November 9, 2016
To Our Clients:
Commonfund is a firm that marries mission and markets in a unique way. And so today we assess the implications of last night's Presidential election on our clients' nonprofit missions as well as on the markets that we invest in together. There were many headlines about markets today, but few about mission. Yet we think that this is an important moment for mission-based organizations.
Much of the dialogue throughout the election campaign has been about equality, often captured in the statistic “the one percent” with reference to the wealthiest Americans. Here at Commonfund we believe that issues of equality are incredibly important, but that the more profound statistic for long-term investors may be two percent. After five decades of post-war economic growth averaging three percent in this country, we are now in a two percent growth world. At the same time, the forces of technology and globalization have disrupted and displaced – but also created – jobs. The result is overall unemployment is very low at 4.9 percent, but the benefits of employment are disproportionately enjoyed by the most educated Americans: roughly 2.5 percent of college graduates are unemployed, while almost 7.5 percent of those without high school degrees are unemployed.
The work that you, nonprofit and public sector investors, do to support education and advancement at all levels is among the most important work being done in our country today. Early and lasting math and science education, critical thinking and communication capabilities, technical skills training and renewal – these are the things that will promote both equality and growth.
We at Commonfund are here to support you. As we have communicated throughout the year, we are committed to strong and consistent investment performance delivered as cost effectively as possible. Basis points always matter, but even more so in a two percent world. We also understand that sustaining institutions for the long term requires a disciplined investment process. With that in mind I want to share some thoughts from our investment teams on how the election may impact markets over the short to medium term, but I also encourage you to stay focused on the long term.
America's Brexit Moment
Contrary to the indications of most pre-election polls, Americans voted for change last night. Many market participants were surprised and S&P futures sold off almost five percent overnight, similar to the five percent drop that followed the surprise Brexit vote. Today, however, as the peaceful transition of power began, the major U.S. indices all recovered and closed in positive territory.
In contrast to equity markets, long duration Treasuries fell almost five percent today, one of the biggest selloffs of the past 30 years. This serves as a reminder that bonds are not always safe havens when yields are near historic lows and expectations for future fiscal stimulus are high.
A Historical Perspective
Not surprisingly, history shows that investors' first day reaction to an election is not indicative of market direction or returns one year later, as shown in the chart below.
It's possible that the policy issues that Donald Trump focused on during the election may change as he transitions to become our next President. For now, the four policy areas that seem to be highest on the agenda for his first 100 days in office are global trade, infrastructure improvements, tax cuts/reforms and healthcare. Each of these policy areas could have important implications for investors and we will be following closely as they unfold.
As long-term investors we adhere to the tenets of the endowment model – an equity bias, broad diversification and prudent use of illiquid investments to take advantage of the return premium they can provide. The election results do not change our belief that this is still the best approach to achieving the CPI plus 5 percent return that most of our clients target to sustain their institutions.
Consistent with this perspective, our strategies are generally positioned for risks and opportunities we see developing over full market cycles. Today, our client portfolios are generally overweight U.S. equities and underweight European and emerging market equities. In fixed income, we have been underweight duration for some time and we plan to continue this positioning over the near term.
Notwithstanding a “change” election, our medium term outlook for modest market returns is unchanged. Thus, we continue to look for higher growth opportunities in today's lower growth world, including finding active managers that can consistently generate excess returns, accessing low cost market beta through allocations to passive strategies, and illiquid investments that can potentially provide a return premium.
As always, the Commonfund team looks forward to seeing you and discussing these topics and your investments over the coming months.
Catherine M. Keating
President and Chief Executive Officer