A prudent approach to managing client assets

In our experience, nonprofit revenues can be as cyclical as those of for-profit companies, rising during economic expansions and falling during recessions. However, unlike their for-profit cousins, demand for nonprofit services often increase during an economic downturn – just as revenues are falling. If the value of the reserve portfolio is falling as well, an organization may be forced to dip into its reserves and sell its investments precisely when it should be staying the course.

“You can’t predict. You can prepare.”
– Howard Marks, Oaktree Capital

There is an old stock market saying that eloquently describes a phenomena most of us have experienced: “Markets take the steps on the way up, but the elevator on the way down.” In fact, 2018 had two such episodes. The first a 10% decline in early February 2018 and the second in December 2018 with a 15% fall over three weeks ending Christmas Eve. Corrections, recessions and bear markets are extremely difficult to predict and can only be correctly identified with the benefit of hindsight. To successfully weather them one must be prepared.

Past performance may not be indicative of future results. The performance noted does not include fees which would reduce an investor’s returns.

Our portfolios are constructed to reflect the findings of a thorough due diligence process done during the initial phase of an engagement. However, our due diligence doesn’t stop there. Organizations evolve, and a healthy ongoing dialogue with both staff and committee members ensures the investment portfolio reflects the shifting landscape of the organization’s revenue model, potential headwinds and strategic initiatives.

“Keep things as simple as possible, but no simpler.”
– Albert Einstein

Do not confuse “simple” with “unsophisticated.” Simplicity in the portfolio management process creates transparency, reduces costs and makes strategies and portfolios easier to understand for busy volunteer leaders.

When in doubt, err on the side of prudence. This means adding portfolio hedges while the bull market remains intact even if it leads to not capturing the full upside of the market. Ultimately, we are all fiduciaries who must put the best interest of the organization first.

Diversification is the only “free lunch,” and globally diversified portfolios offer the most attractive risk/reward profile.

Challenge assumptions and understand how a variety of market and economic scenarios could impact the organization’s revenue and expenses.

It is important to note here that a downside risk-managed philosophy does not necessarily mean that portfolio returns over longer time frames will be subpar. In fact, our objective is quite the opposite.

The application of our principles is as much art as science, and the behavior of markets in recent years has only reinforced our conviction in them. We have seen bursts of ‘irrationality’ (both exuberance and despair), bond yields at levels unimaginable just a few years ago, governments across the world intervening in markets on a regular basis, and geopolitical risks again becoming a relevant feature of what is an increasingly complex investment landscape.

It would seem logical to respond to the complex problems posed by the market environment described above with an equally complex set of solutions in one’s portfolio. We disagree and in fact, think an overly complex portfolio makes it that much more difficult to successfully navigate such an environment.