Stormy Markets, Steady Institutional Investors

January 25, 2019 |
1 minute read
|

This blog is reprinted with permission by Net Assets, published by the National Business Officers Association (NBOA).  The original article can be found here.

Investment guidelines enable institutions to weather market volatility better than individuals, on average, and a crisis playbook can provide additional assurance. The 2017 calendar year saw just eight trading days where the stock market lost or gained more than one percent in a single day.

2018 had 64 such days. That makes the current market seem volatile, but it’s in line with historic volatility, explained Steven C. Snyder, managing director at Commonfund, a nonprofit-focused investment firm that works with more than 200 independent schools. “Coming from a period of calm, it feels more painful,” he said.

His guidance to independent schools is to stay the course and consider the advantages of being an institutional investor. Institutions with endowments follow investment guidelines – usually drawn in periods of calm – to help insure investment decisions will align with mission and vision. Individual or retail investors are far more susceptible to human emotions when making investment decisions and may be tempted to pull their money out of the market in uncertain times.

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“If you analyze previous volatile periods, even huge intra-year dips of 10 to 14 percent, you’ll most often find at the end of year that the market has still made money,” Snyder said.

Investors would need a “crystal ball” to predict not only when to pull out of the market, but also when to put the money back in to avoid significant losses. In comparing longitudinal returns from retail funds and institutional funds, Commonfund has found that institutions do significantly better, largely thanks to clear guidance that prevents emotional decision-making, said Snyder.

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Schools might consider developing a “crisis playbook,” he advised, where senior leaders and the board consider how the school would respond under possible scenarios – for example, if the market, enrollment and fundraising all dropped at once.

“Most independent schools are going to be more dependent on tuition than their endowment, so a 20-student drop in enrollment may present a bigger challenge than a 5 percent drop in the endowment,” Snyder said. But what happens if lost tuition revenue can’t be made up by fundraising, for example?

A crisis playbook would help school leaders identify stress points or triggers where operations are no longer sustainable, and then consider what actions they would feel comfortable taking. Hypothetical questions could include, What programs might we cut? What expenses could we control? In short, Snyder explained, the playbook is a sound way to guide your actions when you spot storm clouds on the horizon, without risking the ship.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.