A Playbook and Coach Help During the Tough Times

Endowments and foundations broadly embrace tactical approaches to asset allocation, though some clearly do it better than others, often by relying on outside expertise.

CAPTRUST has published the results of its second annual Endowments & Foundations Survey, compiling the responses of more than 130 organizations that focus on a broad variety of religious, educational and charitable missions.

Discussing the findings with PLANADVISER, James Stenstrom, senior manager of asset and liability at CAPTRUST, and Eric Bailey, principal and financial adviser at CAPTRUST, say the data shows a clear disconnect surrounding risk appetites and return expectations. Case in point, 72% of respondents indicate their organization’s expected return on assets falls within the 5% to 8% range—which is higher than investment managers were projecting even before the outbreak of the coronavirus pandemic—with 13% expecting returns over 8%.

Beyond this risk disconnect, Bailey and Stenstrom suggest another interesting trend emerged in the data based on who determined the tactical asset allocation and reported performance. When one looks at the net-of-fees trailing returns for organizations who tactically manage their asset allocation internally—for example by maintaining sole trading discretion within the investment committee or board of directors—compared with those who leveraged an external professional investment consultant or asset manager, a clear performance difference emerges.

“The organizations that outsourced tactical asset allocation decisions outperformed in every trailing period measured,” Stenstrom says. “There are several other factors that may drive this outcome, and further research is needed to determine a causal relationship.”

The outperformance seen by those who outsource tactical portfolio decisions is quite sizable, especially over shorter time horizons. Over the trailing three years the outperformance seen equates to an additional 3% return. Over the trailing five years it is 2.5%, and over the trailing 10 years, it is 1%.

“An analogy I like to use in discussing tactical asset allocation is how people respond to a late-breaking hurricane forecast,” Stenstrom continues. “Putting your hurricane plan in place right before the storm shows up is not the best policy. Sure, you can do a little bit and react, but there’s a limit to how much you can accomplish quickly once these events start unfolding. The best plan is one that is prepared well in advance and one which leans on the right experts to act at the right time.”

In this sense, the needs of endowments and foundations mirror those of individual near-retirees.

“It’s about having a part of the portfolio ready, from which you can raise money when it is needed without having to lock in losses,” Stenstrom says. “Unless you have experts and people on your side who have navigated periods like 2008, it’s going to be difficult to know when to pull the trigger and feel that you are being appropriately tactical.”

Part of the reason why external expertise is so helpful is the fact that, as the data shows, fewer than half of organizations do fiduciary training for the board or the investment committee. And only 21% do any training specifically on investment oriented topics for new board members.

“That would go a long way to addressing some of these challenges,” Stenstrom says.