There is no question that we are in unprecedented times and will likely remain so for longer than we anticipated even a few weeks ago. The speed at which a new reality has been imposed on all of us is remarkable and illustrated simply by the scale of closures or adjustments across the non-profit sector over the past week. Today there are at least 260 higher ed institutions, and most likely more, that cancelled classes for some period of time, extended spring break, and/or announced a transition to remote learning, effectively sending more than 5.2 million students home. Operating charities such as museums, aquariums and symphonies have followed suit with a wave of closures that includes institutions like the Met, MoMA, the National Gallery of Art, Carnegie Hall, the Chicago Institute of Art, Monterey Bay Aquarium, the Museum of Fine Arts in Boston and many others. Indeed, as of yesterday, 20 of California’s 21 biggest museums have closed because of Coronavirus.
These rapid developments will reverberate for much longer than it took for them to materialize and will no doubt result in profound structural and fundamental change across the non-profit spectrum – from small independent schools to large museums and everything in between. Any institution that relies in some way on people gathering is, and will continue to be, impacted, which is what makes this crisis different than any other in recent memory.
As a result of these collective actions, we believe there will be budgetary pressures across the non-profit world as revenues decline, the ability to fundraise becomes more challenging, and endowment values come under pressure. And, this is all happening when the need for non-profits to serve their constituents is greater than ever. Foundations will likely feel this first as they are often on the front lines of providing support to communities and other organizations in times of great need. And the response so far has been significant. Total worldwide giving and pledges to fight coronavirus in just the past 3 months have surpassed $1 billion so far this year, exceeding total pledges and donations in response to eight major hurricanes, earthquakes and wildfires since September 2017, including Hurricanes Harvey, Irma, and Maria and the Australian wildfires.
So, what should we be doing with respect to our investment portfolios given the historic market volatility and challenges we are facing together? Here are five things to think about, which admittedly will come after we all get through the operational challenges of moving our institutions to remote environments and ensuring the health and safety of our organizations:
Ask yourselves some important strategic questions: Has your mission changed due to this pandemic? Has the way in which you achieve that mission changed? Have your investment objectives changed? Has your risk/return profile changed? Has your liquidity profile changed? The answers to these questions will inform important decisions that you will have to make as this crisis continues to unfold.
Review your asset allocation policy. If the answers to the questions in number one are “no” and if you went through a thoughtful and strategic process of setting your allocation policy in the first place, then you will likely want to maintain discipline to that policy. If, however, the answers to one or more are “yes,” then it probably makes sense to rethink your allocation policy. The point is that any change to your policy should be driven by dynamics at your institution, not a view on the market. History has not been kind to those who have changed course in the midst of prior crises.
Revisit your spending policy. We have done a lot of work on spending policies over the years but we have found that it rarely gets the attention it deserves. It is the primary mechanism that transfers risk from your long-term investment portfolio to your institution. In a crisis, there’s often a tension between reducing spending due to lower portfolio values and increasing spending due to higher institutional need. There’s no right answer. We told some clients in the depths of the 01-02 recession to spend more if it meant sustaining the mission. Although we are long-term oriented institutions and investors, we also have to survive the short term to make it to the long term. Other institutions made decisions to reduce spending in prior crises. Understanding how your spending policy will behave, i.e. how much you will have vs. how much you may need to spend next year, in various crisis scenarios is paramount to charting a course through any crisis.
Revisit stress tests, crisis playbooks and liquidity needs. We created a stress test and crisis playbook for an operating charity that had, 1) a market decline of 30 percent, 2) a complete closure of their facility resulting in no ticket sales for a year, and, 3) the need for a substantial additional draw from the portfolio. In just a matter of weeks, we are already at number one and likely headed to the second, which will likely then require number three as well. It is critical to understand where the stresses are and the liquidity sources and uses from where we sit today.
Lastly, reach out to your donors. There are still plenty of people and institutions that have the means and the desire to support their favorite causes, institutions, and charities. They may be, in fact, more willing to help through this difficult time than we expect, but we’ll never know if we don’t at least ask.