrong time. Acknowledge that it is a loser’s game to own an aggressive, non-diversified portfolio, if you are simply going to dump investments at their lows.
To me, the charts below illuminate the need for portfolio diversification. The U.S. just experienced a record period of job losses, and yet stocks rallied as though the all-clear was signaled. Which chart should investors believe? Your guess is as good as mine and only time will tell… that’s why diversification matters.
No one knows when a solve for COVID-19 will surface, or for that matter what or when the next crisis will occur. Is remarkable recent equity performance warranted, or simply a bear market bounce? If your endowment portfolio is thoughtfully diversified, continue good stewardship and maintain your discipline. If your portfolio lacks diversification, the recent rally affords your investment committee a second chance. You might not receive a third.
In response to the crisis, we are offering complimentary portfolio stress tests and other analytics to prospective endowment and foundation clients. For details, contact any of the professionals at Fiducient Advisors.
1 U.S. Large Cap: S&P 500 Total Return Index – U.S. Small Cap : Russell 2000 Total Return Index – U.S. Small Cap : Russell 2000 Total Return Index – Hedge Funds: Hedge Fund Research HFRI Fund of Funds Composite Index
2Wall Street Journal – performance through May 8
The information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of Fiducient Advisors is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on Fiducient Advisor research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.