In this turbulent economic climate, keeping perspective is key. ACF fundholders can rest assured that our Board of Governors, Investment Committee and CFO are closely watching the market and how it might affect investment pools. With the aid of our investment counsel, DiMeo Schneider & Associates, the committee monitors and evaluates investment performance and makes changes in policy and portfolio allocation as needed.
Recently, we talked with Joseph Scime, senior investment consultant at DiMeo Schneider & Associates, about the market and opportunities for the future. Here’s what he had to say:
- Joe, how have markets performed so far in the second quarter of 2020?
- After an extremely volatile month of March, in fact the most volatile month ever for the S&P 500, markets across the world rallied significantly in April, May and the first week of June. While most major indices are still below where they started the year, they’ve recovered back to levels they were trading at mid-way through 2019 and much more in line with “normal” levels of market volatility. That being said, the recent drop and rise again is a reminder that spikes in volatility should be expected in the midst of what is still a very turbulent economic period around the world.
- Is there any precedent for the recent market volatility?
- Surprisingly, yes. While the facts and circumstances surrounding COVID-19 and its effect on the economy are unique, the financial market response has been very similar to other periods of economic stress. The most recent peak to trough decline in the S&P 500 has been 34%, while the average bear market peak to trough decline in the bear markets since World War II was roughly 30%. So far, we’ve seen a fairly “average” financial market response to an unprecedented economic situation.
- What should we expect from financial markets moving forward?
- The million dollar question! While no one knows for certain, investors should continue to expect more market volatility. This is still a very fresh economic situation and while there is hope that a quick recovery is possible as many areas slowly emerge from lockdown, we are still in the midst of historically high unemployment and some very difficult economic growth data. We believe prudent diversification combined with thoughtful rebalancing continues to be the best path forward for long-term investors, even in the midst of some difficult times.
- Have there been changes to the strategic asset allocation of ACF’s investment pools?
- We’ve reviewed the strategic targets of the investment pools with ACF’s Investment Committee several times in the past few months. While potential changes were discussed, the Investment Committee decided to stay the course with the long-term strategic targets established and thoughtfully rebalance around those targets. The Committee also recently approved several unique investment opportunities that have arisen, including forming special sub-committees in order to expedite decision making for investments with limited lead time.
- How is ACF protecting grantmaking assets to make sure those are in place to meet community needs?
- As granting has increased significantly over the past few months to support COVID-19 relief efforts, we’ve been in regular communication with ACF staff and the Investment Committee to help fully understand the impact of grantmaking on the investment portfolio. The most important purpose of building a well-diversified investment portfolio is to weather the proverbial storms that periodically shock markets. While the long-term horizon for most Foundation assets lends itself to a more equity-heavy portfolio, there is still an important role for bonds, which typically provide relative protection, even in a very low interest rate environment like we see ourselves in today. The allocation to fixed income broadly, which includes a dedicated cash allocation, has been our first source of liquidity for the additional grants that have been made. Importantly, rather than being forced to sell equity investments at depressed prices, this dynamic allowed the equity component of the portfolio to fully participate in the broad rally we’ve seen since mid-March. The ability to utilize bonds, which likely won’t be generating significant long-term returns, in this stressed market environment has the effect of not only protecting grant-making dollars in the short-term, but also enabling the recovery and expansion of future grant-making dollars in the long run. The broadly diversified nature of the ACF assets, including strategies like hedge funds and private equity, which exhibit less day to day volatility than traditional equity markets, have been and will continue to be a crucial tool for enhancing ACF’s ability to support the community.
- Have the portfolios been rebalanced through this volatile time?
- Yes. The portfolios were partially rebalanced by selling bonds, which held up very well throughout March, to buy equities, moving back towards the long-term strategic targets for each respective pool in early April. That helped the portfolios recover more quickly with the recent market rally. While selling bonds to buy stocks didn’t necessarily feel comforting in the midst of turbulent market moves, the Investment Committee looked systematically at the long term goals and objectives of the Foundation’s investment pools. Rebalancing, if done properly, can be a key component of achieving better long-term investment outcomes by helping investors get past negative emotions to help them “buy low & sell high”.
- Given the volatility of the markets, is it better to get out now and wait for things to stabilize?
- While that’s certainly a logical emotional response, historical data tells us trying to time when to be in and out of the market leads to significant missed opportunities for long-term investors. Many of the best days for the market come right after or in the midst of some of the worst days, which leads to the saying “time in the market is more important than timing the market”. Studies of past volatile markets have shown that trying to time the market can most often result in missing out on the best market days during a recovery period. Without the proverbial crystal ball, it is impossible to perfectly time both when to get out of the market and when to get back in. The more prudent way to handle market risk is to diversify a portfolio across a number of different investments, strategically rebalance in a systematic way, and continually monitor for new opportunities to improve risk-adjusted returns.
Learn more about ACF’s investment pools and review performance reports at austincf.org/investments.