Create your contingency plan now while markets are still sanguine.
In past years, endowment and foundation (E&F) portfolios benefited from strong equity markets, and philanthropic giving more than fully recovered from the fall experienced during the financial crisis in 2008–2009. Expectations of slow growth and changing monetary policy will most likely lead to higher volatility, and as such, committees will revisit their investment and risk management strategies and shift more alternative sources of alpha. To help E&Fs think through these issues, Mercer has identified key priorities for consideration in the year ahead, encompassing both nearer-term market-related risks and longer-term governance-focused enhancements.
Have you practiced your investment portfolio fire drill? As volatility increases, what is your plan to rebalance and evaluate opportunities in the event of a large market drawdown?
What are your true liquidity needs, and is there value in reducing liquidity?
What role does overall enterprise risk play in the management of E&F portfolios, and how integrated should decision processes be?
Is your portfolio positioned too conservatively or not conservatively enough? Should perpetual E&F investment portfolios have large traditional fixed income allocations in the face of very low interest rates?
With headline inflation at unprecedented low levels for the modern era, what role do inflation-sensitive investments play in long-term E&F portfolios, and how strongly does general inflation correlate to your organization’s experienced inflation?
Are you following best practices when conducting operational due diligence on investment managers? If you rely on a third party for operational due diligence, how robust are its procedures and processes?
Is your benchmark helping to measure your success, or is it working against your primary objectives?
Do you really understand what factors are affecting your ability to meet your return objectives?
Hedge funds — love them or leave them?
Given the divergences in global monetary policy, how should E&F investors consider asset allocation decisions for global portfolios?
Are you balancing alpha generation with a need to optimize costs in a lower return environment?