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Stormy Markets, Steady Institutional Investors

January 25, 2019  | by Net Assets

Investment Strategy

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

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. 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. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. 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. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.