Approach decisions with an economic lens, not a political lens. Although much of what's roiling the financial markets has political underpinnings, investors should focus primarily on the economic ramifications of factors such as trade wars, inflation, deregulation, employment and consumer confidence. Be sure to discuss the potential implications of various economic scenarios on your strategic policies and asset allocation with your Investment Committee and financial advisors so that you remain best positioned for success.
Pay extra attention to liquidity. There are many proposals in circulation with the potential to impact nonprofits both directly and indirectly. As they are constantly evolving it may take time to get a clearer overall picture. But questions surrounding tax policy, government funding and potential litigation may warrant increased spending. In this environment, institutions should be careful to maintain adequate levels of liquidity and monitor funding needs that are critical to your institution’s mission.
In an uncertain environment, hedge funds warrant greater attention. Heightened geopolitical and regulatory risks are leading to higher volatility, an environment that is favorable for both the greater diversification and defensive positioning offered by hedge strategies.
The liquidity risk premium is still intact. Asset allocation alone will not get you to CPI plus 5 percent (the necessary return to support annual spending plus real growth after inflation). You need illiquid (private) investments. Today the illiquidity premium over the public markets (S&P 500) stands at 3.6 percent—exactly on its long-term average.1 And be certain to diversify within your private market exposure, as real estate, private credit, real assets and infrastructure all have roles to play. In fact, a plurality of Forum attendees expects private equity, private credit, and venture capital to be the top performing asset classes over the next 12 months.2
Be a courageous leader for your organization. In turbulent times, your organization, co-workers and constituents will look to leadership to set the tone and define successful strategies. Stay true to your mission and let it be a source of clear purpose for all involved.